##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-QSB



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



For Quarterly Period Ended June 30, 2004



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



Commission File No.  0-30541



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PIONEER BANKSHARES, INC.

(Exact name of small business issuer as specified in its charter)



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|                                |  |                    
|------------------------------- |  | -------------------
|Virginia                        |  | 54-1278721         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | 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)



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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 ̈



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 August 12, 2004
|Common Stock, par value - $0.50 |  | 1,073,650 shares              



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



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##### Table of Contents

PIONEER BANKSHARES, INC.



INDEX



|        |  |                                                                                                        |  |     
|------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                                        |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                                  |  | 3   
|        |  |                                                                                                       
|Item 1. |  | Financial Statements                                                                                   |  |     
|        |  |                                                                                                       
|        |  | Consolidated Statements of Income - Three Months Ended June 30, 2004 and 2003                          |  | 3   
|        |  |                                                                                                       
|        |  | Consolidated Statements of Income - Six Months Ended June 30, 2004 and 2003                            |  | 4   
|        |  |                                                                                                       
|        |  | Consolidated Balance Sheets - June 30, 2004 and December 31, 2003                                      |  | 5   
|        |  |                                                                                                       
|        |  | Consolidated Statements of Changes in Stockholders Equity - Three Months Ended June 30, 2004 and 2003 |  | 6   
|        |  |                                                                                                       
|        |  | Consolidated Statements of Cash Flows - Six Months Ended June 30, 2004 and 2003                        |  | 7   
|        |  |                                                                                                       
|        |  | Notes to Consolidated Financial Statements                                                             |  | 8   
|        |  |                                                                                                       
|Item 2. |  | Managements Discussion and Analysis or Plan of Operation                                              |  | 11  
|        |  |                                                                                                       
|Item 3. |  | Controls and Procedures                                                                                |  | 21  
|        |  |                                                                                                       
|PART II |  | OTHER INFORMATION                                                                                      |  | 21  
|        |  |                                                                                                       
|Item 1. |  | Legal Proceedings                                                                                      |  | 21  
|        |  |                                                                                                       
|Item 2. |  | Changes in Securities, and Small Business Issuers Purchases of Equity Securities                      |  | 21  
|        |  |                                                                                                       
|Item 3. |  | Defaults Upon Senior Securities                                                                        |  | 21  
|        |  |                                                                                                       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                    |  | 22  
|        |  |                                                                                                       
|Item 5. |  | Other Information                                                                                      |  | 22  
|        |  |                                                                                                       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                       |  | 22  
|        |  |                                                                                                       
|        |  | SIGNATURES                                                                                             |  | 23  



2



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##### 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 Ended June 30,
|                                                    |  | 2004                        |           |   | 2003
|Interest and Dividend Income:                       |  |                             |           |   |      |   |          
|Loans including fees                                |  | $                           | 1,771     |   |      | $ | 1,924    
|Interest on securities - taxable                    |  |                             | 64        |   |      |   | 91       
|Interest on securities - nontaxable                 |  |                             | 3         |   |      |   | 20       
|Interest on deposits and federal funds sold         |  |                             | 47        |   |      |   | 37       
|Dividends                                           |  |                             | 14        |   |      |   | 23       
|                                                    |  |                             |           |   |      |   |          
|Total Interest and Dividend Income                  |  |                             | 1,899     |   |      |   | 2,095    
|                                                    |  |                             |           |   |      |   |          
|Interest Expense:                                   |  |                             |           |   |      |   |          
|Deposits                                            |  |                             | 336       |   |      |   | 433      
|Long term debt                                      |  |                             | 110       |   |      |   | 71       
|                                                    |  |                             |           |   |      |   |          
|Total Interest Expense                              |  |                             | 446       |   |      |   | 504      
|                                                    |  |                             |           |   |      |   |          
|Net Interest Income                                 |  |                             | 1,453     |   |      |   | 1,591    
|Provision for loan losses                           |  |                             | 55        |   |      |   | 168      
|                                                    |  |                             |           |   |      |   |          
|Net interest income after provision for loan losses |  |                             | 1,398     |   |      |   | 1,423    
|                                                    |  |                             |           |   |      |   |          
|Noninterest Income:                                 |  |                             |           |   |      |   |          
|Service charges and fees                            |  |                             | 218       |   |      |   | 243      
|Other income                                        |  |                             | (1        | ) |      |   | 40       
|Gain (loss) on securities transactions              |  |                             | (18       | ) |      |   | 132      
|                                                    |  |                             |           |   |      |   |          
|Total Noninterest Income                            |  |                             | 199       |   |      |   | 415      
|                                                    |  |                             |           |   |      |   |          
|Noninterest Expense:                                |  |                             |           |   |      |   |          
|Salaries and benefits                               |  |                             | 551       |   |      |   | 537      
|Occupancy expenses                                  |  |                             | 79        |   |      |   | 67       
|Equipment expenses                                  |  |                             | 201       |   |      |   | 173      
|Other expenses                                      |  |                             | 352       |   |      |   | 341      
|                                                    |  |                             |           |   |      |   |          
|Total Noninterest Expenses                          |  |                             | 1,183     |   |      |   | 1,118    
|                                                    |  |                             |           |   |      |   |          
|Income before Income Taxes                          |  |                             | 414       |   |      |   | 720      
|Income Tax Expense                                  |  |                             | 136       |   |      |   | 229      
|                                                    |  |                             |           |   |      |   |          
|Net Income                                          |  |                             | 278       |   |      |   | 491      
|                                                    |  |                             |           |   |      |   |          
|Per Share Data                                      |  |                             |           |   |      |   |          
|Net income, basic and diluted                       |  | $                           | 0.26      |   |      | $ | 0.45     
|                                                    |  |                             |           |   |      |   |          
|Dividends                                           |  | $                           | 0.12      |   |      | $ | 0.11     
|                                                    |  |                             |           |   |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                             | 1,073,650 |   |      |   | 1,092,410
|                                                    |  |                             |           |   |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                             | 1,074,681 |   |      |   | 1,092,410
|                                                    |  |                             |           |   |      |   |          



