##### Table of Contents

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UNITED STATES

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 March 31, 2006



| ̈ | 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 incorporation or organization) |  | (I.R.S. Employer Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices)

(540) 778-2294

(Issuers telephone number)



---

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

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

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



|                                |  |                            
|------------------------------- |  | ---------------------------
|Class                           |  | Outstanding at May 12, 2006
|Common Stock, par value - $0.50 |  | 1,011,481 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 March 31, 2006 and 2005                          |  | 3   
|         |  |                                                                                                        
|         |  | Consolidated Balance Sheets  March 31, 2006 and December 31, 2005                                      |  | 4   
|         |  |                                                                                                        
|         |  | Consolidated Statements of Changes in Stockholders Equity  Three Months Ended March 31, 2006 and 2005 |  | 5   
|         |  |                                                                                                        
|         |  | Consolidated Statements of Cash Flows  Three Months Ended March 31, 2006 and 2005                      |  | 6   
|         |  |                                                                                                        
|         |  | Notes to Consolidated Financial Statements                                                              |  | 7   
|         |  |                                                                                                        
|Item 2.  |  | Managements Discussion and Analysis or Plan of Operation.                                              |  | 11  
|         |  |                                                                                                        
|Item 3.  |  | Controls and Procedures.                                                                                |  | 20  
|         |  |                                                                                                        
|PART II  |  | OTHER INFORMATION                                                                                       |  | 20  
|         |  |                                                                                                        
|Item 1.  |  | Legal Proceedings.                                                                                      |  | 20  
|         |  |                                                                                                        
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                            |  | 20  
|         |  |                                                                                                        
|Item 3.  |  | Defaults Upon Senior Securities.                                                                        |  | 20  
|         |  |                                                                                                        
|Item 4.  |  | Submission of Matters to a Vote of Security Holders.                                                    |  | 20  
|         |  |                                                                                                        
|Item 5.  |  | Other Information.                                                                                      |  | 20  
|         |  |                                                                                                        
|Item 5a. |  | Required 8-K Disclosures.                                                                               |  | 21  
|         |  |                                                                                                        
|Item 5b. |  | Changes in Procedures for Director Nomination by Security Holders                                       |  | 21  
|         |  |                                                                                                        
|Item 6.  |  | Exhibits.                                                                                               |  | 21  
|         |  |                                                                                                        
|         |  | SIGNATURES                                                                                              |  | 22  



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 EndedMarch 31,
|                                                    |  | 2006                        |           | 2005
|Interest and Dividend Income:                       |  |                             |           |      |   |          
|Loans including fees                                |  | $                           | 2,158     |      | $ | 1,833    
|Interest on securities - taxable                    |  |                             | 66        |      |   | 110      
|Interest on securities - nontaxable                 |  |                             | 2         |      |   | 2        
|Interest on deposits and federal funds sold         |  |                             | 92        |      |   | 51       
|Dividends                                           |  |                             | 34        |      |   | 15       
|                                                    |  |                             |           |      |   |          
|Total Interest and Dividend Income                  |  |                             | 2,352     |      |   | 2,011    
|                                                    |  |                             |           |      |   |          
|Interest Expense:                                   |  |                             |           |      |   |          
|Deposits                                            |  |                             | 543       |      |   | 340      
|Long term debt                                      |  |                             | 149       |      |   | 159      
|                                                    |  |                             |           |      |   |          
|Total Interest Expense                              |  |                             | 692       |      |   | 499      
|                                                    |  |                             |           |      |   |          
|Net Interest Income                                 |  |                             | 1,660     |      |   | 1,512    
|Provision for loan losses                           |  |                             | 103       |      |   | 90       
|                                                    |  |                             |           |      |   |          
|Net interest income after provision for loan losses |  |                             | 1,557     |      |   | 1,422    
|                                                    |  |                             |           |      |   |          
|Noninterest Income:                                 |  |                             |           |      |   |          
|Service charges and fees                            |  |                             | 184       |      |   | 166      
|Other income                                        |  |                             | 39        |      |   | 60       
|Gain on security transactions                       |  |                             |          |      |   | 44       
|                                                    |  |                             |           |      |   |          
|Total Noninterest Income                            |  |                             | 223       |      |   | 270      
|                                                    |  |                             |           |      |   |          
|Noninterest Expense:                                |  |                             |           |      |   |          
|Salaries and benefits                               |  |                             | 616       |      |   | 569      
|Occupancy expenses                                  |  |                             | 90        |      |   | 78       
|Equipment expenses                                  |  |                             | 193       |      |   | 199      
|Other expenses                                      |  |                             | 386       |      |   | 387      
|                                                    |  |                             |           |      |   |          
|Total Noninterest Expenses                          |  |                             | 1285      |      |   | 1,233    
|                                                    |  |                             |           |      |   |          
|Income before Income Taxes                          |  |                             | 495       |      |   | 459      
|Income Tax Expense                                  |  |                             | 163       |      |   | 155      
|                                                    |  |                             |           |      |   |          
|Net Income                                          |  | $                           | 332       |      | $ | 304      
|                                                    |  |                             |           |      |   |          
|Per Share Data, basic and diluted                   |  |                             |           |      |   |          
|Net income                                          |  | $                           | 0.33      |      | $ | 0.29     
|                                                    |  |                             |           |      |   |          
|Dividends                                           |  | $                           | 0.12      |      | $ | 0.12     
|                                                    |  |                             |           |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                             | 1,011,481 |      |   | 1,034,045
|                                                    |  |                             |           |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                             | 1,012,647 |      |   | 1,035,201
|                                                    |  |                             |           |      |   |          

