##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



---

FORM 10-QSB



---



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For Quarterly Period Ended September 30, 2006



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------

Commission File No.: 0-30541



---

PIONEER BANKSHARES, INC.

(Exact name of small business issuer 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)

(540) 778-2294

(Issuers telephone number)



---

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

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

State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date.



|                                |  |                                 
|------------------------------- |  | --------------------------------
|Class                           |  | Outstanding at November 10, 2006
|Common Stock, par value - $0.50 |  | 1,011,481 shares                

Transitional Small Business Disclosure Format (check
one)    YES ̈NO  x



---



---

##### Table of Contents

PIONEER BANKSHARES, INC.

INDEX



|         |  |                                                                                                             |  |     
|-------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                             |  | Page
|         |  |                                                                                                            
|PART I   |  | FINANCIAL INFORMATION                                                                                       |  | 3   
|         |  |                                                                                                            
|Item 1.  |  | Financial Statements                                                                                        |  |     
|         |  |                                                                                                            
|         |  | Consolidated Statements of Income - Three Months Ended September 30, 2006 and 2005                          |  | 3   
|         |  |                                                                                                            
|         |  | Consolidated Statements of Income - Six Months Ended September 30, 2006 and 2005                            |  | 4   
|         |  |                                                                                                            
|         |  | Consolidated Balance Sheets  September 30, 2006 and December 31, 2005                                      |  | 5   
|         |  |                                                                                                            
|         |  | Consolidated Statements of Changes in Stockholders Equity - Three Months Ended September 30, 2006 and 2005 |  | 6   
|         |  |                                                                                                            
|         |  | Consolidated Statements of Cash Flows - Six Months Ended September 30, 2006 and 2005                        |  | 7   
|         |  |                                                                                                            
|         |  | Notes to Consolidated Financial Statements                                                                  |  | 8   
|         |  |                                                                                                            
|Item 2.  |  | Managements Discussion and Analysis or Plan of Operation                                                   |  | 13  
|         |  |                                                                                                            
|Item 3.  |  | Controls and Procedures                                                                                     |  | 24  
|         |  |                                                                                                            
|PART II  |  | OTHER INFORMATION                                                                                           |  | 24  
|         |  |                                                                                                            
|Item 1.  |  | Legal Proceedings                                                                                           |  | 24  
|         |  |                                                                                                            
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 24  
|         |  |                                                                                                            
|Item 3.  |  | Defaults Upon Senior Securities                                                                             |  | 24  
|         |  |                                                                                                            
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                         |  | 25  
|         |  |                                                                                                            
|Item 5.  |  | Other Information                                                                                           |  | 25  
|         |  |                                                                                                            
|Item 5a. |  | Required 8-K Disclosures                                                                                    |  | 25  
|         |  |                                                                                                            
|Item 5b. |  | Changes in Procedures for Director Nomination by Security Holders                                           |  | 25  
|         |  |                                                                                                            
|Item 6.  |  | Exhibits                                                                                                    |  | 25  
|         |  |                                                                                                            
|         |  | SIGNATURES                                                                                                  |  | 26  



2



---

##### Table of Contents

Part I - Financial Information

Item 1. Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)



|                                                    |  |                                 |           |      |   |          
|--------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | ---------
|                                                    |  | Three Months EndedSeptember 30,
|                                                    |  | 2006                            |           | 2005
|Interest and Dividend Income:                       |  |                                 |           |      |   |          
|Loans including fees                                |  | $                               | 2,245     |      | $ | 1,975    
|Interest on securities - taxable                    |  |                                 | 83        |      |   | 87       
|Interest on securities - nontaxable                 |  |                                 | 2         |      |   | 2        
|Interest on deposits and federal funds sold         |  |                                 | 137       |      |   | 93       
|Dividends                                           |  |                                 | 39        |      |   | 13       
|                                                    |  |                                 |           |      |   |          
|Total Interest and Dividend Income                  |  |                                 | 2,506     |      |   | 2,170    
|                                                    |  |                                 |           |      |   |          
|Interest Expense:                                   |  |                                 |           |      |   |          
|Deposits                                            |  |                                 | 734       |      |   | 438      
|Long term debt                                      |  |                                 | 175       |      |   | 173      
|                                                    |  |                                 |           |      |   |          
|Total Interest Expense                              |  |                                 | 909       |      |   | 611      
|                                                    |  |                                 |           |      |   |          
|Net Interest Income                                 |  |                                 | 1,597     |      |   | 1,559    
|Provision for loan losses                           |  |                                 | 53        |      |   | 107      
|                                                    |  |                                 |           |      |   |          
|Net interest income after provision for loan losses |  |                                 | 1,544     |      |   | 1,452    
|                                                    |  |                                 |           |      |   |          
|Noninterest Income:                                 |  |                                 |           |      |   |          
|Service charges and fees                            |  |                                 | 197       |      |   | 204      
|Other income                                        |  |                                 | 10        |      |   | 18       
|Gain on securities transactions                     |  |                                 | 143       |      |   | 39       
|                                                    |  |                                 |           |      |   |          
|Total Noninterest Income                            |  |                                 | 350       |      |   | 261      
|                                                    |  |                                 |           |      |   |          
|Noninterest Expense:                                |  |                                 |           |      |   |          
|Salaries and benefits                               |  |                                 | 534       |      |   | 582      
|Occupancy expenses                                  |  |                                 | 97        |      |   | 82       
|Equipment expenses                                  |  |                                 | 217       |      |   | 185      
|Other expenses                                      |  |                                 | 414       |      |   | 398      
|                                                    |  |                                 |           |      |   |          
|Total Noninterest Expenses                          |  |                                 | 1,262     |      |   | 1,247    
|                                                    |  |                                 |           |      |   |          
|Income before Income Taxes                          |  |                                 | 632       |      |   | 466      
|Income Tax Expense                                  |  |                                 | 216       |      |   | 157      
|                                                    |  |                                 |           |      |   |          
|Net Income                                          |  | $                               | 416       |      | $ | 309      
|                                                    |  |                                 |           |      |   |          
|Per Share Data                                      |  |                                 |           |      |   |          
|Net income, basic and diluted                       |  | $                               | 0.41      |      | $ | 0.30     
|                                                    |  |                                 |           |      |   |          
|Dividends                                           |  | $                               | 0.13      |      | $ | 0.12     
|                                                    |  |                                 |           |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                                 | 1,011,481 |      |   | 1,034,045
|                                                    |  |                                 |           |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                                 | 1,013,968 |      |   | 1,035,253
|                                                    |  |                                 |           |      |   |          

See Notes to Consolidated Financial Statements



3



---

##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)