See Notes to
Consolidated Financial Statements



3



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)



|                                                    |  |                           |           |      |   |          
|--------------------------------------------------- |  | ------------------------- | --------- | ---- | - | ---------
|                                                    |  | Six Months Ended June 30,
|                                                    |  | 2004                      |           | 2003
|Interest and Dividend Income:                       |  |                           |           |      |   |          
|Loans including fees                                |  | $                         | 3,529     |      | $ | 3,930    
|Interest on securities  taxable                    |  |                           | 155       |      |   | 174      
|Interest on securities  nontaxable                 |  |                           | 17        |      |   | 41       
|Interest on deposits and federal funds sold         |  |                           | 103       |      |   | 88       
|Dividends                                           |  |                           | 28        |      |   | 47       
|                                                    |  |                           |           |      |   |          
|Total Interest and Dividend Income                  |  |                           | 3,832     |      |   | 4,280    
|                                                    |  |                           |           |      |   |          
|Interest Expense:                                   |  |                           |           |      |   |          
|Deposits                                            |  |                           | 691       |      |   | 941      
|Long term debt                                      |  |                           | 221       |      |   | 145      
|                                                    |  |                           |           |      |   |          
|Total Interest Expense                              |  |                           | 912       |      |   | 1,086    
|                                                    |  |                           |           |      |   |          
|Net Interest Income                                 |  |                           | 2,920     |      |   | 3,194    
|Provision for loan losses                           |  |                           | 46        |      |   | 485      
|                                                    |  |                           |           |      |   |          
|Net interest income after provision for loan losses |  |                           | 2,874     |      |   | 2,709    
|                                                    |  |                           |           |      |   |          
|Noninterest Income:                                 |  |                           |           |      |   |          
|Service charges and fees                            |  |                           | 417       |      |   | 455      
|Other income                                        |  |                           | 37        |      |   | 117      
|Gain on securities transactions                     |  |                           | 231       |      |   | 128      
|                                                    |  |                           |           |      |   |          
|Total Noninterest Income                            |  |                           | 685       |      |   | 700      
|                                                    |  |                           |           |      |   |          
|Noninterest Expense:                                |  |                           |           |      |   |          
|Salaries and benefits                               |  |                           | 1,108     |      |   | 1,044    
|Occupancy expenses                                  |  |                           | 154       |      |   | 130      
|Equipment expenses                                  |  |                           | 401       |      |   | 344      
|Other expenses                                      |  |                           | 678       |      |   | 687      
|                                                    |  |                           |           |      |   |          
|Total Noninterest Expenses                          |  |                           | 2,341     |      |   | 2,205    
|                                                    |  |                           |           |      |   |          
|Income before Income Taxes                          |  |                           | 1,214     |      |   | 1,204    
|Income Tax Expense                                  |  |                           | 406       |      |   | 389      
|                                                    |  |                           |           |      |   |          
|Net Income                                          |  |                           | 808       |      |   | 815      
|                                                    |  |                           |           |      |   |          
|Per Share Data                                      |  |                           |           |      |   |          
|Net income, basic and diluted                       |  | $                         | 0.75      |      | $ | 0.75     
|                                                    |  |                           |           |      |   |          
|Dividends                                           |  | $                         | 0.24      |      | $ | 0.22     
|                                                    |  |                           |           |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                           | 1,073,650 |      |   | 1,092,410
|                                                    |  |                           |           |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                           | 1,074,681 |      |   | 1,092,410
|                                                    |  |                           |           |      |   |          



See Notes to
Consolidated Financial Statements



4



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)



|                                                                                     |  |               |         |                   |   |        
|------------------------------------------------------------------------------------ |  | ------------- | ------- | ----------------- | - | -------
|                                                                                     |  | June 30, 2004 |         | December 31, 2003
|                                                                                     |  | (Unaudited)   |         | (Audited)        
|ASSETS                                                                               |  |               |         |                   |   |        
|Cash and due from banks                                                              |  | $             | 5,506   |                   | $ | 7,579  
|Federal funds sold                                                                   |  |               | 400     |                   |   | 2,500  
|Interest bearing deposits in other banks                                             |  |               | 8,059   |                   |   | 5,212  
|Securities available for sale, at fair value                                         |  |               | 16,025  |                   |   | 18,348 
|Securities held to maturity                                                          |  |               | 24      |                   |   | 31     
|Restricted securities                                                                |  |               | 639     |                   |   | 557    
|Loans receivable, net of allowance for loan losses of $1,399 and $1,433 respectively |  |               | 86,898  |                   |   | 80,781 
|Premises and equipment, net                                                          |  |               | 4,001   |                   |   | 4,115  
|Accrued interest receivable                                                          |  |               | 453     |                   |   | 497    
|Other assets                                                                         |  |               | 1,376   |                   |   | 1,301  
|                                                                                     |  |               |         |                   |   |        
|Total Assets                                                                         |  | $             | 123,381 |                   | $ | 120,921
|                                                                                     |  |               |         |                   |   |        
|LIABILITIES                                                                          |  |               |         |                   |   |        
|Deposits                                                                             |  |               |         |                   |   |        
|Noninterest bearing demand                                                           |  | $             | 23,135  |                   |   | 21,181 
|Interest bearing                                                                     |  |               |         |                   |   |        
|Demand                                                                               |  |               | 14,226  |                   |   | 14,155 
|Savings                                                                              |  |               | 14,051  |                   |   | 12,888 
|Time deposits over $100,000                                                          |  |               | 8,259   |                   |   | 8,219  
|Other time deposits                                                                  |  |               | 38,523  |                   |   | 43,148 
|                                                                                     |  |               |         |                   |   |        
|Total Deposits                                                                       |  |               | 98,194  |                   |   | 99,591 
|Accrued expenses and other liabilities                                               |  |               | 536     |                   |   | 740    
|Long term debt                                                                       |  |               | 11,100  |                   |   | 7,425  
|                                                                                     |  |               |         |                   |   |        
|Total Liabilities                                                                    |  |               | 109,830 |                   |   | 107,756
|                                                                                     |  |               |         |                   |   |        
|STOCKHOLDERS EQUITY                                                                 |  |               |         |                   |   |        
|Common stock; $.50 par value, authorized 5,000,000, outstanding 1,073,650            |  |               | 537     |                   |   | 537    
|Retained earnings                                                                    |  |               | 13,014  |                   |   | 12,464 
|Accumulated other comprehensive income, net                                          |  |               |        |                   |   | 164    
|                                                                                     |  |               |         |                   |   |        
|Total Stockholders Equity                                                           |  |               | 13,551  |                   |   | 13,165 
|                                                                                     |  |               |         |                   |   |        
|Total Liabilities and Stockholders Equity                                           |  | $             | 123,381 |                   | $ | 120,921
|                                                                                     |  |               |         |                   |   |        



See Notes to
Consolidated Financial Statements



5



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(In Thousands)