See Notes to Consolidated Financial Statements



3



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)



|                                                                                     |  |               |         |                 |   |         |  
|------------------------------------------------------------------------------------ |  | ------------- | ------- | --------------- | - | ------- | -
|                                                                                     |  | March 31,2006 |         | December 312005 |  
|                                                                                     |  | (Unaudited)   |         | (Audited)       |  
|ASSETS                                                                               |  |               |         |                 |   |         |  
|                                                                                     |  |              
|Cash and due from banks                                                              |  | $             | 7,495   |                 | $ | 7,373   |  
|Federal funds sold                                                                   |  |               | 2,500   |                 |   | 3,250   |  
|Interest bearing deposits in banks                                                   |  |               | 7,009   |                 |   | 4,946   |  
|Securities available for sale, at fair value                                         |  |               | 11,639  |                 |   | 11,129  |  
|Securities held to maturity                                                          |  |               | 4       |                 |   | 5       |  
|Restricted securities                                                                |  |               | 1,202   |                 |   | 1,016   |  
|Loans receivable, net of allowance for loan losses of $1,430 and $1,332 respectively |  |               | 113,723 |                 |   | 108,692 |  
|Premises and equipment, net                                                          |  |               | 4,631   |                 |   | 4,581   |  
|Accrued interest receivable                                                          |  |               | 610     |                 |   | 567     |  
|Other assets                                                                         |  |               | 1,360   |                 |   | 1,419   |  
|                                                                                     |  |               |         |                 |   |         |  
|Total Assets                                                                         |  | $             | 150,173 |                 | $ | 142,978 |  
|                                                                                     |  |               |         |                 |   |         |  
|LIABILITIES                                                                          |  |               |         |                 |   |         |  
|                                                                                     |  |              
|Deposits                                                                             |  |               |         |                 |   |         |  
|Noninterest bearing demand                                                           |  | $             | 30,721  |                 |   | 29,704  |  
|Interest bearing                                                                     |  |               |         |                 |   |         |  
|Demand                                                                               |  |               | 12,983  |                 |   | 14,525  |  
|Savings                                                                              |  |               | 14,179  |                 |   | 14,264  |  
|Time deposits over $100,000                                                          |  |               | 10,388  |                 |   | 12,421  |  
|Other time deposits                                                                  |  |               | 48,435  |                 |   | 42,799  |  
|                                                                                     |  |               |         |                 |   |         |  
|Total Deposits                                                                       |  |               | 116,706 |                 |   | 113,713 |  
|                                                                                     |  |              
|Accrued expenses and other liabilities                                               |  |               | 1,023   |                 |   | 820     |  
|Long term debt                                                                       |  |               | 18,200  |                 |   | 14,500  |  
|                                                                                     |  |               |         |                 |   |         |  
|Total Liabilities                                                                    |  |               | 135,929 |                 |   | 129,033 |  
|                                                                                     |  |               |         |                 |   |         |  
|STOCKHOLDERS EQUITY                                                                 |  |               |         |                 |   |         |  
|                                                                                     |  |              
|Common stock; $.50 par value, authorized 5,000,000, outstanding 1,011,481            |  |               | 506     |                 |   | 506     |  
|Retained earnings                                                                    |  |               | 13,679  |                 |   | 13,468  |  
|Accumulated other comprehensive income (loss), net                                   |  |               | 59      |                 |   | (29     | )
|                                                                                     |  |               |         |                 |   |         |  
|Total Stockholders Equity                                                           |  |               | 14,244  |                 |   | 13,945  |  
|                                                                                     |  |               |         |                 |   |         |  
|Total Liabilities and Stockholders Equity                                           |  | $             | 150,173 |                 | $ | 142,978 |  
|                                                                                     |  |               |         |                 |   |         |  

See Notes to Consolidated Financial Statements



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PIONEER BANKSHARES, INC

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(In Thousands)

(UNAUDITED)



|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|--------------------------------------------------------------------------------------- |  | ----------- | --- | ---------------- | - | ------ | ------------------------------------------ |  | - | ----- | - |  | - | ------ | -
|                                                                                        |  | CommonStock |     | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total |  
|BALANCE DECEMBER 31, 2004                                                               |  |             | 517 |                  |   | 12,918 |                                            |  |   | 102   |   |  |   | 13,537 |  
|                                                                                        |  |             |     |                 
|Comprehensive Income                                                                    |  |             |     |                  |   | 304    |                                            |  |   |       |   |  |   | 304    |  
|Net Income                                                                              |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Changes in unrealized gains (losses) on securities, net of taxes                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $19)           |  |             |     |                  |   |        |                                            |  |   | (30   | ) |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $15) |  |             |     |                  |   |        |                                            |  |   | (29   | ) |  |   | (59    | )
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                            |  |   |       |   |  |   | 245    |  
|Cash Dividends                                                                          |  |             |     |                  |   | (124   | )                                          |  |   |       |   |  |   | (124   | )
|Retirement of common stock                                                              |  |             |    |                  |   |       |                                            |  |   |      |   |  |   |       |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE MARCH 31, 2005                                                                  |  | $           | 517 |                  | $ | 13,098 |                                            |  | $ | 43    |   |  | $ | 13,658 |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE DECEMBER 31, 2005                                                               |  |             | 506 |                  |   | 13,468 |                                            |  |   | (29   | ) |  |   | 13,945 |  
|                                                                                        |  |             |     |                 
|Comprehensive Income                                                                    |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net Income                                                                              |  |             |     |                  |   | 332    |                                            |  |   |       |   |  |   | 332    |  
|Changes in unrealized gains (losses) on securities, net of taxes                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $52)           |  |             |     |                  |   |        |                                            |  |   | 88    |   |  |   | 88     |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                            |  |   |       |   |  |   | 420    |  
|                                                                                        |  |             |     |                 
|Cash Dividends                                                                          |  |             |    |                  |   | (121   | )                                          |  |   |      |   |  |   | (121   | )
|Retirement of common stock                                                              |  |             |    |                  |   |       |                                            |  |   |      |   |  |   |       |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE MARCH 31, 2006                                                                  |  | $           | 506 |                  | $ | 13,679 |                                            |  | $ | 59    |   |  | $ | 14,244 |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  