|                                                    |  |                                |           |      |   |          
|--------------------------------------------------- |  | ------------------------------ | --------- | ---- | - | ---------
|                                                    |  | Nine Months EndedSeptember 30,
|                                                    |  | 2006                           |           | 2005
|Interest and Dividend Income:                       |  |                                |           |      |   |          
|Loans including fees                                |  | $                              | 6,604     |      | $ | 5,710    
|Interest on securities - taxable                    |  |                                | 216       |      |   | 306      
|Interest on securities - nontaxable                 |  |                                | 7         |      |   | 7        
|Interest on deposits and federal funds sold         |  |                                | 356       |      |   | 200      
|Dividends                                           |  |                                | 102       |      |   | 66       
|                                                    |  |                                |           |      |   |          
|Total Interest and Dividend Income                  |  |                                | 7,285     |      |   | 6,289    
|                                                    |  |                                |           |      |   |          
|Interest Expense:                                   |  |                                |           |      |   |          
|Deposits                                            |  |                                | 1,890     |      |   | 1,146    
|Long term debt                                      |  |                                | 516       |      |   | 504      
|                                                    |  |                                |           |      |   |          
|Total Interest Expense                              |  |                                | 2,406     |      |   | 1,650    
|                                                    |  |                                |           |      |   |          
|Net Interest Income                                 |  |                                | 4,879     |      |   | 4,639    
|Provision for loan losses                           |  |                                | 197       |      |   | 273      
|                                                    |  |                                |           |      |   |          
|Net interest income after provision for loan losses |  |                                | 4,682     |      |   | 4,366    
|                                                    |  |                                |           |      |   |          
|Noninterest Income:                                 |  |                                |           |      |   |          
|Service charges and fees                            |  |                                | 585       |      |   | 576      
|Other income                                        |  |                                | 68        |      |   | 90       
|Gain on securities transactions                     |  |                                | 305       |      |   | 119      
|                                                    |  |                                |           |      |   |          
|Total Noninterest Income                            |  |                                | 958       |      |   | 785      
|                                                    |  |                                |           |      |   |          
|Noninterest Expense:                                |  |                                |           |      |   |          
|Salaries and benefits                               |  |                                | 1,713     |      |   | 1,749    
|Occupancy expenses                                  |  |                                | 281       |      |   | 241      
|Equipment expenses                                  |  |                                | 599       |      |   | 560      
|Other expenses                                      |  |                                | 1,180     |      |   | 1,169    
|                                                    |  |                                |           |      |   |          
|Total Noninterest Expenses                          |  |                                | 3,773     |      |   | 3,719    
|                                                    |  |                                |           |      |   |          
|Income before Income Taxes                          |  |                                | 1,867     |      |   | 1,432    
|Income Tax Expense                                  |  |                                | 635       |      |   | 483      
|                                                    |  |                                |           |      |   |          
|Net Income                                          |  | $                              | 1,232     |      | $ | 949      
|                                                    |  |                                |           |      |   |          
|Per Share Data                                      |  |                                |           |      |   |          
|Net income, basic and diluted                       |  | $                              | 1.22      |      | $ | 0.92     
|                                                    |  |                                |           |      |   |          
|Dividends                                           |  | $                              | 0.38      |      | $ | 0.36     
|                                                    |  |                                |           |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                                | 1,011,481 |      |   | 1,034,045
|                                                    |  |                                |           |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                                | 1,013,318 |      |   | 1,035,411
|                                                    |  |                                |           |      |   |          

See Notes to Consolidated Financial Statements



4



---

##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)



|                                                                                     |  |                   |         |                  |   |         |  
|------------------------------------------------------------------------------------ |  | ----------------- | ------- | ---------------- | - | ------- | -
|                                                                                     |  | September 30,2006 |         | December 31,2005 |  
|                                                                                     |  | (Unaudited)       |         | (Audited)        |  
|ASSETS                                                                               |  |                   |         |                  |   |         |  
|Cash and due from banks                                                              |  | $                 | 7,401   |                  | $ | 7,373   |  
|Federal funds sold                                                                   |  |                   | 750     |                  |   | 3,250   |  
|Interest bearing deposits in banks                                                   |  |                   | 3,770   |                  |   | 4,946   |  
|Securities available for sale, at fair value                                         |  |                   | 13,971  |                  |   | 11,129  |  
|Securities held to maturity                                                          |  |                   | 2       |                  |   | 5       |  
|Restricted securities                                                                |  |                   | 1,089   |                  |   | 1,016   |  
|Loans receivable, net of allowance for loan losses of $1,523 and $1,332 respectively |  |                   | 116,978 |                  |   | 108,692 |  
|Premises and equipment, net                                                          |  |                   | 4,556   |                  |   | 4,581   |  
|Accrued interest receivable                                                          |  |                   | 699     |                  |   | 567     |  
|Other assets                                                                         |  |                   | 1,500   |                  |   | 1,419   |  
|                                                                                     |  |                   |         |                  |   |         |  
|Total Assets                                                                         |  | $                 | 150,716 |                  | $ | 142,978 |  
|                                                                                     |  |                   |         |                  |   |         |  
|LIABILITIES                                                                          |  |                   |         |                  |   |         |  
|                                                                                     |  |                  
|Deposits                                                                             |  |                   |         |                  |   |         |  
|Noninterest bearing demand                                                           |  | $                 | 29,980  |                  | $ | 29,704  |  
|Interest bearing                                                                     |  |                   |         |                  |   |         |  
|Demand                                                                               |  |                   | 11,886  |                  |   | 14,525  |  
|Savings                                                                              |  |                   | 13,455  |                  |   | 14,264  |  
|Time deposits over $100,000                                                          |  |                   | 10,801  |                  |   | 12,421  |  
|Other time deposits                                                                  |  |                   | 52,467  |                  |   | 42,799  |  
|                                                                                     |  |                   |         |                  |   |         |  
|Total Deposits                                                                       |  |                   | 118,589 |                  |   | 113,713 |  
|                                                                                     |  |                  
|Accrued expenses and other liabilities                                               |  |                   | 985     |                  |   | 820     |  
|Long term debt                                                                       |  |                   | 16,300  |                  |   | 14,500  |  
|                                                                                     |  |                   |         |                  |   |         |  
|Total Liabilities                                                                    |  |                   | 135,874 |                  |   | 129,033 |  
|                                                                                     |  |                   |         |                  |   |         |  
|STOCKHOLDERS EQUITY                                                                 |  |                   |         |                  |   |         |  
|                                                                                     |  |                  
|Common stock; $.50 par value, authorized 5,000,000, outstanding 1,011,481            |  |                   | 506     |                  |   | 506     |  
|Retained earnings                                                                    |  |                   | 14,315  |                  |   | 13,468  |  
|Accumulated other comprehensive income (loss), net                                   |  |                   | 21      |                  |   | (29     | )
|                                                                                     |  |                   |         |                  |   |         |  
|Total Stockholders Equity                                                           |  |                   | 14,842  |                  |   | 13,945  |  
|                                                                                     |  |                   |         |                  |   |         |  
|Total Liabilities and Stockholders Equity                                           |  | $                 | 150,716 |                  | $ | 142,978 |  
|                                                                                     |  |                   |         |                  |   |         |  

See Notes to Consolidated Financial Statements



5



---

##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(In Thousands)

(UNAUDITED)



|                                                                                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ----------- | --- | ---------------- | - | ------ | ------------------------------------------ |  | - | ----- | - |  | - | ------ | -
|                                                                                         |  | CommonStock |     | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total |  
|BALANCE DECEMBER 31, 2004                                                                |  | $           | 517 |                  | $ | 12,918 |                                            |  | $ | 102   |   |  | $ | 13,537 |  
|                                                                                         |  |             |     |                 
|Comprehensive Income                                                                     |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net Income                                                                               |  |             |     |                  |   | 949    |                                            |  |   |       |   |  |   | 949    |  
|Changes in unrealized gains (losses) on securities, net of taxes                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding gains (losses) arising during the period (net of tax effect of $8)    |  |             |     |                  |   |        |                                            |  |   | (18   | ) |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $45)  |  |             |     |                  |   |        |                                            |  |   | (74   | ) |  |   | (92    | )
|                                                                                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                               |  |             |     |                  |   |        |                                            |  |   |       |   |  |   | 857    |  
|Cash Dividends                                                                           |  |             |     |                  |   | (372   | )                                          |  |   |       |   |  |   | (372   | )
|                                                                                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE SEPTEMBER 30, 2005                                                               |  | $           | 517 |                  | $ | 13,495 |                                            |  | $ | 10    |   |  | $ | 14,022 |  
|                                                                                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE DECEMBER 31, 2005                                                                |  | $           | 506 |                  | $ | 13,468 |                                            |  | $ | (29   | ) |  | $ | 13,945 |  
|                                                                                         |  |             |     |                 
|Comprehensive Income                                                                     |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net Income                                                                               |  |             |     |                  |   | 1,232  |                                            |  |   |       |   |  |   | 1,232  |  
|Changes in unrealized gains (losses) on securities, net of taxes                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $138)           |  |             |     |                  |   |        |                                            |  |   | 239   |   |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $116) |  |             |     |                  |   |        |                                            |  |   | (189  | ) |  |   | 50     |  
|                                                                                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                               |  |             |     |                  |   |        |                                            |  |   |       |   |  |   | 1,282  |  
|Cash Dividends                                                                           |  |             |    |                  |   | (385   | )                                          |  |   |      |   |  |   | (385   | )
|                                                                                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE SEPTEMBER 30, 2006                                                               |  | $           | 506 |                  | $ | 14,315 |                                            |  | $ | 21    |   |  | $ | 14,842 |  
|                                                                                         |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  