(UNAUDITED)



|                                                                                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ----------- | --- | ----------------- | - | ------ | -------------------------------------- |  | - | ----- | - |  | - | ------ | -
|                                                                                         |  | CommonStock |     | Retained Earnings |   |        | Accumulated Other Comprehensive Income |  |   | Total |  
|BALANCE DECEMBER 31, 2002                                                                |  | $           | 546 |                   | $ | 11,913 |                                        |  | $ | 216   |   |  | $ | 12,675 |  
|Comprehensive Income                                                                     |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|Net Income                                                                               |  |             |     |                   |   | 815    |                                        |  |   |       |   |  |   | 815    |  
|Changes in unrealized gains on securities, net of taxes                                  |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|Unrealized holding losses arising during the period (net of tax effect $4)               |  |             |     |                   |   |        |                                        |  |   | (8    | ) |  |   |        |  
|Reclassification adjustment for losses included in net income (net of tax effect of $44) |  |             |     |                   |   |        |                                        |  |   | (84   | ) |  |   | (92    | )
|                                                                                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                               |  |             |     |                   |   |        |                                        |  |   |       |   |  |   | 723    |  
|Cash Dividends                                                                           |  |             |     |                   |   | (239   | )                                      |  |   |       |   |  |   | (239   | )
|Retirement of common stock                                                               |  |             |    |                   |   |       |                                        |  |   |      |   |  |   |       |  
|                                                                                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|BALANCE JUNE 30, 2003                                                                    |  |             | 546 |                   |   | 12,489 |                                        |  |   | 124   |   |  |   | 13,159 |  
|                                                                                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|BALANCE DECEMBER 31, 2003                                                                |  |             | 537 |                   |   | 12,464 |                                        |  |   | 164   |   |  |   | 13,165 |  
|Comprehensive Income                                                                     |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|Net Income                                                                               |  |             |     |                   |   | 808    |                                        |  |   |       |   |  |   | 808    |  
|Changes in unrealized gains (losses) on securities, net of taxes                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|Unrealized holding losses arising during the period (net of tax effect of $6)            |  |             |     |                   |   |        |                                        |  |   | (12   | ) |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $79)  |  |             |     |                   |   |        |                                        |  |   | (152  | ) |  |   | (164   | )
|                                                                                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                               |  |             |     |                   |   |        |                                        |  |   |       |   |  |   | 644    |  
|Cash Dividends                                                                           |  |             |     |                   |   | (258   | )                                      |  |   |       |   |  |   | (258   | )
|Retirement of common stock                                                               |  |             |    |                   |   |       |                                        |  |   |      |   |  |   |       |  
|                                                                                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  
|BALANCE JUNE 30, 2004                                                                    |  | $           | 537 |                   | $ | 13,014 |                                        |  | $ |      |   |  | $ | 13,551 |  
|                                                                                         |  |             |     |                   |   |        |                                        |  |   |       |   |  |   |        |  



See Notes to
Consolidated Financial Statements



6



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)



|                                                                                  |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six Months Ended June 30, |        
|                                                                                  |  | 2004                      |         |   | 2003 |  
|Cash Flows from Operating Activities:                                             |  |                           |         |   |      |   |         |  
|Net income                                                                        |  | $                         | 808     |   |      | $ | 815     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Provision for loan losses                                                         |  |                           | 46      |   |      |   | 485     |  
|Depreciation and amortization                                                     |  |                           | 279     |   |      |   | 252     |  
|Loss (gain) on sale of securities                                                 |  |                           | (231    | ) |      |   | (128    | )
|Income on insurance policies                                                      |  |                           |        |   |      |   | (24     | )
|Net change in:                                                                    |  |                           |         |   |      |   |         |  
|Accrued interest receivable                                                       |  |                           | 44      |   |      |   | 58      |  
|Other assets                                                                      |  |                           | (8      | ) |      |   | (216    | )
|Accrued expense and other liabilities                                             |  |                           | (204    | ) |      |   | (7      | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                         |  |                           | 734     |   |      |   | 1,235   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash Flows from Investing Activities:                                             |  |                           |         |   |      |   |         |  
|Net change in federal funds sold                                                  |  |                           | 2,100   |   |      |   | 350     |  
|Net change in interest bearing deposits                                           |  |                           | (2,847  | ) |      |   | (1,051  | )
|Net change in restricted securities                                               |  |                           | (82     | ) |      |   |        |  
|Proceeds from maturities and sales of securities available for sale               |  |                           | 12,399  |   |      |   | 15,676  |  
|Proceeds from maturities and calls of securities held to maturity                 |  |                           | 7       |   |      |   | 12      |  
|Purchase of securities available for sale                                         |  |                           | (10,076 | ) |      |   | (10,832 | )
|Net (increase) decrease in loans                                                  |  |                           | (6,163  | ) |      |   | 4,166   |  
|Purchase of bank premises and equipment                                           |  |                           | (165    | ) |      |   | (672    | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net Cash Provided by (Used in) Investing Activities                               |  |                           | (4,827  | ) |      |   | 7,649   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash Flows from Financing Activities:                                             |  |                           |         |   |      |   |         |  
|Net change in:                                                                    |  |                           |         |   |      |   |         |  
|Demand and savings deposits                                                       |  |                           | 3,188   |   |      |   | (1,028  | )
|Time deposits                                                                     |  |                           | (4,585  | ) |      |   | (7,730  | )
|Proceeds from borrowings                                                          |  |                           | 4,000   |   |      |   |        |  
|Proceeds from curtailments of borrowings                                          |  |                           | (325    | ) |      |   | (325    | )
|Dividends paid                                                                    |  |                           | (258    | ) |      |   | (239    | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net Cash (Used in) Provided by Financing Activities                               |  |                           | 2,020   |   |      |   | (9,322  | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash and Cash Equivalents                                                         |  |                           |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |                           | (2,073  | ) |      |   | (438    | )
|Cash and Cash Equivalents, beginning of year                                      |  |                           | 7,579   |   |      |   | 7,680   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash and Cash Equivalents, End of Period                                          |  | $                         | 5,506   |   |      | $ | 7,242   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Supplemental Disclosure of Cash Paid                                              |  |                           |         |   |      |   |         |  
|During the Period for:                                                            |  |                           |         |   |      |   |         |  
|Interest                                                                          |  | $                         | 956     |   |      | $ | 1,321   |  
|Income taxes                                                                      |  | $                         | 251     |   |      | $ | 253     |  