See Notes to Consolidated Financial Statements



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)



|                                                                                  |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Three Months Ended March 31, |       
|                                                                                  |  | 2006                         |        |   | 2005 |  
|Cash Flows from Operating Activities:                                             |  |                              |        |   |      |   |        |  
|Net income                                                                        |  | $                            | 332    |   |      | $ | 304    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |        |   |      |   |        |  
|Provision for loan losses                                                         |  |                              | 103    |   |      |   | 90     |  
|Depreciation and amortization                                                     |  |                              | 143    |   |      |   | 125    |  
|Gain on sale of securities                                                        |  |                              |       |   |      |   | (44    | )
|Net amortization on securities                                                    |  |                              | 13     |   |      |   | 28     |  
|Net change in:                                                                    |  |                              |        |   |      |   |        |  
|Accrued interest receivable                                                       |  |                              | (43    | ) |      |   | (24    | )
|Other assets                                                                      |  |                              | 7      |   |      |   | 115    |  
|Accrued expense and other liabilities                                             |  |                              | 203    |   |      |   | 100    |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Net Cash Provided by Operating Activities                                         |  |                              | 758    |   |      |   | 694    |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash Flows from Investing Activities:                                             |  |                              |        |   |      |   |        |  
|Net change in federal funds sold                                                  |  |                              | 750    |   |      |   | 850    |  
|Net change in interest bearing deposits                                           |  |                              | (2,063 | ) |      |   | 5,264  |  
|Net change in restricted securities                                               |  |                              | (186   | ) |      |   | 80     |  
|Proceeds from maturities and sales of securities available for sale               |  |                              | 37     |   |      |   | 425    |  
|Proceeds from maturities and calls of securities held to maturity                 |  |                              | 1      |   |      |   | 2      |  
|Purchase of securities available for sale                                         |  |                              | (420   | ) |      |   | (6,593 | )
|Net increase in loans                                                             |  |                              | (5,134 | ) |      |   | (1,614 | )
|Purchase of bank premises and equipment                                           |  |                              | (193   | ) |      |   | (244   | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Net Cash Used in Investing Activities                                             |  |                              | (7,208 | ) |      |   | (1,830 | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash Flows from Financing Activities:                                             |  |                              |        |   |      |   |        |  
|Net change in:                                                                    |  |                              |        |   |      |   |        |  
|Demand and savings deposits                                                       |  |                              | (610   | ) |      |   | (1,660 | )
|Time deposits                                                                     |  |                              | 3,603  |   |      |   | 589    |  
|Proceeds from borrowings                                                          |  |                              | 5,000  |   |      |   |       |  
|Curtailments of borrowings                                                        |  |                              | (1,300 | ) |      |   | (1,300 | )
|Dividends paid                                                                    |  |                              | (121   | ) |      |   | (124   | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Net Cash Provided by (Used in) Financing Activities                               |  |                              | 6,572  |   |      |   | (2,495 | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash and Cash Equivalents                                                         |  |                              |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                              |  |                              | 122    |   |      |   | (3,631 | )
|Cash and Cash Equivalents, beginning of year                                      |  |                              | 7,373  |   |      |   | 9,896  |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash and Cash Equivalents, End of Period                                          |  | $                            | 7,495  |   |      | $ | 6,265  |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Supplemental Disclosure of Cash Paid                                              |  |                              |        |   |      |   |        |  
|During the Period for:                                                            |  |                              |        |   |      |   |        |  
|Interest                                                                          |  | $                            | 714    |   |      | $ | 485    |  
|Income taxes                                                                      |  | $                            |       |   |      | $ |       |  

See Notes to Consolidated Financial Statements



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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 March 31, 2006 and the results of operations for the three-month periods and year to date periods ended March 31, 2006 and March 31, 2005. The notes included herein should be
read in conjunction with the notes to financial statements included in the 2005 annual report to stockholders of Pioneer Bankshares, Inc. (the Company) and its Form 10-KSB for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission.

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

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

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



|                                                                                                 |  |                |     
|------------------------------------------------------------------------------------------------ |  | -------------- | ----
|                                                                                                 |  | March 31, 2005
|(In Thousands, except per share data)                                                            |  |               
|Net Income, as reported                                                                          |  | $              | 304 
|Total stock-based compensation expenses determined under fair value based method for all rewards |  |                |    
|                                                                                                 |  |                |     
|Pro forma net income                                                                             |  | $              | 304 
|                                                                                                 |  |                |     
|Basic earnings per share                                                                         |  |                |     
|As reported                                                                                      |  | $              | 0.29
|                                                                                                 |  |                |     
|Pro forma                                                                                        |  | $              | 0.29
|                                                                                                 |  |                |     
|Diluted earnings per share                                                                       |  |                |     
|As reported                                                                                      |  | $              | 0.29
|                                                                                                 |  |                |     
|Pro forma                                                                                        |  | $              | 0.29
|                                                                                                 |  |                |     

The fair value of each grant was estimated at the grant date using the Black-Scholes option-pricing model. The
estimates were calculated using the following weighted-average assumptions for grants in 2005:

Dividend rate of 3.22%, price volatility of 14.97%,
risk-free interest rate of 4.11%, and expected lives of 10 years.

There were no additional stock options granted or exercised during the first quarter of
2006.

The expense relating to previously issued stock options, as of March 31, 2006, is less than $1,000 or $625 net of tax.