See Notes to Consolidated Financial Statements



6



---

##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |        
|                                                                                  |  | 2006                           |         |   | 2005 |  
|Cash Flows from Operating Activities:                                             |  |                                |         |   |      |   |         |  
|Net income                                                                        |  | $                              | 1,232   |   |      | $ | 949     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Provision for loan losses                                                         |  |                                | 197     |   |      |   | 273     |  
|Depreciation and amortization                                                     |  |                                | 345     |   |      |   | 374     |  
|Gain on sale of securities                                                        |  |                                | (305    | ) |      |   | (119    | )
|Net amortization on securities                                                    |  |                                | 24      |   |      |   | 80      |  
|Net change in:                                                                    |  |                                |         |   |      |   |         |  
|Accrued interest receivable                                                       |  |                                | (132    | ) |      |   | (31     | )
|Other assets                                                                      |  |                                | (104    | ) |      |   | (60     | )
|Accrued expense and other liabilities                                             |  |                                | 165     |   |      |   | 167     |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                         |  |                                | 1,422   |   |      |   | 1,633   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash Flows from Investing Activities:                                             |  |                                |         |   |      |   |         |  
|Net change in federal funds sold                                                  |  |                                | 2,500   |   |      |   | 650     |  
|Net change in interest bearing deposits                                           |  |                                | 1,176   |   |      |   | 6,296   |  
|Purchase of restricted securities                                                 |  |                                | (73     | ) |      |   | 165     |  
|Proceeds from maturities and sales of securities available for sale               |  |                                | 10,322  |   |      |   | 10,944  |  
|Proceeds from maturities and calls of securities held to maturity                 |  |                                | 3       |   |      |   | 6       |  
|Purchase of securities available for sale                                         |  |                                | (12,811 | ) |      |   | (15,388 | )
|Net increase in loans                                                             |  |                                | (8,483  | ) |      |   | (12,413 | )
|Purchase of bank premises and equipment                                           |  |                                | (319    | ) |      |   | (812    | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net Cash Used in Investing Activities                                             |  |                                | (7,685  | ) |      |   | (10,552 | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash Flows from Financing Activities:                                             |  |                                |         |   |      |   |         |  
|Net change in:                                                                    |  |                                |         |   |      |   |         |  
|Demand and savings deposits                                                       |  |                                | (3,172  | ) |      |   | 3,314   |  
|Time deposits                                                                     |  |                                | 8,048   |   |      |   | 8,354   |  
|Proceeds from borrowings                                                          |  |                                | 5,000   |   |      |   | 5,000   |  
|Curtailments of borrowings                                                        |  |                                | (3,200  | ) |      |   | (8,200  | )
|Dividends paid                                                                    |  |                                | (385    | ) |      |   | (372    | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net Cash (Used in) Provided by Financing Activities                               |  |                                | 6,291   |   |      |   | 8,096   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and Cash Equivalents:                                                        |  |                                |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                | 28      |   |      |   | (823    | )
|Cash and Cash Equivalents, beginning of year                                      |  |                                | 7,373   |   |      |   | 9,896   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and Cash Equivalents, End of Period                                          |  | $                              | 7,401   |   |      | $ | 9,073   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Supplemental Disclosure of Cash Paid                                              |  |                                |         |   |      |   |         |  
|During the Period for:                                                            |  |                                |         |   |      |   |         |  
|Interest                                                                          |  | $                              | 2,282   |   |      | $ | 1,547   |  
|Income taxes                                                                      |  | $                              | 723     |   |      | $ | 303     |  
|                                                                                  |  |                               
|Supplemental Disclosure of non-cash activity:                                     |  |                                |         |   |      |   |         |  
|Unrealized gain (loss) on securities available for sale                           |  |                                | 72      |   |      |   | (145    | )

See Notes to Consolidated Financial Statements



7



---

##### Table of Contents

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 ACCOUNTING PRINCIPLES:

The consolidated financial statements
conform to generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of September 30, 2006 and the results of operations for the nine month periods and year to date periods ended September 30, 2006 and September 30, 2005. Operating results for the
nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The notes included herein should be read in conjunction with the notes to financial statements
included in the 2005 annual report to stockholders of Pioneer Bankshares, Inc. (the Company) and its form 10-KSB for the year ended December 31, 2005, as filed with the Securities and Exchange Commission.

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

Stock Compensation Plans  The Company previously accounted for its stock option plan under the recognition

and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2006, the
Financial Accounting Standards Board (FASB) Statement No. 123R (Revised 2004), Share-Based Payment (SFAS No. 123R), replaces and supersedes APB Opinion No. 25. This revised accounting principle now requires that costs resulting from all
share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted. The Company has adopted SFAS No. 123R and does not expect this change in accounting principle to have a
material impact on its financial condition or future results of operations.

The following table details the effect on net income and earnings per share
had the stock-based compensation expense been recorded in the nine months of 2005 based on the revised accounting principle of SFAS No. 123R:



|                                                                                                 |  |                    |      |  
|------------------------------------------------------------------------------------------------ |  | ------------------ | ---- | -
|(In Thousands, except per share data)                                                            |  | September 30, 2005 |     
|Net Income, as reported                                                                          |  | $                  | 949  |  
|Total stock-based compensation expenses determined under fair value based method for all rewards |  |                    | (1   | )
|                                                                                                 |  |                    |      |  
|Pro forma net income                                                                             |  | $                  | 948  |  
|                                                                                                 |  |                    |      |  
|Basic earnings per share                                                                         |  |                    |      |  
|As reported                                                                                      |  | $                  | 0.92 |  
|                                                                                                 |  |                    |      |  
|Pro forma                                                                                        |  | $                  | 0.92 |  
|                                                                                                 |  |                    |      |  
|Diluted earnings per share                                                                       |  |                    |      |  
|As reported                                                                                      |  | $                  | 0.92 |  
|                                                                                                 |  |                    |      |  
|Pro forma                                                                                        |  | $                  | 0.92 |  
|                                                                                                 |  |                    |      |  

The fair value of each grant was estimated at the grant date using the Black-Scholes option-pricing model. The
estimates were calculated using the following weighted-average assumptions for stock options granted in 2006 and 2005 respectively: Dividend rate of 3.07% and 3.22%, price volatility of 14.58% and 14.97%, risk-free interest rate of 5.13% and 4.11%,
and expected lives of 10 years.

Additional stock options were granted to non-employee directors under this plan on May 9, 2006. The expense relating
to all outstanding stock options, as of September 30, 2006, is approximately $1,510, net of tax. There have been no stock options exercised under this plan as of the date of this report.