See Notes to
Consolidated Financial Statements



7



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##### 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 June 30, 2004 and the results of operations for the three-month periods and year to date periods ended June 30, 2004 and June 30, 2003. The notes included herein should be read in conjunction with the notes to financial statements included in
the 2003 annual report to stockholders of Pioneer Bankshares, Inc. and its form 10-KSB for the year ended December 31, 2003, 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 accounts for the plan under the
recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted
under the plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of the Financial Account Standards Boards Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation



(dollars in thousands except per share amounts):



|                                                                                                 |  |          |      |   |      |   |      |  
|------------------------------------------------------------------------------------------------ |  | -------- | ---- | - | ---- | - | ---- | -
|                                                                                                 |  | June 30, |     
|                                                                                                 |  | 2004     |      |   | 2003 |  
|Net Income, as reported                                                                          |  | $        | 808  |   |      | $ | 815  |  
|Total stock-based compensation expenses determined under fair value based method for all rewards |  |          | (1   | ) |      |   | (2   | )
|                                                                                                 |  |          |      |   |      |   |      |  
|Pro forma net income                                                                             |  | $        | 807  |   |      | $ | 813  |  
|                                                                                                 |  |          |      |   |      |   |      |  
|Basic earnings per share                                                                         |  |          |      |   |      |   |      |  
|As reported                                                                                      |  | $        | 0.75 |   |      | $ | 0.75 |  
|                                                                                                 |  |          |      |   |      |   |      |  
|Pro forma                                                                                        |  | $        | 0.75 |   |      | $ | 0.74 |  
|                                                                                                 |  |          |      |   |      |   |      |  
|Diluted earnings per share                                                                       |  |          |      |   |      |   |      |  
|As reported                                                                                      |  | $        | 0.75 |   |      | $ | 0.75 |  
|                                                                                                 |  |          |      |   |      |   |      |  
|Pro forma                                                                                        |  | $        | 0.75 |   |      | $ | 0.74 |  
|                                                                                                 |  |          |      |   |      |   |      |  



The fair value of each grant is
estimated at the grant date using the Black-Scholes option-pricing model. The estimates were calculated using the following weighted-average assumptions for grants in 2004 and 2003: Dividend rate of 3.43% and 3.75%, price volatility of 19.94% and
17.58%, risk-free interest rate of 4.81% and 3.34%, and expected lives of 10 years.



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##### Table of Contents

NOTE 2    INVESTMENT SECURITIES:



The amounts at which investment securities are carried in the consolidated balance sheets
and their approximate market values at June 30, 2004 and December 31, 2003 follows:



|                                     |  |                |        |                   |   |                |  |              |        |  |   |       
|------------------------------------ |  | -------------- | ------ | ----------------- | - | -------------- |  | ------------ | ------ |  | - | ------
|                                     |  | (In Thousands)
|                                     |  | June 30, 2004  |        | December 31, 2003
|                                     |  | Carrying Value |        | Market Value      |   | Carrying Value |  | Market Value
|Securities held to maturity:         |  |                |        |                   |   |                |  |              |        |  |   |       
|Mortgage-backed securities           |  | $              | 24     |                   | $ | 21             |  | $            | 31     |  | $ | 33    
|                                     |  |                |        |                   |   |                |  |              |        |  |   |       
|Total                                |  | $              | 24     |                   | $ | 21             |  | $            | 31     |  | $ | 33    
|                                     |  |                |        |                   |   |                |  |              |        |  |   |       
|Securities available for sale:       |  |                |        |                   |   |                |  |              |        |  |   |       
|U.S. Treasury and agency obligations |  | $              | 13,922 |                   | $ | 13,793         |  | $            | 14,836 |  | $ | 14,832
|Municipal securities                 |  |                | 214    |                   |   | 226            |  |              | 1,710  |  |   | 1,827 
|Equity securities                    |  |                | 1,889  |                   |   | 2,006          |  |              | 1,546  |  |   | 1,689 
|                                     |  |                |        |                   |   |                |  |              |        |  |   |       
|Total                                |  | $              | 16,025 |                   | $ | 16,025         |  | $            | 18,092 |  | $ | 18,348
|                                     |  |                |        |                   |   |                |  |              |        |  |   |       



NOTE
3    LOANS:



Loans outstanding are summarized as
follows:

(In Thousands)



|                                 |  |               |        |   |                   |   |        |  
|-------------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|                                 |  | June 30, 2004 |        |   | December 31, 2003 |  
|Mortgage loans on real estate    |  |               |        |   |                   |   |        |  
|Construction loans               |  | $             | 7,709  |   |                   | $ | 5,929  |  
|Agricultural                     |  |               | 4,682  |   |                   |   | 4,809  |  
|Equity lines of credit           |  |               | 2,022  |   |                   |   | 1,853  |  
|Residential 1-4 family           |  |               | 38,262 |   |                   |   | 37,930 |  
|Second Mortgages                 |  |               | 2,643  |   |                   |   | 2,726  |  
|Multifamily                      |  |               | 1,215  |   |                   |   | 517    |  
|Commercial                       |  |               | 13,872 |   |                   |   | 10,712 |  
|                                 |  |               |        |   |                   |   |        |  
|Total real estate loans          |  |               | 70,405 |   |                   |   | 64,476 |  
|                                 |  |              
|Commercial and industrial loans  |  |               | 5,228  |   |                   |   | 3,912  |  
|                                 |  |              
|Consumer installment loans       |  |               |        |   |                   |   |        |  
|Personal                         |  |               | 13,039 |   |                   |   | 14,416 |  
|Credit cards                     |  |               | 700    |   |                   |   | 803    |  
|                                 |  |               |        |   |                   |   |        |  
|Total consumer installment loans |  |               | 13,739 |   |                   |   | 15,219 |  
|                                 |  |              
|All other loans                  |  |               | 216    |   |                   |   | 142    |  
|                                 |  |               |        |   |                   |   |        |  
|Gross Loans                      |  |               | 89,588 |   |                   |   | 83,749 |  
|                                 |  |              
|Less unearned income on loans    |  |               | (1,291 | ) |                   |   | (1,535 | )
|                                 |  |               |        |   |                   |   |        |  
|Loans, less unearned discount    |  |               | 88,297 |   |                   |   | 82,214 |  
|                                 |  |              
|Less allowance for loan losses   |  |               | (1,399 | ) |                   |   | (1,433 | )
|                                 |  |               |        |   |                   |   |        |  
|Net Loans Receivable             |  | $             | 86,898 |   |                   | $ | 80,781 |  
|                                 |  |               |        |   |                   |   |        |  