7



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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
March 31, 2006 and December 31, 2005 follows:



|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|------------------------------------ |  | -------------- | ------ | ----------------- | - | ------------- |  | ----------- | ------ |  | - | ------
|                                     |  | (In Thousands)
|                                     |  | March 31, 2006 |        | December 31, 2005
|                                     |  | CarryingValue  |        | MarketValue       |   | CarryingValue |  | MarketValue
|Securities held to maturity:         |  |                |        |                   |   |               |  |             |        |  |   |       
|Mortgage-backed securities           |  | $              | 4      |                   | $ | 4             |  | $           | 5      |  | $ | 5     
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $              | 4      |                   | $ | 4             |  | $           | 5      |  | $ | 5     
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|Securities available for sale:       |  |                |        |                   |   |               |  |             |        |  |   |       
|U.S. Treasury and agency obligations |  | $              | 8,520  |                   | $ | 8,442         |  | $           | 8,532  |  | $ | 8,417 
|Mortgage-backed                      |  |                | 489    |                   |   | 480           |  |             | 527    |  |   | 512   
|Municipal securities                 |  |                | 214    |                   |   | 220           |  |             | 214    |  |   | 221   
|Equity securities                    |  |                | 2,313  |                   |   | 2,497         |  |             | 1,894  |  |   | 1,979 
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $              | 11,536 |                   | $ | 11,639        |  | $           | 11,167 |  | $ | 11,129
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       

As of March 31, 2006, there were 11 investment securities that had been in a loss position for more than 12
consecutive months and 9 additional securities that had been in a loss position for less than one year.

Management has the intent and ability to hold
securities to their scheduled maturity or call date, and considers any current market value losses to be temporary. One factor considered in the determination and evaluation of temporary losses is credit quality of the issuer. Managements
conclusion for this reporting period is that the temporary losses are the result of current economic conditions and market interest rate changes. The temporary losses are not considered to be related to credit quality.

The schedule of losses on the securities as of March 31, 2006, is as follows:



|                      |  |                                |       |   |                           |   |     |                  |  |   |       |   |  |   |       |  
|--------------------- |  | ------------------------------ | ----- | - | ------------------------- | - | --- | ---------------- |  | - | ----- | - |  | - | ----- | -
|LOSSES (In Thousands) |  | US GovernmentAgency Securities |       |   | Mortgage-BackedSecurities |   |     | EquitySecurities |  |   | Total |  
|Less than 12 Months   |  |                                |       |   |                           |   |     |                  |  |   |       |   |  |   |       |  
|Fair Value            |  | $                              | 498   |   |                           | $ |    |                  |  | $ | 496   |   |  | $ | 994   |  
|Unrealized Losses     |  |                                |      |   |                           |   |    |                  |  |   | (77   | ) |  |   | (77   | )
|                      |  |                                |       |  
|More than 12 Months   |  |                                |       |   |                           |   |     |                  |  |   |       |   |  |   |       |  
|Fair Value            |  |                                | 7 944 |   |                           |   | 480 |                  |  |   |      |   |  |   | 8,424 |  
|Unrealized Losses     |  |                                | (78   | ) |                           |   | (9  | )                |  |   |      |   |  |   | (87   | )
|                      |  |                                |       |   |                           |   |     |                  |  |   |       |   |  |   |       |  
|Total                 |  |                                |       |   |                           |   |     |                  |  |   |       |   |  |   |       |  
|Fair Value            |  |                                | 8,442 |   |                           |   | 480 |                  |  |   | 496   |   |  |   | 9,418 |  
|Unrealized Losses     |  |                                | (78   | ) |                           |   | (9  | )                |  |   | (77   | ) |  |   | (164  | )
|                      |  |                                |       |   |                           |   |     |                  |  |   |       |   |  |   |       |  



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##### Table of Contents

NOTE 2 INVESTMENT SECURITIES (cont):

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



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

NOTE 3 LOANS:



|Loans | outstanding are summarized as follows:
|----- | --------------------------------------



|                                 |  |                |         |   |                  |   |         |  
|-------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                 |  | (In Thousands) |        
|                                 |  | March 31,2006  |         |   | December 31,2005 |  
|Mortgage loans on real estate    |  |                |         |   |                  |   |         |  
|Construction loans               |  | $              | 12,241  |   |                  | $ | 11,543  |  
|Agricultural                     |  |                | 4,800   |   |                  |   | 4,595   |  
|Equity lines of credit           |  |                | 2,237   |   |                  |   | 1,780   |  
|Residential 1-4 family           |  |                | 45,041  |   |                  |   | 43,308  |  
|Second Mortgages                 |  |                | 4,297   |   |                  |   | 3,807   |  
|Multifamily                      |  |                | 3,550   |   |                  |   | 3,275   |  
|Commercial                       |  |                | 22,698  |   |                  |   | 21,892  |  
|                                 |  |                |         |   |                  |   |         |  
|Total real estate loans          |  |                | 94,864  |   |                  |   | 90,200  |  
|                                 |  |               
|Commercial and industrial loans  |  |                | 6,075   |   |                  |   | 5,543   |  
|Consumer installment loans       |  |                |         |   |                  |   |         |  
|Personal                         |  |                | 14,732  |   |                  |   | 14,699  |  
|Credit cards                     |  |                | 583     |   |                  |   | 668     |  
|                                 |  |                |         |   |                  |   |         |  
|Total consumer installment loans |  |                | 15,315  |   |                  |   | 15,367  |  
|All other loans                  |  |                | 211     |   |                  |   | 225     |  
|                                 |  |                |         |   |                  |   |         |  
|Gross Loans                      |  |                | 116,465 |   |                  |   | 111,335 |  
|Less unearned income on loans    |  |                | (1,312  | ) |                  |   | (1,311  | )
|                                 |  |                |         |   |                  |   |         |  
|Loans, less unearned discount    |  |                | 115,153 |   |                  |   | 110,024 |  
|                                 |  |               
|Less allowance for loan losses   |  |                | (1,430  | ) |                  |   | (1,332  | )
|                                 |  |                |         |   |                  |   |         |  
|Net Loans Receivable             |  | $              | 113,723 |   |                  | $ | 108,692 |  
|                                 |  |                |         |   |                  |   |         |  