8



---

##### Table of Contents

NOTE 1 ACCOUNTING PRINCIPLES: (cont)

The following summarizes the stock option activity for the nine months ended September 30, 2006:



|                              |  |        |  |                              |       |                                            |      |                                                    |   |   
|----------------------------- |  | ------ |  | ---------------------------- | ----- | ------------------------------------------ | ---- | -------------------------------------------------- | - | --
|                              |  | Shares |  | WeightedAverageExercisePrice |       | Weighted Average RemainingContractual Term |      | Intrinsic Value of Unexercised In-the-MoneyOptions
|                              |  |        |  |                              |       |                                            |      | (In Thousands)                                    
|Options outstanding, 12/31/05 |  | 6,300  |  | $                            | 14.62 |                                            | 6.1  |                                                    |   |   
|New Options Granted           |  | 800    |  | $                            | 22.20 |                                            | 10.0 |                                                    |   |   
|Options Exercised             |  |       |  |                              |      |                                            |      |                                                    |   |   
|Options Forfeited             |  |       |  |                              |      |                                            |      |                                                    |   |   
|Options outstanding, 9/30/06  |  | 7,100  |  | $                            | 15.48 |                                            | 5.6  |                                                    |   |   
|Options exercisable, 9/30/06  |  | 6,300  |  | $                            | 14.62 |                                            | 5.6  |                                                    | $ | 50

NOTE 2 INVESTMENT SECURITIES:

The amounts at which investment securities are carried in the consolidated balance sheets and their approximate market values at September 30, 2006 and December 31, 2005 follows:



|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|------------------------------------ |  | ------------------ | ------ | ----------------- | - | ------------- |  | ----------- | ------ |  | - | ------
|                                     |  | (In Thousands)    
|                                     |  | September 30, 2006 |        | December 31, 2005
|                                     |  | CarryingValue      |        | MarketValue       |   | CarryingValue |  | MarketValue
|Securities held to maturity:         |  |                    |        |                   |   |               |  |             |        |  |   |       
|Mortgage-backed securities           |  | $                  | 2      |                   | $ | 2             |  | $           | 5      |  | $ | 5     
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $                  | 2      |                   | $ | 2             |  | $           | 5      |  | $ | 5     
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|Securities available for sale:       |  |                    |        |                   |   |               |  |             |        |  |   |       
|U.S. Treasury and agency obligations |  | $                  | 11,484 |                   | $ | 11,482        |  | $           | 8,532  |  | $ | 8,417 
|Mortgage-backed                      |  |                    | 406    |                   |   | 391           |  |             | 527    |  |   | 512   
|Municipal securities                 |  |                    | 214    |                   |   | 218           |  |             | 214    |  |   | 221   
|Equity securities                    |  |                    | 1,833  |                   |   | 1,880         |  |             | 1,894  |  |   | 1,979 
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $                  | 13,937 |                   | $ | 13,971        |  | $           | 11,167 |  | $ | 11,129
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       

As of September 30, 2006, there were 5 investment securities that had been in a loss position for more than
12 consecutive months. Management has the intent and ability to hold securities to their scheduled maturity or call date, and considers any current market value losses to be temporary. One factor considered in the determination and evaluation of
temporary losses is credit quality of the issuer. Managements conclusion for this reporting period is that the temporary losses are the result of current economic conditions and market interest rate changes. The temporary losses are not
considered to be related to credit quality.

The schedule of losses on the securities as of September 30, 2006, is as follows:



|                      |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|--------------------- |  | ------------------------------- | ----- | - | -------------------------- | - | --- | ----------------- |  | - | ----- | - |  | - | ----- | -
|LOSSES (In Thousands) |  | US Government Agency Securities |       |   | Mortgage-Backed Securities |   |     | Equity Securities |  |   | Total |  
|Less than 12 Months   |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Fair Value            |  | $                               | 495   |   |                            | $ |    |                   |  | $ | 794   |   |  | $ | 1,289 |  
|Unrealized Losses     |  |                                 | (4    | ) |                            |   |    |                   |  |   | (49   | ) |  |   | (53   | )
|More than 12 Months   |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Fair Value            |  |                                 | 2,484 |   |                            |   | 391 |                   |  |   |      |   |  |   | 2,875 |  
|Unrealized Losses     |  |                                 | (19   | ) |                            |   | (14 | )                 |  |   |      |   |  |   | (33   | )
|                      |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Total                 |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Fair Value            |  | $                               | 2,979 |   |                            |   | 391 |                   |  | $ | 794   |   |  | $ | 4,164 |  
|Unrealized Losses     |  |                                 | (23   | ) |                            |   | (14 | )                 |  |   | (49   | ) |  |   | (86   | )
|                      |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  



9



---

##### Table of Contents

NOTE 2 INVESTMENT SECURITIES (cont):

As of December 31, 2005, there were 21 securities in the portfolio that had losses, which were considered to be temporary. The schedule of losses on these securities is as follows:



|                      |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|--------------------- |  | ------------------------------- | ----- | - | -------------------------- | - | --- | ----------------- |  | - | ----- | - |  | - | ----- | -
|LOSSES (In Thousands) |  | US Government Agency Securities |       |   | Mortgage-Backed Securities |   |     | Equity Securities |  |   | Total |  
|Less than 12 Months   |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Fair Value            |  | $                               | 981   |   |                            | $ | 350 |                   |  | $ | 830   |   |  | $ | 2,161 |  
|Unrealized Losses     |  |                                 | (18   | ) |                            |   | (9  | )                 |  |   | (31   | ) |  |   | (58   | )
|More than 12 Months   |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Fair Value            |  |                                 | 6,937 |   |                            |   | 162 |                   |  |   |      |   |  |   | 7,099 |  
|Unrealized Losses     |  |                                 | (97   | ) |                            |   | (6  | )                 |  |   |      |   |  |   | (103  | )
|                      |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Total                 |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  
|Fair Value            |  | $                               | 7,918 |   |                            | $ | 512 |                   |  | $ | 830   |   |  | $ | 9,260 |  
|Unrealized Losses     |  |                                 | (115  | ) |                            |   | (15 | )                 |  |   | (31   | ) |  |   | (161  | )
|                      |  |                                 |       |   |                            |   |     |                   |  |   |       |   |  |   |       |  

NOTE 3 LOANS:

Loans outstanding are summarized as follows:

|                                 |  |                   |         |   |                  |   |         |  
|-------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                 |  | (In Thousands)    |        
|                                 |  | September 30,2006 |         |   | December 31,2005 |  
|Mortgage loans on real estate    |  |                   |         |   |                  |   |         |  
|Construction loans               |  | $                 | 9,983   |   |                  | $ | 11,543  |  
|Agricultural                     |  |                   | 4,964   |   |                  |   | 4,595   |  
|Equity lines of credit           |  |                   | 2,075   |   |                  |   | 1,780   |  
|Residential 1-4 family           |  |                   | 46,509  |   |                  |   | 43,308  |  
|Second Mortgages                 |  |                   | 4,895   |   |                  |   | 3,807   |  
|Multifamily                      |  |                   | 3,831   |   |                  |   | 3,275   |  
|Commercial                       |  |                   | 24,713  |   |                  |   | 21,892  |  
|                                 |  |                   |         |   |                  |   |         |  
|Total real estate loans          |  |                   | 96,970  |   |                  |   | 90,200  |  
|                                 |  |                  
|Commercial and industrial loans  |  |                   | 6,625   |   |                  |   | 5,543   |  
|Consumer installment loans       |  |                   |         |   |                  |   |         |  
|Personal                         |  |                   | 15,337  |   |                  |   | 14,699  |  
|Credit cards                     |  |                   | 573     |   |                  |   | 668     |  
|                                 |  |                   |         |   |                  |   |         |  
|Total consumer installment loans |  |                   | 15,910  |   |                  |   | 15,367  |  
|All other loans                  |  |                   | 247     |   |                  |   | 225     |  
|                                 |  |                   |         |   |                  |   |         |  
|Gross Loans                      |  |                   | 119,752 |   |                  |   | 111,335 |  
|                                 |  |                  
|Less unearned income on loans    |  |                   | (1,251  | ) |                  |   | (1,311  | )
|                                 |  |                   |         |   |                  |   |         |  
|Loans, less unearned discount    |  |                   | 118,501 |   |                  |   | 110,024 |  
|                                 |  |                  
|Less allowance for loan losses   |  |                   | (1,523  | ) |                  |   | (1,332  | )
|                                 |  |                   |         |   |                  |   |         |  
|Net Loans Receivable             |  | $                 | 116,978 |   |                  | $ | 108,692 |  
|                                 |  |                   |         |   |                  |   |         |  