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##### Table of Contents

NOTE 4    ALLOWANCE FOR LOAN LOSSES:



A summary of transactions in the allowance for loan losses for the six months ended June 30,
2004 and 2003 follows:



|                                        |  |                |       |   |      |   |       |  
|--------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                        |  | (In Thousands) |      
|                                        |  | 2004           |       |   | 2003 |  
|Balance, beginning of period            |  | $              | 1,433 |   |      | $ | 1,448 |  
|Provision charged to operating expenses |  |                | 46    |   |      |   | 485   |  
|Recoveries of loans charged off         |  |                | 205   |   |      |   | 356   |  
|Loans charged off                       |  |                | (285  | ) |      |   | (785  | )
|                                        |  |                |       |   |      |   |       |  
|Balance, End of Period                  |  | $              | 1,399 |   |      | $ | 1,504 |  
|                                        |  |                |       |   |      |   |       |  



NOTE
5    EARNINGS PER SHARE:



The following shows the
weighted average number of shares as of June 30, 2004 and 2003, 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.



|                               |  |               |  |                  |      |        |           |                  |   |     
|------------------------------ |  | ------------- |  | ---------------- | ---- | ------ | --------- | ---------------- | - | ----
|                               |  | June 30, 2004 |  | June 30, 2003   
|                               |  | Shares        |  | Per Share Amount |      | Shares |           | Per Share Amount
|Basic earnings per share       |  | 1,073,650     |  | $                | 0.75 |        | 1,092,410 |                  | $ | 0.75
|                               |  |               |  |                  |      |        |           |                  |   |     
|Effect of dilutive securities: |  |               |  |                  |      |        |           |                  |   |     
|Stock Options                  |  | 1,031         |  |                  |      |        |          |                  |   |     
|                               |  |               |  |                  |      |        |           |                  |   |     
|Diluted earnings per share     |  | 1,074,681     |  | $                | 0.75 |        | 1,092,410 |                  | $ | 0.75
|                               |  |               |  |                  |      |        |           |                  |   |     



As of June 30, 2004, stock options
representing 1,500 shares were not included in computing diluted EPS because their effects were anti-dilutive.



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##### Table of Contents

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



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



Forward-Looking Statements



This quarterly report on Form 10-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.



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) 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 internally generated



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##### Table of Contents

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 issued
Statement of Financial Accounting Standard (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 asses with indefinite lives. Instead, these assets will be subject to at
least an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identifies for the purpose of assessing potential future impairments of goodwill.



Goodwill is included in other assets and totaled $360,000 at June 30, 2004
and December 31, 2003. The goodwill is no longer amortized, but instead is tested for impairment at least annually.



Overview



In the first six months of 2004, net income including securities transactions was $808,000 ($0.75 per share) compared with $815,000 ($0.75) for the first six months of 2003. This represents a decrease of 0.86%.



Total assets for the Company as of June 30, 2004 were $123,381,000 compared to
$120,921,000 at year-end 2003. This is an increase of $2,460,000 or 2.03%. Total net loans have increased from $80,781,000 as of December 31, 2003 to $86,898,000 as of June 30, 2004. This represents an increase of $6,117,000 or 7.57%. The majority
of this increase in loans has been in the area of commercial real estate properties.



Total liabilities for the Company as of June 30, 2004 were $109,830,000 compared to $107,756,000 at year-end 2003. This is an increase of 2,074,000 or 1.92%. The primary basis for this increase is related to additional long term borrowings
from the Federal Home Loan Bank of Atlanta.



The Companys total capital
position remains strong and exceeds regulatory guidelines. As of June 30, 2004, total capital was $13,551,000.



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.



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##### Table of Contents

Results of Operations



Net Interest Income



Total interest income decreased $448,000 or 10.47% in the first six months of 2004 compared to the first six months of 2003. Total interest
expense decreased $174,000 or 16.02% in the first six months of 2004 compared to the same period of 2003. These decreases in interest income and interest expense resulted in a total decrease in net interest income of $274,000 or 8.58% for the period
ending June 30, 2004 compared to the period ending June 30, 2003.



The net
interest margin decreased from 5.89% for the first six months of 2003 to 5.87% for the first six months of 2004. The net interest margin for the three month period ending June 30, 2004 was 5.19% in comparison to 5.96% for the same period in 2003.
These decreases in net interest margin are mainly due to a decline in market interest rates in comparison to market rates one year ago. The average yield on earning assets has decreased from 7.86% as of June 30, 2003 to 6.87% as of June 30, 2004.



The average interest rate being paid on time deposits has decreased from 3.08%
as of June 30, 2003 to 2.56% as of June 30, 2004. This decrease is also attributed to time deposit re-pricing at lower market interest rates during the past year.



The Company plans to invest in additional securities and to continue expanding its commercial loan and consumer real estate portfolios
during the remainder of 2004. The Company will also continue to offer consumer installment loans to its customer base.



Noninterest Income



In the first six months of 2004, the net decrease in noninterest income was $15,000 when compared to the same period last year. Total gains on security transactions were $231,000 as of June 30, 2004 in comparison to
$128,000 as of June 30, 2003. Service charge income decreased by $38,000 and other income decreased by $80,000. The decrease in service charge income is attributed to managements proactive approach to reducing overdrafts, which has affected
the fee income generated from bounce protection on checking accounts. The decrease in other income is mainly due to a reduced amount of activity from the investment subsidiary, Pioneer Financial Service, LLC. Management plans to implement a new
profitability strategy for the investment subsidiary in the near future.



Noninterest Expense



For the six months of 2004, noninterest
expense increased $136,000 (6.17%) in comparison to the first six months of 2003. Salaries and benefits increased by $64,000 due to regular payroll adjustments and cost of living increases. Occupancy expenses increased $24,000 and equipment expense
increased $57,000 primarily due to increased depreciation on asset purchases for technology upgrades and the new Harrisonburg branch office. Additionally, other expenses decreased by $9,000 as a result of managements efforts to control
spending.



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 stockholders equity.



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##### Table of Contents

As of June 30, 2004, the total market value of all securities available for sale was equal to the total amortized cost.
Management has traditionally held debt securities until maturity and thus it does not expect any minor fluctuation in the value of these securities to have a direct impact on earnings.