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



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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 three months ended March 31, 2006 and 2005 follows:



|                                        |  |                |       |   |      |   |       |  
|--------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                        |  | 2006           |       |   | 2005 |  
|                                        |  | (In Thousands) |      
|Balance, beginning of period            |  | $              | 1,332 |   |      | $ | 1,346 |  
|Provision charged to operating expenses |  |                | 103   |   |      |   | 90    |  
|Recoveries of loans charged off         |  |                | 123   |   |      |   | 82    |  
|Loans charged off                       |  |                | (128  | ) |      |   | (137  | )
|                                        |  |                |       |   |      |   |       |  
|Balance, End of Period                  |  | $              | 1,430 |   |      | $ | 1,381 |  
|                                        |  |                |       |   |      |   |       |  

NOTE 5 EARNINGS PER SHARE

The following shows the weighted average number of shares as of March 31, 2006 and 2005, used in computing earnings per share and the effect on weighted average number of shares diluted potential common stock.
Potential dilutive common stock had no effect on income available to common shareholders.



|                               |  |                 |  |                  |      |        |           |                 |   |     
|------------------------------ |  | --------------- |  | ---------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | March, 31, 2006 |  | March 31, 2005  
|                               |  | Shares          |  | Per Share Amount |      | Shares |           | Per ShareAmount
|Basic earnings per share       |  | 1,011,481       |  | $                | 0.33 |        | 1,034,045 |                 | $ | 0.29
|                               |  |                 |  |                  |      |        |           |                 |   |     
|Effect of dilutive securities: |  |                 |  |                  |      |        |           |                 |   |     
|Stock Options                  |  | 1,166           |  |                  |      |        | 1,156     |                 |   |     
|                               |  |                 |  |                  |      |        |           |                 |   |     
|Diluted earnings per share     |  | 1,012,647       |  | $                | 0.33 |        | 1,035,201 |                 | $ | 0.29
|                               |  |                 |  |                  |      |        |           |                 |   |     

Stock options representing 1,500 shares were not included in computing diluted EPS because their effects were
anti-dilutive for the reporting periods ending March 31, 2006 and March 31, 2005.

NOTE 6 OTHER EXPENSES:

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



|                      |  |                |     |      |   |    
|--------------------- |  | -------------- | --- | ---- | - | ---
|                      |  | March 31,     
|                      |  | 2006           |     | 2005
|                      |  | (In Thousands)
|Director Fees         |  | $              | 40  |      | $ | 55 
|Professional Fees     |  |                | 39  |      |   | 68 
|Insurance Expense     |  |                | 32  |      |   | 20 
|Postage               |  |                | 20  |      |   | 27 
|Supplies and Printing |  |                | 37  |      |   | 30 
|Telephone Expense     |  |                | 42  |      |   | 31 
|Other                 |  |                | 176 |      |   | 156
|                      |  |                |     |      |   |    
|Total                 |  | $              | 386 |      | $ | 387
|                      |  |                |     |      |   |    



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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.

Overview

In the first three
months of 2006, net income including securities transactions was $332,000 ($0.33 per share) compared with $304,000 ($0.29) for the first three months of 2005. This represents an increase of $28,000 or 9.21%. The increase in net income can be
accounted for mainly in the category of interest income and fees on loans and is the result of the Companys continued efforts to expand its loan portfolio.

Total assets for the Company as of March 31, 2006 were $150.2 million compared to $143.0 million at year-end 2005. This is an increase of approximately $7.2 million or 5.03%. Total net loans have increased from $108.7 million as of
December 31, 2005 to $113.7 million as of March 31, 2006. This represents an increase of approximately $5.0 million or 4.63%. The majority of this increase in loans is in the area of commercial and residential real estate properties.

Total liabilities for the Company as of March 31, 2006 were $135.9 million compared to $129.0 million at year-end 2005. This represents an increase
of approximately $6.9 million or 5.34%. The primary increases in liability accounts have been in time deposit accounts and outstanding borrowings. Total time deposit accounts have increased by approximately $3.6 million and outstanding borrowings
have increased by $3.7 million. These increases in deposits and borrowings are directly related to the increase in loans and the Companys efforts to maintain adequate sources of funding for future lending opportunities.

The Companys total capital position remains strong and exceeds regulatory guidelines. As of March 31, 2006, total capital was $14.2 million.

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



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##### Table of Contents

Critical Accounting Policies

General

The Companys consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions
and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or relieving a liability.

The Company uses historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ
significantly from the historical factors. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our
transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic 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 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 SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after
June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be
subject to at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of
goodwill.

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



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##### Table of Contents

Results of Operations

Net Interest Income

Total interest
income increased $341,000 or 6.96% during the first three months of 2006 as compared to the first three months of 2005. Total interest expense increased $193,000 or 38.69% in the first three months of 2006 compared to the same period of 2005. The
increases in interest income and interest expense resulted in a total overall increase in net interest income of $148,000 or 9.79% for the period ending March 31, 2006 compared to the period ending March 31, 2005. The net interest margin
decreased from 5.01% for the first three months of 2005 to 4.98% for the first three months of 2006. Managements decision to focus on commercial and residential real estate lending as opposed to higher yielding consumer loans, as well as the
increased market interest rates on deposits and borrowings, were the main contributors to the slight decrease in net interest margin. The average yield on earning assets increased from 6.66% as of March 31, 2005 to 7.04% as of March 31,
2006, as a result of current economic conditions and market interest rates.