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



10



---

##### Table of Contents

NOTE 4 ALLOWANCE FOR LOAN LOSSES:

A summary of transactions in the allowance for loan losses for the nine months ended September 30, 2006 and 2005 follows:



|                                        |  |                |       |   |      |   |       |  
|--------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                        |  | 2006           |       |   | 2005 |  
|                                        |  | (In Thousands) |      
|Balance, beginning of period            |  | $              | 1,332 |   |      | $ | 1,346 |  
|Provision charged to operating expenses |  |                | 197   |   |      |   | 273   |  
|Recoveries of loans charged off         |  |                | 268   |   |      |   | 222   |  
|Loans charged off                       |  |                | (274  | ) |      |   | (550  | )
|                                        |  |                |       |   |      |   |       |  
|Balance, End of Period                  |  | $              | 1,523 |   |      | $ | 1,291 |  
|                                        |  |                |       |   |      |   |       |  

NOTE 5 EARNINGS PER SHARE:

The following shows the weighted average number of shares for the nine month period ending September 30, 2006 and 2005, used in computing earnings per share and the effect on weighted average number of shares
diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.



|                               |  |                                     |  |                                     |      |        |           |                 |   |     
|------------------------------ |  | ----------------------------------- |  | ----------------------------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | Nine Months EndedSeptember 30, 2006 |  | Nine Months EndedSeptember 30, 2005
|                               |  | Shares                              |  | Per ShareAmount                     |      | Shares |           | Per ShareAmount
|Basic earnings per share       |  | 1,011,481                           |  | $                                   | 1.22 |        | 1,034,045 |                 | $ | 0.92
|                               |  |                                     |  |                                     |      |        |           |                 |   |     
|Effect of dilutive securities: |  |                                     |  |                                     |      |        |           |                 |   |     
|Stock Options                  |  | 1,837                               |  |                                     |      |        | 1,208     |                 |   |     
|                               |  |                                     |  |                                     |      |        |           |                 |   |     
|Diluted earnings per share     |  | 1,013,318                           |  | $                                   | 1.22 |        | 1,035,253 |                 | $ | 0.92
|                               |  |                                     |  |                                     |      |        |           |                 |   |     

Anti-dilutive stock option shares are generally excluded from the earnings per share calculations. However; there
were no anti-dilutive shares for the period ending September 30, 2006 and 2005.

The weighted average number of shares for the three month period
ending September 30, 2006 and 2005, used in computing earnings per share and the effect on weighted average number of shares diluted potential common stock are shown below.



|                               |  |                                      |  |                                     |      |        |           |                 |   |     
|------------------------------ |  | ------------------------------------ |  | ----------------------------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | Three Months EndedSeptember 30, 2006 |  | Three Month EndedSeptember 30, 2005
|                               |  | Shares                               |  | Per ShareAmount                     |      | Shares |           | Per ShareAmount
|Basic earnings per share       |  | 1,011,481                            |  | $                                   | 0.41 |        | 1,034,045 |                 | $ | 0.30
|                               |  |                                      |  |                                     |      |        |           |                 |   |     
|                               |  |                                      |  |                                    
|Effect of dilutive securities: |  |                                      |  |                                     |      |        |           |                 |   |     
|Stock Options                  |  | 2,487                                |  |                                     |      |        | 1,366     |                 |   |     
|                               |  |                                      |  |                                     |      |        |           |                 |   |     
|Diluted earnings per share     |  | 1,013,968                            |  | $                                   | 0.41 |        | 1,035,411 |                 | $ | 0.30
|                               |  |                                      |  |                                     |      |        |           |                 |   |     



11



---

##### Table of Contents

NOTE 6 BORROWINGS:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta (the FHLB) upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. FHLB advances bear interest at a
fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by 1-4 family residential mortgages. On some fixed rate advances, the FHLB may convert the advance to
an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may pay back all or part of the advance without a prepayment penalty.

As of September 30, 2006, the total outstanding borrowings with FHLB were $16.3 million with approximately $11.3 million being fixed-rate long-term debt, which
matures through December 30, 2009. The interest rates on the fixed-rate notes payable ranges from 2.92% to 3.92%. As of September 30, 2006, the total outstanding borrowing with variable interest rates was $5.0 million.

The maturities of FHLB advances as of September 30, 2006 are shown in TABLE II of this report.

NOTE 7 OTHER EXPENSES:

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



|                      |  |                                |       |      |   |      
|--------------------- |  | ------------------------------ | ----- | ---- | - | -----
|                      |  | Nine Months EndedSeptember 30,
|                      |  | 2006                           |       | 2005
|                      |  | (In Thousands)                
|Director Fees         |  | $                              | 124   |      | $ | 135  
|Insurance Expense     |  |                                | 70    |      |   | 71   
|Professional Fees     |  |                                | 99    |      |   | 174  
|Postage               |  |                                | 54    |      |   | 54   
|Supplies and Printing |  |                                | 102   |      |   | 102  
|Telephone Expense     |  |                                | 122   |      |   | 106  
|Other                 |  |                                | 609   |      |   | 527  
|                      |  |                                |       |      |   |      
|Total                 |  | $                              | 1,180 |      | $ | 1,169
|                      |  |                                |       |      |   |      



12



---

##### Table of Contents

Item 2. Managements Discussion and Analysis or Plan of Operation

The discussion covers the consolidated balance
sheet and statement of income of Pioneer Bankshares, Inc. (Company) and its subsidiary Pioneer Bank (Bank).

Forward-Looking
Statements

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

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

Overview

For the nine months
ended September 30, 2006, net income including securities transactions was $1.232 million ($1.22 per share) compared with $949,000 ($0.92 per share) for the first nine months of 2005. This represents an increase of $283,000 or approximately
29.82%. The increase in net income can be primarily attributed to an increase in interest income on loans, as well as gains on securities transactions. Interest income on loans increased by approximately $894,000 or 15.66%. This increase in interest
income on loans is related to increased loan volume and increases in market interest rates. Gains on securities transactions during the nine months ended September 30, 2006 were $305,000 compared to gains in the same period last year of
$119,000. This increase of approximately $186,000 had a net tax effect on income of approximately $115,000.

Total assets for the Company as of
September 30, 2006 were $150.7 million compared to $143.0 million at year-end 2005. This is an increase of approximately $7.7 million or 5.41%. Total net loans have increased from $108.7 million as of December 31, 2005 to $117.0 million as
of September 30, 2006. This represents an increase of $8.3 million or 7.62%. The majority of this increase in loans is in the area of commercial and residential real estate properties.

Total liabilities for the Company as of September 30, 2006 were $135.9 million compared to $129.0 million at year-end 2005. This represents an increase of
approximately $6.8 million or 5.30%. The primary increases in liability accounts have been in time deposits and outstanding borrowings. Time deposits increased by $8.0 million during the first nine months of 2006 and outstanding borrowings have
increased by $1.8 million.

The Companys total capital position remains strong and exceeds regulatory guidelines. As of September 30, 2006,
total capital was $14.8 million.

Management is not aware of any trends, events, or other uncertainties that would have a material effect on the
Companys liquidity, capital resources, or operational activities.