Investments in securities, including those which were restricted, decreased by 11.87% in the first six months of 2004. The Company generally
invests in securities with a relatively short-term maturity due to uncertainty in the direction of interest rates. Of the investments in securities available for sale, 12.52% (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, which includes the counties of Page, Greene, Rockingham and the
City of Harrisonburg. 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.



In the first six months of 2004, the loan portfolio increased $6,117,000 or 7.57%, 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 $335,000 at June 30, 2004 compared to $342,000 at
June 30, 2003. This decrease is attributed to managements proactive collection efforts. Although the potential exists for additional losses, management believes the bank is generally well secured and continues to actively work with these
customers to effect payment.



Problem loans (serious doubt loans) are loans
whereby information known by management indicates that the borrower may not be able to comply with present payment terms. Management was not aware of any problem loans at June 30, 2004 that are not included in the past due or non-accrual loans
referred to above.



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##### Table of Contents

Allowance for Loan Losses



Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and
industry standards. Specific factors considered by management in determining the adequacy of the level of the allowance include internally generated loan review reports, past due reports, historical loan loss experience and individual
borrowers financial condition. This review also considers concentrations of loans in terms of geography, business type or level of risk. Management evaluates the risk elements involved in loans relative to their collateral value and maintains
the allowance for loan losses at a level which is adequate to absorb credit losses inherent in the loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans.
Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.



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



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 losses of $1,399,000 at June 30, 2004 decreased $34,000 from its level at December 31, 2003. This decrease is a
direct result of managements concentrated collection efforts, which has reduced past due loan balances and charge off totals. This decrease is also partly attributed to the tightening of lending criteria during the past two years specifically
in the area of consumer lending related to auto financing. The allowance was equal to 1.58% and 1.74% of total loans at June 30, 2004 and December 31, 2003, respectively.



Premises and Equipment



The Company is presently in the process of making renovations to the Jenkins building, which is located next to the main office in Stanley, Virginia. The Company plans to
convert the upper floor of this building to a new data processing and bookkeeping area. The total cost of these renovations is estimated to be approximately $1,000,000. The Company also has outstanding contracts with its core software vendor for the
implementation of document imaging, which may require the purchase of additional equipment. The estimated cost of the new document imaging software and related equipment expenditures are not expected to exceed $200,000.



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 remained relatively stable historically. Total deposits decreased by
$1,397,000 or 1.40% during the first six months of 2004. This decrease was mainly in the area of certificates of deposits and is a result of the Companys proactive funds management practices in order to reduce interest expense.



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##### Table of Contents

Long Term Debt



The Companys subsidiary has a line of credit with the Federal Home Loan Bank (FHLB) of Atlanta upon which credit advances can be made up to 40% of total assets,
subject to certain eligibility requirements. As of June 30, 2004, total borrowings were $11,100,000 compared to $7,425,000 at December 31, 2003. This represents an increase of $3,675,000 or 49.49%. The additional borrowings have been matched with
loan maturities over the next five years and are being used to fund large dollar commercial and real estate loans. Managements decision to fund certain loans through low interest borrowings provides adequate interest income margins and enables
the bank to maintain a profitable interest spread on these funds.



Capital



The Company maintains a strong capital base to
expand facilities, promote public confidence, support operations and grow at a manageable level. As of June 30, 2004 and December 31, 2003, the Companys total capital- to- total asset ratios were 10.98% and 10.89%, respectively. The 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 Federal Home Loan Bank of Atlanta and correspondent banks.



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



Liquidity as of June 30, 2004 remains adequate and within policy guidelines.



Interest Rate Sensitivity



The Company historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base,
changes in interest rates should not have a significant effect on liquidity. The Company also uses loan repayments and maturing investments to meet its liquidity needs. The Banks membership in the Federal Home Loan Bank System provides
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 June 30,
2004.



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##### Table of Contents

As of June 30, 2004, the Company had a cumulative Gap Rate Sensitivity Ratio of (27.17%) for the one year repricing
period, compared with (33.35%) at December 31, 2003. This negative gap position generally indicates that earnings would improve in a declining interest rate environment as liabilities reprice 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 reprice concurrently with changes in rates within the general economy. Management constantly monitors
the Companys interest rate sensitivity position and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.



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 Commission, including Pioneer Bankshares, Inc.



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##### Table of Contents

TABLE I



PIONEER BANKSHARES, INC.

NET
INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|---------------------------------- |  | ------------------------------ | ------- | --------------- | ------------------------------ | ----- |  | ----- | --------------- |  | --------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Six Months Ended June 30, 2004 |         |                 | Six Months Ended June 30, 2003 |      
|                                   |  | AverageBalance4                |         | Income/ Expense |                                | Rates |  |       | Average Balance |  | Income/ Expense |         | Rates |  
|Interest Income                    |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Loans3                             |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Commercial                         |  | $                              | 2,916   |                 | $                              | 108   |  | 7.41  | %               |  | $               | 2,997   |       | $ | 126   |  | 8.41  | %
|Real estate                        |  |                                | 68,175  |                 |                                | 2,429 |  | 7.12  | %               |  |                 | 64,096  |       |   | 2,418 |  | 7.54  | %
|Installment                        |  |                                | 12,722  |                 |                                | 914   |  | 14.37 | %               |  |                 | 17,387  |       |   | 1,299 |  | 14.94 | %
|Credit Card                        |  |                                | 734     |                 |                                | 78    |  | 21.25 | %               |  |                 | 866     |       |   | 87    |  | 20.09 | %
|Federal funds sold                 |  |                                | 3,879   |                 |                                | 18    |  | 0.93  | %               |  |                 | 5,592   |       |   | 31    |  | 1.11  | %
|Interest Bearing                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Deposits                           |  |                                | 7,912   |                 |                                | 85    |  | 2.15  | %               |  |                 | 5,636   |       |   | 57    |  | 2.02  | %
|Investments                        |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Taxable2                           |  |                                | 12,832  |                 |                                | 166   |  | 2.59  | %               |  |                 | 9,739   |       |   | 187   |  | 3.84  | %
|Nontaxable1                        |  |                                | 2,824   |                 |                                | 50    |  | 3.54  | %               |  |                 | 3,842   |       |   | 111   |  | 5.78  | %
|                                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Total earning assets               |  |                                | 111,994 |                 |                                | 3,848 |  | 6.87  | %               |  |                 | 110,155 |       |   | 4,329 |  | 7.86  | %
|                                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Interest Expense                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Demand deposits                    |  |                                | 13,979  |                 |                                | 26    |  | 0.37  | %               |  |                 | 13,153  |       |   | 40    |  | 0.61  | %
|Savings                            |  |                                | 13,418  |                 |                                | 35    |  | 0.52  | %               |  |                 | 12,691  |       |   | 52    |  | 0.82  | %
|Time deposits                      |  |                                | 49,286  |                 |                                | 630   |  | 2.56  | %               |  |                 | 55,168  |       |   | 849   |  | 3.08  | %
|Borrowings                         |  |                                | 10,699  |                 |                                | 221   |  | 4.13  | %               |  |                 | 4,981   |       |   | 145   |  | 5.82  | %
|                                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                              | 87,382  |                 | $                              | 912   |  | 2.09  | %               |  | $               | 85,993  |       | $ | 1,086 |  | 2.53  | %
|                                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Net Interest Income1               |  |                                |         |                 |                                | 2,936 |  |       |                 |  |                 |         |       |   | 3,243 |  |       |  
|                                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Net Interest Margin                |  |                                |         |                 |                                |       |  | 5.87  | %               |  |                 |         |       |   |       |  | 5.89  | %
|                                   |  |                                |         |                 |                                |       |  |       |                 |  |                 |         |       |   |       |  |       |  