The average interest rate being paid on time deposits increased from 2.65% as
of March 31, 2005 to 3.53% as of March 31, 2006. This is directly related to the recent increases in market interest rates during the reporting period.

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

Noninterest Income

In the first
three months of 2006, non-interest income decreased by $47,000 when compared to the same period last year. This decrease can be accounted for primarily in the category of gains on securities transactions. The first three months of the prior year
included gains on securities transactions of $44,000. This is approximately 93.6% of the overall decrease in non-interest income. Security gains are generally infrequent in nature and are considered non-recurring income.

Service charge income increased by $18,000, while other income decreased by $21,000. The increase in service charge income is primarily in the category of overdraft fees
related to the Companys bounce protection product for checking accounts. The decrease in other income can be accounted for mainly in the area of gains on foreclosure properties in the prior year of approximately $18,000. Foreclosure
transactions for the Company are generally infrequent in nature and are considered to be non-recurring income. There have been no gains related to foreclosures as of March 31, 2006.

Noninterest Expense

For the first
three months of 2006, non-interest expense increased $52,000 or 4.22% in comparison to the first three months of 2005. Salaries and benefits increased by $47,000 due to regular payroll adjustments, cost of living increases, and the additional
staffing of commercial lending officers in order to promote loan growth. Occupancy expenses increased $12,000 and is primarily the result of additional depreciation expense related to the recent completion of the new data processing facility. There
was also a slight decrease in equipment expense of approximately $6,000. Additionally, other expenses decreased by approximately $1,000.

Financial
Condition

Securities

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



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##### Table of Contents

As of March 31, 2006, the net amortized cost of securities available for sale was approximately $103,000 less than
the stated market value as shown in note 2 of the financial statements included in this report. Management has traditionally held debt securities until maturity and thus it does not expect the fluctuation in the value of these securities to have a
material impact on earnings.

Investments in securities, including those which were restricted, increased by approximately $695,000 during the first three
months of 2006. The Company generally invests in securities with a relatively short-term maturity due to uncertainty in the direction of interest rates. Of the investments in securities available for sale, 21.45% (based on market value) are invested
in equities, some of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The Company believes these investments offer adequate returns and/or have the potential for increases in value.

Loan Portfolio

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

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

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

In the first three months of 2006, net loans increased by approximately $5.0 million or 4.63%, 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 $8,000 at March 31, 2006 compared to $519,000 at March 31, 2005. This represents a decrease of $511,000
and is mainly due to managements continued proactive collection efforts. These collection efforts have resulted in past due customers bringing their accounts current. Management continually monitors non-accrual accounts and all non-performing
assets in order to promptly identify any loss allocations that should be made. Although the potential exists for additional losses, management believes the Bank is generally well secured and continues to actively work with these customers to effect
payment.

Impaired loans are those loans which have been identified by management as problem credits due to various circumstances concerning the
borrowers financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a non-accrual classification, however, management has classified these accounts as impaired and is monitoring the
circumstances and payment status closely. In most cases, a specific allocation to the Banks allowance for loan loss is made for an impaired loan. The total amount of impaired loans as of March 31, 2006 was $285,000 compared to $587,000 at
March 31, 2005. Based on current collateral values, management has identified potential losses relating to impaired loans of approximately $70,000 as of March 31, 2006. Specific valuation allowances have been made as a precautionary
measure to cover these potential losses.

Problem loans (serious doubt loans) are loans whereby information known by management indicates that the borrower
may not be able to comply with present payment terms. Management was not aware of any problem loans at March 31, 2006 that are not included in the past due or non-accrual loans referred to above.



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Allowance for Loan Losses

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

Management also evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards.
Additional allocation factors relating to identified loan concentrations, unfunded commitments, and loan growth trends are also included in the calculation of the adequacy of the loan loss reserve. The periodic review of the allowance for loan loss
and funding provision considers concentrations of loans in terms of geography, business type or level of risk. Management evaluates the risk elements involved in loans relative to collateral values and maintains the allowance for loan losses at a
level which is adequate to absorb credit losses considered to be inherent in the loan portfolio. Management engages the services of an outside loan review firm on an annual basis to evaluate the loan portfolio, provide an independent analysis of
significant borrowers, and to assist in identifying potential problem credits. The independent loan review report is used by management as an additional tool for monitoring and minimizing risks that may be inherent in the loan portfolio. In
addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available
to them at the time of their examination.

The methodology used to calculate the allowance for loan losses and the provision for loan losses is a
significant accounting principle which is based on estimates that are particularly susceptible to 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 loss balance of $1.4 million at March 31, 2006 increased by approximately $98,000 from its level at December 31, 2005. The cumulative balance in the allowance for loan loss account was
equal to 1.24% and 1.21% of total loans at March 31, 2006 and December 31, 2005, respectively. The increase in the allowance account is directly related to the significant growth in the loan portfolio and is deemed to be within an
acceptable range based on managements evaluation of the losses inherent in the loan portfolio at the end of this reporting period. The evaluation of the allowance for loan loss account for the period ending March 31, 2006 included
specific allocations for certain borrowers, whose payment performance and collateral values have recently shown improvement. Management exercises the utmost caution and due diligence in allocating for possible loan losses, and follows a conservative
methodology in order to protect its investors and to minimize the potential for large fluctuations in future provision expenses. Managements practice of funding the allowance for loan loss account is to make necessary adjustments on a
quarterly basis for the foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary allowance for loan loss
reserves are recorded directly to income or expense in the reporting period.

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

Managements evaluation of the allowance for loan losses for the periods ending March 31, 2006 and December 31, 2005 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan
loss account is monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.