13



---

##### Table of Contents

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 basis
principles of accounting: 1) Statement of Financial Accounting Standard (SFAS) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable, and 2) SFAS 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 loan review reports, past due reports, historical loan loss experience and individual borrowers financial condition. This
review also considers concentrations of loans in terms of geography, business type or level of risk. Management evaluates the risk elements involved in loans relative to their collateral value and maintains the allowance for loan losses at a level
which is adequate to absorb credit losses inherent in the loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to
recognize additional losses based on their judgment about information available to them at the time of their examination.

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

Goodwill

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

Goodwill is included in other assets and totaled
$360,000 at September 30, 2006 and December 31, 2005. The goodwill is no longer amortized, but instead is tested for impairment at least annually.



14



---

##### Table of Contents

Results of Operations

Net Interest Income

Total interest
income increased by $996,000 or 15.84% in the nine month period ending September 30, 2006 compared to the nine month period ending September 30, 2005. Total interest expense increased $756,000 or 45.82% during the nine month period ending
September 30, 2006 compared to the same period in 2005. The increases in interest income and interest expense resulted in a total overall increase in net interest income of $240,000 or 5.17% for the nine month period ending September 30,
2006 compared to the nine month period ending September 30, 2005. The net interest margin decreased from 4.95% for the nine month period ending September 30, 2005 to 4.73% for the nine month period ending September 30, 2006.
Managements decision to focus on commercial and residential real estate lending as opposed to higher yielding consumer loans, as well as the increased market interest rates on deposits and borrowings were the main contributors to the decrease
in net interest margin. The average yield on earning assets increased from 6.70% as of September 30, 2005 to 7.05% as of September 30, 2006 due to increasing market rates. As noted, the increase in yield on earning assets was more than
offset by an increase in average cost of interest bearing liabilities resulting in a decline in the net interest margin.

The average interest rate being
paid on time deposits increased from 2.89% as of September 30, 2005 to 3.93% as of September 30, 2006. The average interest rate being paid for on borrowed funds increased from 3.68% as of September 30, 2005 to 4.01% as of
September 30, 2006. The increased in these average costs are directly related to the recent increases in market interest rates and the increased deposit volume during the reporting period.

The Company plans to continue its efforts to expand the commercial loan and residential real estate portfolios during the remainder of 2006. The Company will also
continue to offer consumer installment loans to its customer base.

Noninterest Income

During the nine month period ending September 30, 2006, non-interest income increased by $173,000 or 22.04% when compared to the same period last year. The primary
factor contributing to this increase were gains on securities transactions of $305,000 compared to gains in the prior year of only $119,000. Service charge income increased by $9,000, while other income decreased by $22,000. The increase in service
charge income is primarily the result of increases in the categories of ATM fees and NSF/Overdraft fees collected. The decrease in other income is primarily attributed to a one-time gain in 2005 of approximately $18,000 relating to the sale of a
foreclosure property. There were no sales of foreclosure properties during the nine month period ending September 30, 2006.

Noninterest Expense

During the first nine months of 2006, non-interest expense increased $54,000 or 1.45% in comparison to the first nine
months of 2005. Salaries and benefits decreased by $36,000 as a result of deferred compensation costs related to loan origination fees. Occupancy expenses increased $40,000 and equipment expense increased by approximately $39,000. Additionally,
other expenses increased by $11,000. The increased occupancy and equipment expenses are primarily attributed to additional depreciation related to the new data processing facility, as well as required equipment upgrades related to banking
technologies.

Financial Condition

Securities

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

As of September 30, 2006, the market value of securities available for sale was approximately $34,000 more than the amortized cost as shown in note 2 of the
financial statements included in this report. Management has traditionally held debt securities until maturity and thus it does not expect market fluctuations in the value of these securities to have a material impact on earnings.



15



---

##### Table of Contents

Investments in securities, including those which were restricted, increased by approximately $2.9 million during the
first nine months of 2006. The Company generally invests in securities with a relatively short-term maturity due to uncertainty in the direction of interest rates. Of the investments in securities available for sale, 13.46% (based on market value)
are invested in equities, some of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The Company believes these investments offer adequate returns and/or have the potential for increases in value.

Loan Portfolio

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

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

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

For the nine month period ending September 30, 2006, net loans increased by approximately $8.3 million or 7.62%, as a result of managements proactive efforts
to add volume in the commercial and residential real estate sectors of the lending portfolio. The Company has taken measures to reduce the risk exposure related to consumer and automobile financing during the past two years and continues to monitor
its progress in this area. A schedule of loans by type is shown in a note to the consolidated financial statements included in this report.

The risk
elements in lending activities include non-accrual loans, loans 90 days or more past due and restructured loans. Non-accrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have changed due to financial hardship. Non-accrual loans and loans 90 days or more past due totaled $347,000 at September 30, 2006 compared to $369,000 at December 31, 2006. Management
continually monitors non-accrual accounts and all non-performing assets in order to promptly identify any loss allocations that should be made. Although the potential exists for additional losses, management believes the Bank is generally well
secured and continues to actively work with these customers to effect payment.

Impaired loans are those loans which have been identified by management as
problem credits due to various circumstances concerning the borrowers financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a non-accrual classification, however, management has
classified these accounts as impaired and is monitoring the circumstances and payment status closely. In most cases, a specific allocation to the Banks allowance for loan loss is made for an impaired loan. The total amount of impaired loans as
of September 30, 2006 was $319,000 compared to $479,000 at December 31, 2005. Based on current collateral values, management has identified potential losses relating to impaired loans of approximately $95,000 as of September 30, 2006.
Specific valuation allowances have been made as a precautionary measure to cover these potential losses.

Problem loans (serious doubt loans) are loans
whereby information known by management indicates that the borrower may not be able to comply with present payment terms. Management was not aware of any problem loans at September 30, 2006 that are not included in the past due, non-accrual
loans, or impaired loans referred to above.



16



---

##### Table of Contents

Allowance for Loan Losses

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

Management also evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards.
Additional allocation factors relating to identified loan concentrations, unfunded commitments, and loan growth trends are also 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 on an annual basis 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. In
addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available
to them at the time of their examination.

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

The provision for loan losses and changes in the allowance for loan losses are shown in the notes to financial statements included in this report.

The allowance for loan loss balance of $1.523 million at September 30, 2006, increased by approximately $191,000 from its level at December 31, 2005. The cumulative balance in the allowance for loan loss account was equal to 1.29%
and 1.21% of total loans at September 30, 2006 and December 31, 2005, respectively. The increase in the allowance account is directly related to the significant growth in the commercial real estate and residential loan portfolios. This
increase 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 for the nine month
period ending September 30, 2006 included specific allocations for certain borrowers, whose payment performance and collateral values have recently shown improvement. Management exercises the utmost caution and due diligence in allocating for
possible loan losses, and follows a conservative and consistent 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.

Managements
practices for funding the allowance for loan loss account effectively matches expenses to loan losses as they are occurring and ensure that losses are properly recorded in the period in which they occur.

Managements evaluation of the allowance for loan losses for the periods ending September 30, 2006 and December 31, 2005 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.



17



---

##### Table of Contents

Premises and Equipment

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 Company also periodically evaluates opportunities for possible additional branch locations for the future. There are no immediate plans for additional office
locations at this time.

Deposits

The
Companys main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Companys service area. Deposit accounts include demand deposits, savings, money market and certificates
of deposit. The Companys total deposit portfolio has historically remained stable with steady growth in new market areas. During the nine month period ending September 30, 2006, total deposits have increased by $4.9 million or 4.29%. This
increase was mainly in the area of time deposit accounts, and is believed to be the result of consumer demand for higher income opportunities in interest bearing accounts. The growth in time deposits has been a combination of local customer
accounts, as well as, some brokered certificate of deposit accounts. The growth in deposits is a direct source of funds to support loan and asset growth for the Company.