---

|1 | An incremental tax rate of 34% was used to calculate the tax equivalent income
|- | ------------------------------------------------------------------------------

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

|3 | Average balances include non-accruing loans
|- | -------------------------------------------



18



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##### Table of Contents

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|---------------------------------- |  | -------------------------------- | ------- | --------------- | -------------------------------- | ----- |  | ----- | --------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Three Months Ended June 30, 2004 |         |                 | Three Months Ended June 30, 2003 |      
|                                   |  | AverageBalance                   |         | Income/ Expense |                                  | Rates |  |       | Average Balance |  | Income/Expense |         | Rates |  
|Interest Income                    |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Loans3                             |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Commercial                         |  | $                                | 2,986   |                 | $                                | 54    |  | 7.23  | %               |  | $              | 3,066   |       | $ | 64    |  | 8.35  | %
|Real estate                        |  |                                  | 70,017  |                 |                                  | 1,232 |  | 7.04  | %               |  |                | 64,056  |       |   | 1,201 |  | 7.50  | %
|Installment                        |  |                                  | 12,485  |                 |                                  | 446   |  | 14.29 | %               |  |                | 16,668  |       |   | 616   |  | 14.78 | %
|Credit card                        |  |                                  | 704     |                 |                                  | 38    |  | 21.59 | %               |  |                | 809     |       |   | 43    |  | 21.26 | %
|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Total Loans                        |  |                                  | 86,192  |                 |                                  | 1,770 |  | 8.21  | %               |  |                | 84,599  |       |   | 1,924 |  | 9.10  | %
|Federal funds sold                 |  |                                  | 4,950   |                 |                                  | 12    |  | 0.97  | %               |  |                | 2,730   |       |   | 7     |  | 1.03  | %
|Interest Bearing                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Deposits                           |  |                                  | 8,089   |                 |                                  | 35    |  | 1.73  | %               |  |                | 6,049   |       |   | 30    |  | 1.98  | %
|Securities                         |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Taxable2                           |  |                                  | 11,006  |                 |                                  | 70    |  | 2.54  | %               |  |                | 10,789  |       |   | 97    |  | 3.60  | %
|Nontaxable1                        |  |                                  | 2,157   |                 |                                  | 16    |  | 2.97  | %               |  |                | 3,773   |       |   | 55    |  | 5.83  | %
|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Total earning assets               |  |                                  | 111,591 |                 |                                  | 1,903 |  | 6.77  | %               |  |                | 107,940 |       |   | 2,113 |  | 7.83  | %
|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Interest Expense                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Demand deposits                    |  |                                  | 13,931  |                 |                                  | 13    |  | 0.37  | %               |  |                | 13,277  |       |   | 21    |  | 0.63  | %
|Savings                            |  |                                  | 13,093  |                 |                                  | 19    |  | 0.55  | %               |  |                | 12,502  |       |   | 25    |  | 0.80  | %
|Time deposits                      |  |                                  | 50,514  |                 |                                  | 304   |  | 2.53  | %               |  |                | 52,824  |       |   | 387   |  | 2.93  | %
|Borrowings                         |  |                                  | 10,145  |                 |                                  | 110   |  | 3.91  | %               |  |                | 4,911   |       |   | 71    |  | 5.78  | %
|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                                | 87,683  |                 | $                                | 446   |  | 2.05  | %               |  | $              | 83,514  |       | $ | 504   |  | 2.41  | %
|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Net Interest Income1               |  |                                  |         |                 | $                                | 1,457 |  |       |                 |  |                |         |       | $ | 1,609 |  |       |  
|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  
|Net Interest Margin                |  |                                  |         |                 |                                  |       |  | 5.19  | %               |  |                |         |       |   |       |  | 5.96  | %
|                                   |  |                                  |         |                 |                                  |       |  |       |                 |  |                |         |       |   |       |  |       |  

---

|1 | An incremental tax rate of 34% was used to calculate the tax equivalent income
|- | ------------------------------------------------------------------------------

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

|3 | Average balances include non-accruing loans
|- | -------------------------------------------



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##### Table of Contents

TABLE II



PIONEER BANKSHARES, INC.

INTEREST
SENSITIVITY ANALYSIS

JUNE 30, 2004

(Dollar Amounts in Thousands)