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##### Table of Contents

Premises and Equipment

The Company is currently in the process of implementing new software and equipment in conjunction with the implementation of the Check Truncation Act of the 21stCentury (Check 21), which became effective October 28, 2004. The Check 21 Act is expected to have an impact on all financial institutions in
the coming months by creating an electronic means of clearing checks. The estimated costs of equipment and check processing software related to Check 21 are not expected to exceed $35,000.

The Company is considering the implementation of branch data capture and merchant capture equipment. This will allow remote branch locations and certain merchant
customers to process deposit transactions electronically. The estimated cost of the data capture equipment is not expected to exceed $75,000 and will likely be offset with cost savings associated with the elimination of courier services or other
merchant fee income.

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

Deposits

The Companys main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Companys service
area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. The Companys total deposit portfolio has historically remained relatively stable. During the first three months of 2006, total deposits have
increased by $3.0 million or 2.63%. This increase was mainly in the area of time deposit accounts, and is believed to be the result of consumer demand for higher income opportunities in interest bearing accounts.

Long Term Debt

The Bank 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 March 31, 2006, total borrowings were $18.2 million compared to $14.5 million at
December 31, 2005. This represents an increase of $3.7 million or 25.52%. The Bank utilizes borrowings periodically as a source of funds for loan growth and other investment opportunities in order to maintain a profitable interest spread.
Borrowings are generally matched with maturities of specific groups of loans, and are normally advanced for a 5 year term.

Capital

The Company maintains a strong capital base as support for possible future expansion, to promote public confidence, to support operations and for
continued growth at a manageable level. As of March 31, 2006 and December 31, 2005, the Companys total capital-to-total asset ratios were 9.49% and 9.75%, respectively. The Companys capital ratios exceed regulatory minimums.
Earnings have been sufficient to allow for dividends to be declared on a quarterly basis and management has no reason to believe this payment schedule will not continue.

Liquidity

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



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##### Table of Contents

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 certain correspondent banks.

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

Liquidity as of March 31, 2006 remains adequate.

Interest Rate Sensitivity

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

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

Table II contains an analysis, which shows the re-pricing opportunities of earning assets and interest bearing liabilities as of March 31, 2006.

As of March 31, 2006, the Company had a negative cumulative Gap Rate Sensitivity Ratio of (27.62%) for the one year re-pricing period, compared with
(23.72%) at December 31, 2005. This negative gap position generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably
decrease in periods during which interest rates are increasing. However, in actual practice, this may not be the case as deposits may not re-price concurrently with changes in rates within the general economy. Management constantly monitors the
Companys interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.

Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement 140 (Statement 156). Statement 156 amends Statement 140 with respect to separately recognized servicing assets and
liabilities. Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and
liabilities to be initially measured at fair value, if practicable. Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method. Under the
amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing. Under the fair value measurement method, servicing assets are measured at fair value at each reporting date
and changes in fair value are reported in net income for the period the change occurs.

Adoption of Statement 156 is required as of the beginning of fiscal
years beginning subsequent to September 15, 2006. Earlier adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including interim financial statements.

Effect of Proposed Accounting Standards

The
Company does not believe that any newly issued but as yet unapplied or recent accounting pronouncements 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)



|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|---------------------- |  | --------------------------------- | ------- | --------------- | --------------------------------- | ----- |  | ----- | --------------- |  | --------------- | ------- | ----- | - | ----- |  | ----- | -
|                       |  | Three Months Ended March 31, 2006 |         |                 | Three Months Ended March 31, 2005 |      
|                       |  | Average Balance                   |         | Income/ Expense |                                   | Rates |  |       | Average Balance |  | Income/ Expense |         | Rates |  
|Interest Income        |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Loans1                 |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Commercial             |  | $                                 | 5,326   |                 | $                                 | 109   |  | 8.18  | %               |  | $               | 3,392   |       | $ | 65    |  | 7.67  | %
|Real estate            |  |                                   | 91,982  |                 |                                   | 1,591 |  | 6.92  | %               |  |                 | 77,551  |       |   | 1,309 |  | 6.75  | %
|Installment            |  |                                   | 14,246  |                 |                                   | 425   |  | 11.93 | %               |  |                 | 13,008  |       |   | 425   |  | 13.07 | %
|Credit card            |  |                                   | 618     |                 |                                   | 33    |  | 21.36 | %               |  |                 | 676     |       |   | 34    |  | 20.12 | %
|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Total Loans            |  |                                   | 112,172 |                 |                                   | 2,158 |  | 7.69  | %               |  |                 | 94,627  |       |   | 1,833 |  | 7.75  | %
|                       |  |                                   |         |                 |                                   |      
|Federal funds sold     |  |                                   | 3,338   |                 |                                   | 32    |  | 3.83  | %               |  |                 | 2,295   |       |   | 13    |  | 2.27  | %
|Interest Bearing       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Deposits               |  |                                   | 6,222   |                 |                                   | 60    |  | 3.79  | %               |  |                 | 5,208   |       |   | 38    |  | 2.92  | %
|Securities             |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Taxable                |  |                                   | 10,102  |                 |                                   | 85    |  | 3.37  | %               |  |                 | 16,782  |       |   | 118   |  | 2.81  | %
|Nontaxable2            |  |                                   | 2,112   |                 |                                   | 24    |  | 4.54  | %               |  |                 | 2,229   |       |   | 14    |  | 2.51  | %
|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Total earning assets   |  |                                   | 133,946 |                 |                                   | 2,359 |  | 7.04  | %               |  |                 | 121,141 |       |   | 2,016 |  | 6.66  | %
|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Interest Expense       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Demand deposits        |  |                                   | 13,922  |                 |                                   | 17    |  | 0.49  | %               |  |                 | 14,627  |       |   | 15    |  | 0.41  | %
|Savings                |  |                                   | 14,024  |                 |                                   | 21    |  | 0.60  | %               |  |                 | 13,980  |       |   | 19    |  | 0.54  | %
|Time deposits          |  |                                   | 57,144  |                 |                                   | 505   |  | 3.53  | %               |  |                 | 46,216  |       |   | 306   |  | 2.65  | %
|Borrowings             |  |                                   | 16,156  |                 |                                   | 149   |  | 3.69  | %               |  |                 | 17,772  |       |   | 159   |  | 3.58  | %
|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Total Interest Bearing |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Liabilities            |  | $                                 | 101,246 |                 | $                                 | 692   |  | 2.73  | %               |  | $               | 92,595  |       | $ | 499   |  | 2.16  | %
|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Net Interest Income    |  |                                   |         |                 | $                                 | 1,667 |  |       |                 |  |                 |         |       | $ | 1,517 |  |       |  
|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  
|Net Interest Margin    |  |                                   |         |                 |                                   |       |  | 4.98  | %               |  |                 |         |       |   |       |  | 5.01  | %
|                       |  |                                   |         |                 |                                   |       |  |       |                 |  |                 |         |       |   |       |  |       |  