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta (FHLB) upon
which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. As of September 30, 2006, total borrowings were $16.3 million compared to $14.5 million at December 31, 2005. This represents an
increase of $1.8 million or 12.41%. The Bank utilizes borrowings periodically as a source of funds for loan growth and other investment opportunities in order to maintain a profitable interest spread. Borrowings are generally matched with maturities
of specific groups of loans, and are normally advanced for a 5 year term.

Capital

The Company maintains a strong capital base as support for possible future expansion, to promote public confidence, to support operations and for continued growth at a
manageable level. As of September 30, 2006, and December 31, 2005, the Companys total capital-to-total asset ratios were 9.85% and 9.75%, respectively. The Companys capital ratios exceed regulatory minimums. Earnings have been
sufficient to allow for dividends to be declared on a quarterly basis and management has no reason to believe this payment schedule will not continue.

Liquidity

Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Companys ability to obtain
deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Companys management of liquid assets and the ability to generate liquidity through borrowings, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors requirements and meet its customers credit needs.

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

There are no off-balance sheet items that should impair future liquidity. Liquidity as of
September 30, 2006 remains adequate.



18



---

##### Table of Contents

Interest Rate Sensitivity

The Company has historically had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a
significant effect on liquidity. The Company also uses loan repayments and maturing investments to meet its liquidity needs. The Banks membership in the Federal Home Loan Bank System provides additional liquidity. The matching of long-term
receivables and liabilities helps the Company reduce its sensitivity to interest rate changes.

The Company reviews its interest rate gap periodically and
makes adjustments as needed.

Table II contains an analysis, which shows the re-pricing opportunities of earning assets and interest bearing liabilities as
of September 30, 2006.

As of September 30, 2006, the Company had a cumulative Gap Rate Sensitivity Ratio of (34.34%) for the one year
re-pricing period, compared with (23.72%) at December 31, 2005. This negative gap position generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets.
Conversely, earnings would probably decrease in periods during which interest rates are increasing. However, in actual practice, this may not be the case as deposits may not re-price concurrently with changes in rates within the general economy.
Management constantly monitors the Companys interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.

Recent Accounting Pronouncements

In September 2006, the
Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses the SEC staffs views regarding the process of quantifying financial statement misstatements. These interpretations were
issued to address diversity in practice and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 expresses the SEC staffs view that a registrants materiality evaluation of an identified
unadjusted error should quantify the effects of the error on each financial statement and related financial statement disclosures and that prior year misstatements should be considered in quantifying misstatements in current year financial
statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial
statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. The
cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for
that year. Registrants should disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure should also include when and how each error arose and the fact that the errors had previously been
considered immaterial. The SEC staff encourages early application of the guidance in SAB 108 for interim periods of the first fiscal year ending after November 15, 2006. The Company does not anticipate any material impact as a result of SAB
108.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments
 an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 permits fair value measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. The Statement also
clarifies which interest-only strips and principal-only strips are not subject to the requirements of FASB Statement 133. It establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. Finally, SFAS 155
amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective
for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 155 to have a material impact on its
financial statements.



19



---

##### Table of Contents

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing
of Financial Assets  an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering
into certain servicing contracts. The Statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose between the amortization
and fair value methods for subsequent measurements. At initial adoption, the Statement permits a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights. SFAS 156 also requires
separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This
Statement is effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 156 to have a material impact on its financial statements.

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 may change current practice for
some entities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company does not expect the implementation of SFAS 157 to have a material
impact on its financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit
plan will be measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. For any other postretirement plan, the benefit obligation is the
accumulated postretirement benefit obligation. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The Statement also requires additional disclosure in the notes
to financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company is
required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and
benefit obligations as of the date of the employers fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not expect the implementation of SFAS 158 to have a
material impact on its financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes: An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS 109. The Interpretation prescribes a
recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company does not expect the implementation of FIN 48 to have a material impact on its financial statements.

Effect of Proposed Accounting Standards

The Company does not believe that any newly issued but as yet unapplied accounting standards will have a material impact on the Companys
financial position or operations.

Securities and Exchange Commission Web Site

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



20



---

##### Table of Contents

TABLE I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|---------------------------------- |  | ------------------------------------ | ------- | -------------- | ------------------------------------ | ----- |  | ----- | -------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Nine Months Ended September 30, 2006 |         |                | Nine Months Ended September 30, 2005 |      
|                                   |  | AverageBalance                       |         | Income/Expense |                                      | Rates |  |       | AverageBalance |  | Income/Expense |         | Rates |  
|Interest Income                    |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Loans1                             |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Commercial                         |  | $                                    | 5,944   |                | $                                    | 380   |  | 8.52  | %              |  | $              | 3,762   |       | $ | 221   |  | 7.83  | %
|Real estate                        |  |                                      | 94,355  |                |                                      | 4,878 |  | 6.89  | %              |  |                | 80,739  |       |   | 4,090 |  | 6.75  | %
|Installment                        |  |                                      | 14,500  |                |                                      | 1,249 |  | 11.49 | %              |  |                | 13,595  |       |   | 1,297 |  | 12.72 | %
|Credit Card                        |  |                                      | 598     |                |                                      | 97    |  | 21.63 | %              |  |                | 642     |       |   | 102   |  | 21.18 | %
|Federal funds sold                 |  |                                      | 4,507   |                |                                      | 163   |  | 4.82  | %              |  |                | 2,333   |       |   | 51    |  | 2.91  | %
|Interest Bearing                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Deposits                           |  |                                      | 5,970   |                |                                      | 193   |  | 4.31  | %              |  |                | 6,324   |       |   | 149   |  | 3.14  | %
|Investments                        |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Taxable                            |  |                                      | 10,098  |                |                                      | 279   |  | 3.68  | %              |  |                | 16,019  |       |   | 346   |  | 2.88  | %
|Nontaxable2                        |  |                                      | 2,187   |                |                                      | 67    |  | 4.08  | %              |  |                | 2,006   |       |   | 48    |  | 3.19  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total earning assets               |  |                                      | 138,159 |                |                                      | 7,306 |  | 7.05  | %              |  |                | 125,420 |       |   | 6,304 |  | 6.70  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Interest Expense                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Demand deposits                    |  |                                      | 12,669  |                |                                      | 42    |  | 0.44  | %              |  |                | 15,051  |       |   | 46    |  | 0.41  | %
|Savings                            |  |                                      | 13,643  |                |                                      | 63    |  | 0.62  | %              |  |                | 14,170  |       |   | 60    |  | 0.56  | %
|Time deposits                      |  |                                      | 60,575  |                |                                      | 1,785 |  | 3.93  | %              |  |                | 47,908  |       |   | 1,040 |  | 2.89  | %
|Borrowings                         |  |                                      | 17,160  |                |                                      | 516   |  | 4.01  | %              |  |                | 18,277  |       |   | 504   |  | 3.68  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                                    | 104,047 |                | $                                    | 2,406 |  | 3.08  | %              |  | $              | 95,406  |       | $ | 1,650 |  | 2.31  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Income                |  |                                      |         |                | $                                    | 4,900 |  |       |                |  |                |         |       | $ | 4,654 |  |       |  
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Margin                |  |                                      |         |                |                                      |       |  | 4.73  | %              |  |                |         |       |   |       |  | 4.95  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  

---

|1 | Nonaccrual loans are included in computing the average balances.
|- | ----------------------------------------------------------------