|                                                                     |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        
|-------------------------------------------------------------------- |  | ---------- | ------- | -- | ----------- | - | ------- | --------- |  | - | ------------ | -- |  | -------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                                                     |  | 0-3 Months |         |    | 4-12 Months |   |         | 1-5 Years |  |   | Over 5 Years |    |  | Not Classified |        |   | Total
|Uses of Funds:                                                       |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        
|Loans                                                                |  | $          | 7,050   |    |             | $ | 7,343   |           |  | $ | 30,954       |    |  | $              | 42,950 |   |       | $ |       |   |  | $ | 88,297 
|Interest bearing bank deposits                                       |  |            | 5,560   |    |             |   | 1,900   |           |  |   | 599          |    |  |                |       |   |       |   |       |   |  |   | 8,059  
|Investment securities                                                |  |            | 2,500   |    |             |   |        |           |  |   | 11,316       |    |  |                | 227    |   |       |   | 2,006  |   |  |   | 16,049 
|Restricted stock                                                     |  |            |        |    |             |   |        |           |  |   |             |    |  |                |       |   |       |   | 639    |   |  |   | 639    
|Federal funds sold                                                   |  |            | 400     |    |             |   |        |           |  |   |             |    |  |                |       |   |       |   |       |   |  |   | 400    
|                                                                     |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        
|Total                                                                |  |            | 15,510  |    |             |   | 9,243   |           |  |   | 42,869       |    |  |                | 43,177 |   |       |   | 2,645  |   |  |   | 113,444
|                                                                     |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        
|Sources of Funds:                                                    |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        
|Interest bearing demand deposits                                     |  |            | 14,226  |    |             |   |        |           |  |   |             |    |  |                |       |   |       |   |       |   |  |   | 14,226 
|Regular savings                                                      |  |            | 14,051  |    |             |   |        |           |  |   |             |    |  |                |       |   |       |   |       |   |  |   | 14,051 
|Certificates of deposit $100,000 and over                            |  |            | 1,260   |    |             |   | 4,105   |           |  |   | 2,894        |    |  |                |       |   |       |   |       |   |  |   | 8,259  
|Other certificates of deposit                                        |  |            | 5,380   |    |             |   | 15,227  |           |  |   | 17,916       |    |  |                |       |   |       |   |       |   |  |   | 38,523 
|Borrowings                                                           |  |            | 863     |    |             |   | 1,189   |           |  |   | 8,208        |    |  |                | 840    |   |       |   |       |   |  |   | 11,100 
|                                                                     |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        
|Total                                                                |  |            | 35,780  |    |             |   | 20,521  |           |  |   | 29,018       |    |  |                | 840    |   |       |   |       |   |  |   | 86,159 
|                                                                     |  |            |         |    |             |  
|Discrete Gap                                                         |  |            | (20,270 | )  |             |   | (11,278 | )         |  |   | 13,851       |    |  |                | 42,337 |   |       |   | 2,645  |   |  |   | 27,285 
|                                                                     |  |            |         |    |             |  
|Cumulative Gap                                                       |  |            | (20,270 | )  |             |   | (31,548 | )         |  |   | (17,697      | )  |  |                | 24,640 |   |       |   | 27,285 |   |  |   |        
|Ratio of Cumulative Gap To Total Earning Assets at June 30, 2004     |  |            | (18.10  | )% |             |   | (28.17  | )%        |  |   | (15.80       | )% |  |                | 21.72  | % |       |   | 24.05  | % |  |   |        
|                                                                     |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        
|Ratio of Cumulative Gap To Total Earning Assets at December 31, 2003 |  |            | (28.45  | )% |             |   | (33.35  | )%        |  |   | 3.54         | %  |  |                | 19.19  | % |       |   | 20.75  | % |  |   |        
|                                                                     |  |            |         |    |             |   |         |           |  |   |              |    |  |                |        |   |       |   |        |   |  |   |        



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##### 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.



We have established disclosure controls and procedures to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive
officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, we evaluate the effectiveness of these disclosure controls and procedures on a
quarterly basis, and have done so as of the end of the period covered by this report. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures are adequate and effective. There were no changes in the Companys internal control over financial reporting during the six months ended June 30, 2004, that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.



Changes in
Internal Controls



There were no significant changes in Pioneer
Bankshares 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 -



There are no material legal proceedings to which the Company or any of its subsidiaries, directors, or officers is a party or by which they, or any of them are threatened. Any legal proceedings pending or threatened against Pioneer
Bankshares, Inc or its subsidiary, Pioneer Bank are either not material in respect to the amount in controversy or fully covered by insurance.



Item 2.    Changes in Securities and Small Business Issuers Purchases of Equity Securities-



The Company has a stock repurchase program authorized with 5,000 shares remaining available for repurchase.



Item 3.    Defaults Upon Senior Securities -                        Not Applicable



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##### Table of Contents

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



The Annual Shareholders Meeting of Pioneer Bankshares, Inc. was held on May 13, 2004. At this meeting, Harry F. Louderback [votes for 750,497 against 478], Thomas R.
Rosazza [votes for 742,079, against 8,878] and David N. Slye [votes for 750,697, against 260] were elected to serve as directors. These directors will serve a three year term expiring in 2007. Each of these directors will be eligible for re-election
at the end of their term.



After the meeting, the full Board of Directors
consisted of Patricia G. Baker, Louis L. Bosley, Robert E. Long, Harry F. Louderback, Edwin P. Markowitz, Kyle L. Miller, Mark N. Reed, Thomas R. Rosazza and David N. Slye.



Item 5.    Other Information-



The Companys 1998 Stock Incentive Plan (the Plan) was adopted by the Board of Directors on June 11, 1998 and approved by the shareholders on June 11, 1999. The Plan makes available up to 14,000 shares of common stock for
awards to employees and to non-employee directors of the Company and its subsidiaries in the form of stock options (Options), however, no Options have been exercised in previous years, under the Plan.



Generally, the Plan provides for the grants of incentive stock options and non-qualified
stock options. The exercise price of the Option cannot be less than 100% of the fair market value of the common stock (or if greater, the book value) on the date of the grant. The option terms applicable to each grant are determined at the grant
date, but no Option can be exercisable in any event, after ten years from its grant date. On May 13, 2004, the Board of Directors granted Options to current non-employee directors for 2004. The effective date of the grant is May 14, 2004 and the
Options may be exercised on or after May 14, 2005. The total options granted under the plan are shown in the following table:



|      |  |        |  |                |  |                
|----- |  | ------ |  | -------------- |  | ---------------
|Class |  | Number |  | Exercise Price |  | Expiration Date
|1998  |  | 700    |  | $18.00         |  | June 10, 2008  
|1999  |  | 800    |  | 12.75          |  | June 7, 2009   
|2000  |  | 800    |  | 12.75          |  | April 10, 2010 
|2001  |  | 800    |  | 12.75          |  | May 7, 2011    
|2002  |  | 800    |  | 12.75          |  | May 6, 2012    
|2003  |  | 800    |  | 12.50          |  | May 12, 2013   
|2004  |  | 800    |  | 18.40          |  | May 13, 2014   
|      |  |        |  |                |  |                
|Total |  | 5,500  |  |                |  |                
|      |  |        |  |                |  |                



Item 6.    Exhibits and Reports on 8-K



| | (a) | Exhibits
| | --- | --------



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



| | (b) | Reports on Form 8-K
| | --- | -------------------



The Company did not file any reports on Form 8-K for the quarter ending June 30, 2004.



22



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##### 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:    August 13, 2004



23