---

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

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



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##### Table of Contents

TABLE II

PIONEER BANKSHARES, INC.

INTEREST SENSITIVITY ANALYSIS

MARCH 31, 2006

(Dollar Amounts in
Thousands)



|                                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|-------------------------------------------------------------------- |  | --------- | ------- | - | ---------- | - | ------- | --------- |  | - | ----------- | - |  | ------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                                                     |  | 0-3Months |         |   | 4-12Months |   |         | 1-5 Years |  |   | Over 5Years |   |  | NotClassified |        |   | Total
|Uses of Funds:                                                       |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                                                     |  |           |         |   |            |  
|Loans1                                                               |  | $         | 12,751  |   |            | $ | 9,099   |           |  | $ | 45,019      |   |  | $             | 48,284 |   |       | $ |       |   |  | $ | 115,153
|Interest bearing bank deposits                                       |  |           | 4,313   |   |            |   | 2,696   |           |  |   |             |   |  |               |       |   |       |   |       |   |  |   | 7,009  
|Investment securities2                                               |  |           | 1,494   |   |            |   | 5,469   |           |  |   | 1,963       |   |  |               | 220    |   |       |   | 2,497  |   |  |   | 11,643 
|Restricted stock                                                     |  |           |        |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   | 1,202  |   |  |   | 1,202  
|Federal funds sold                                                   |  |           | 2,500   |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 2,500  
|                                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                                                |  |           | 21,058  |   |            |   | 17,227  |           |  |   | 46,982      |   |  |               | 48,505 |   |       |   | 3,735  |   |  |   | 137,507
|                                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Sources of Funds:                                                    |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                                                     |  |           |         |   |            |  
|Interest bearing demand deposits                                     |  |           | 12,983  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 12,983 
|Regular savings                                                      |  |           | 14,179  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 14,179 
|Certificates of deposit $100,000 and over                            |  |           | 10,548  |   |            |   | 22,090  |           |  |   | 15,797      |   |  |               |       |   |       |   |       |   |  |   | 48,435 
|Other certificates of deposit                                        |  |           | 2,822   |   |            |   | 3,854   |           |  |   | 3,712       |   |  |               |       |   |       |   |       |   |  |   | 10,388 
|Borrowings                                                           |  |           | 600     |   |            |   | 25,944  |           |  |   | 19,509      |   |  |               |       |   |       |   |       |   |  |   | 18,200 
|                                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                                                |  |           | 41,132  |   |            |   | 34,144  |           |  |   | 28,909      |   |  |               |       |   |       |   |       |   |  |   | 33,322 
|                                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Discrete Gap                                                         |  |           | (20,074 | ) |            |   | (16,917 | )         |  |   | 18,073      |   |  |               | 48,505 |   |       |   | 3,735  |   |  |   |        
|                                                                     |  |           |         |   |            |  
|Cumulative Gap                                                       |  |           | (20,074 | ) |            |   | (36,991 | )         |  |   | (18,918     | ) |  |               | 29,587 |   |       |   | 33,322 |   |  |   |        
|                                                                     |  |           |         |   |            |  
|Ratio of Cumulative Gap To Total Earning Assets at March 31, 2006    |  |           | -14.99  | % |            |   | -27,62  | %         |  |   | -14.12      | % |  |               | 22.09  | % |       |   | 24.88  | % |  |   |        
|                                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Ratio of Cumulative Gap To Total Earning Assets at December 31, 2005 |  |           | -17.53  | % |            |   | -23.72  | %         |  |   | -13.37      | % |  |               | 22.14  | % |       |   | 24.44  | % |  |   |        
|                                                                     |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        

---

|1 | Nonaccrual loans are included in the loan totals.
|- | -------------------------------------------------

|2 | Investment securities are reflected at book value
|- | -------------------------------------------------



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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 three months ended March 31, 2006, 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 the Companys internal controls pertaining to its financial reporting and control of its assets or
in other factors that could significantly affect these controls since the date of their evaluation.

Part II - Other Information

Item 1. Legal Proceedings 

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

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

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

Item 3. Defaults Upon Senior Securities 

Not Applicable

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

Not Applicable

Item 5. Other Information 

Not Applicable



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##### Table of Contents

Item 5a. Required 8-K Disclosures

None

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

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

Item 6. Exhibits



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



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



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



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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.By:

/s/ THOMAS R. ROSAZZAThomas R. RosazzaPresident and Chief Executive OfficerBy:

/s/ LORI G. HASSETTLori G. HassettVice President and Chief Financial Officer


Date: May 12, 2006



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