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



21



---

##### Table of Contents

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|---------------------------------- |  | ------------------------------------ | ------- | -------------- | ------------------------------------ | ----- |  | ----- | -------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Three Months EndedSeptember 30, 2006 |         |                | Three Months EndedSeptember 30, 2005 |      
|                                   |  | AverageBalance                       |         | Income/Expense |                                      | Rates |  |       | AverageBalance |  | Income/Expense |         | Rates |  
|Interest Income                    |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Loans1                             |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Commercial                         |  | $                                    | 6,514   |                | $                                    | 147   |  | 9.03  | %              |  | $              | 4,126   |       | $ | 82    |  | 7.95  | %
|Real estate                        |  |                                      | 95,866  |                |                                      | 1,652 |  | 6.89  | %              |  |                | 83,753  |       |   | 1,413 |  | 6.75  | %
|Installment                        |  |                                      | 14,725  |                |                                      | 414   |  | 11.25 | %              |  |                | 14,485  |       |   | 448   |  | 12.37 | %
|Credit card                        |  |                                      | 589     |                |                                      | 32    |  | 21.73 | %              |  |                | 612     |       |   | 32    |  | 20.92 | %
|Federal funds sold                 |  |                                      | 5,904   |                |                                      | 79    |  | 5.35  | %              |  |                | 3,586   |       |   | 31    |  | 3.46  | %
|Interest Bearing                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Deposits                           |  |                                      | 5,097   |                |                                      | 58    |  | 4.55  | %              |  |                | 7,322   |       |   | 62    |  | 3.39  | %
|Securities                         |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Taxable                            |  |                                      | 10,017  |                |                                      | 107   |  | 4.27  | %              |  |                | 14,040  |       |   | 93    |  | 2.65  | %
|Nontaxable2                        |  |                                      | 2,141   |                |                                      | 25    |  | 4.67  | %              |  |                | 1,935   |       |   | 14    |  | 2.89  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total earning assets               |  |                                      | 140,853 |                |                                      | 2,514 |  | 7.14  | %              |  |                | 129,859 |       |   | 2,174 |  | 6.70  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Interest Expense                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Demand deposits                    |  |                                      | 11,995  |                |                                      | 12    |  | 0.40  | %              |  |                | 15,860  |       |   | 17    |  | 0.43  | %
|Savings                            |  |                                      | 13,173  |                |                                      | 21    |  | 0.64  | %              |  |                | 14,081  |       |   | 20    |  | 0.57  | %
|Time deposits                      |  |                                      | 63,462  |                |                                      | 701   |  | 4.41  | %              |  |                | 50,885  |       |   | 401   |  | 3.15  | %
|Borrowings                         |  |                                      | 17,122  |                |                                      | 175   |  | 4.09  | %              |  |                | 17,778  |       |   | 173   |  | 3.89  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                                    | 105,752 |                | $                                    | 909   |  | 3.43  | %              |  | $              | 98,604  |       | $ | 611   |  | 2.48  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Income                |  |                                      |         |                | $                                    | 1,605 |  |       |                |  |                |         |       | $ | 1,564 |  |       |  
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Margin                |  |                                      |         |                |                                      |       |  | 4.56  | %              |  |                |         |       |   |       |  | 4.82  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  

---

|1 | Nonaccrual loans are included in computing the average balances.
|- | ----------------------------------------------------------------

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



22



---

##### Table of Contents

TABLE II

PIONEER BANKSHARES, INC.

INTEREST SENSITIVITY ANALYSIS

SEPTEMBER 30, 2006

(Dollar Amounts
in Thousands)



|                                                                      |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|--------------------------------------------------------------------- |  | --------- | ------- | - | ---------- | - | ------- | --------- |  | - | ----------- | - |  | ------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                                                      |  | 0-3Months |         |   | 4-12Months |   |         | 1-5 Years |  |   | Over 5Years |   |  | NotClassified |        |   | Total
|Uses of Funds:                                                        |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                                                      |  |           |         |   |            |  
|Loans                                                                 |  | $         | 13,323  |   |            | $ | 8,447   |           |  | $ | 49,357      |   |  | $             | 47,374 |   |       | $ |       |   |  | $ | 118,501
|Interest bearing bank deposits                                        |  |           | 1,870   |   |            |   | 1,900   |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 3,770  
|Investment securities                                                 |  |           | 6,995   |   |            |   | 1,988   |           |  |   | 2,379       |   |  |               | 731    |   |       |   | 1,880  |   |  |   | 13,973 
|Restricted stock                                                      |  |           |        |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   | 1,089  |   |  |   | 1,089  
|Federal funds sold                                                    |  |           | 750     |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 750    
|                                                                      |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                                                 |  | $         | 22,938  |   |            | $ | 12,335  |           |  | $ | 51,736      |   |  | $             | 48,105 |   |       | $ | 2,969  |   |  | $ | 138,083
|                                                                      |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Sources of Funds:                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                                                      |  |           |         |   |            |  
|Interest bearing demand deposits                                      |  |           | 11,886  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 11,886 
|Regular savings                                                       |  |           | 13,455  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 13,455 
|Certificates of deposit $100,000 and over                             |  |           | 1,359   |   |            |   | 6,617   |           |  |   | 2,825       |   |  |               |       |   |       |   |       |   |  |   | 10,801 
|Other certificates of deposit                                         |  |           | 14,728  |   |            |   | 25,866  |           |  |   | 11,873      |   |  |               |       |   |       |   |       |   |  |   | 52,467 
|Borrowings                                                            |  |           | 600     |   |            |   | 8,200   |           |  |   | 7,500       |   |  |               |       |   |       |   |       |   |  |   | 16,300 
|                                                                      |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                                                 |  |           | 42,028  |   |            |   | 40,683  |           |  |   | 22,198      |   |  |               |       |   |       |   |       |   |  |   | 104,909
|                                                                      |  |           |         |   |            |  
|Discrete Gap                                                          |  |           | (19,090 | ) |            |   | (28,348 | )         |  |   | 29,538      |   |  |               | 48,105 |   |       |   | 2,969  |   |  |   | 33,174 
|                                                                      |  |           |         |   |            |  
|Cumulative Gap                                                        |  |           | (19,090 | ) |            |   | (47,438 | )         |  |   | (17,900     | ) |  |               | 30,205 |   |       |   | 33,174 |   |  |   |        
|                                                                      |  |           |         |   |            |  
|Ratio of Cumulative Gap To Total Earning Assets at September 30, 2006 |  |           | -13.83  | % |            |   | -34.35  | %         |  |   | -12.96      | % |  |               | 21.87  | % |       |   | 24.02  | % |  |   |        
|                                                                      |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        



23



---

##### Table of Contents

Item 3. Controls and Procedures

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

The Company has established disclosure controls and procedures to ensure material information related to Pioneer
Bankshares, Inc. is made known to our principal executive officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, the Company evaluates
the effectiveness of these disclosure controls and procedures on a quarterly basis, and has done so as of the end of the period covered by this report. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were adequate and effective as of the end of the period covered by this report. There were no changes in the Companys internal control over financial reporting during the
quarter ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Changes in Internal Controls

There were no significant changes in the Companys internal controls pertaining to
its financial reporting and control of its assets or in other factors that could significantly affect these controls since the date of their evaluation.

Part II - Other Information

Item 1. Legal Proceedings

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

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

The Company has a stock repurchase program authorized
with 5,000 shares remaining available for repurchase. There have been no repurchase transactions during 2006.

Item 3. Defaults Upon Senior Securities

Not Applicable



24



---

##### Table of Contents

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

Not Applicable

Item 5. Other Information

Not Applicable

Item 5a. Required 8-K Disclosures

Not Applicable

Item 5b. Changes in Procedures for Director Nominations by Security Holders

There have been no material changes to the
Companys procedures by which the security holders may recommend nominees to the registrants board of directors during this reporting period.

Item 6. Exhibits



|     |  |                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).                                                                                                           
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).                                                                                                           
|     | 
|32   |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).



25



---

##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



PIONEER BANKSHARES, INC./s/ THOMAS R. ROSAZZAThomas R. RosazzaPresident and Chief Executive Officer/s/ LORI G. HASSETTLori G. HassettVice President and Chief Financial Officer


Date: November 10, 2006



26