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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q







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

For the Quarterly Period Ended June 30, 2008



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

Commission File Number: 0-30541





PIONEER BANKSHARES, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 54-1278721                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

(540) 778-2294

(Registrants telephone number, including area code)





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

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: Common shares outstanding as of August 12, 2008 were 1,017,170.









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PIONEER BANKSHARES, INC.

INDEX



|         |  |                                                                                                        |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                        |  | Page
|PART I   |  | FINANCIAL INFORMATION                                                                                  |  | 3   
|         |  |                                                                                                       
|Item 1.  |  | Financial Statements.                                                                                  |  |     
|         |  |                                                                                                       
|         |  | Consolidated Balance Sheets  June 30, 2008 and December 31, 2007                                      |  | 3   
|         |  |                                                                                                       
|         |  | Consolidated Statements of Income  Three Months Ended June 30, 2008 and 2007                          |  | 4   
|         |  |                                                                                                       
|         |  | Consolidated Statements of Income  Six Months Ended June 30, 2008 and 2007                            |  | 5   
|         |  |                                                                                                       
|         |  | Consolidated Statements of Changes in Stockholders Equity  Three Months Ended June 30, 2008 and 2007 |  | 6   
|         |  |                                                                                                       
|         |  | Consolidated Statements of Cash Flows  Six Months Ended June 30, 2008 and 2007                        |  | 7   
|         |  |                                                                                                       
|         |  | Notes to Consolidated Financial Statements                                                             |  | 8   
|         |  |                                                                                                       
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                 |  | 13  
|         |  |                                                                                                       
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 24  
|         |  |                                                                                                       
|Item 4.  |  | Controls and Procedures.                                                                               |  | 24  
|         |  |                                                                                                       
|PART II  |  | OTHER INFORMATION                                                                                      |  | 24  
|         |  |                                                                                                       
|Item 1.  |  | Legal Proceedings.                                                                                     |  | 24  
|         |  |                                                                                                       
|Item 1A. |  | Risk Factors.                                                                                          |  | 24  
|         |  |                                                                                                       
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                           |  | 24  
|         |  |                                                                                                       
|Item 3.  |  | Defaults Upon Senior Securities.                                                                       |  | 24  
|         |  |                                                                                                       
|Item 4.  |  | Submission of Matters to a Vote of Security Holders.                                                   |  | 25  
|         |  |                                                                                                       
|Item 5.  |  | Other Information.                                                                                     |  | 25  
|         |  |                                                                                                       
|Item 6.  |  | Exhibits.                                                                                              |  | 25  
|         |  |                                                                                                       
|         |  | SIGNATURES                                                                                             |  | 26  



2



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Part I - Financial Information



|Item 1. | Financial Statements
|------- | --------------------

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)



|                                                                                                     |  |              |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                     |  | June 30,2008 |         |   | December 31,2007 |  
|                                                                                                     |  | (Unaudited)  |         |   | (Audited)        |  
|ASSETS                                                                                               |  |              |         |   |                  |   |         |  
|Cash and due from banks                                                                              |  | $            | 4,008   |   |                  | $ | 6,106   |  
|Interest bearing deposits in banks                                                                   |  |              | 11,056  |   |                  |   | 1,600   |  
|Federal funds sold                                                                                   |  |              | 3,200   |   |                  |   | 300     |  
|Securities available for sale, at fair value                                                         |  |              | 19,248  |   |                  |   | 11,069  |  
|Restricted securities                                                                                |  |              | 1,134   |   |                  |   | 680     |  
|Loans receivable, net of allowance for loan losses of $1,667 and $1,573 respectively                 |  |              | 120,535 |   |                  |   | 125,611 |  
|Premises and equipment, net                                                                          |  |              | 3,967   |   |                  |   | 4,056   |  
|Accrued interest receivable                                                                          |  |              | 760     |   |                  |   | 758     |  
|Other assets                                                                                         |  |              | 2,209   |   |                  |   | 1,645   |  
|                                                                                                     |  |              |         |   |                  |   |         |  
|Total Assets                                                                                         |  | $            | 166,117 |   |                  | $ | 151,825 |  
|                                                                                                     |  |              |         |   |                  |   |         |  
|LIABILITIES                                                                                          |  |              |         |   |                  |   |         |  
|Deposits                                                                                             |  |              |         |   |                  |   |         |  
|Noninterest bearing demand                                                                           |  | $            | 29,138  |   |                  | $ | 33,423  |  
|Interest bearing                                                                                     |  |              |         |   |                  |   |         |  
|Demand                                                                                               |  |              | 10,812  |   |                  |   | 10,238  |  
|Savings                                                                                              |  |              | 16,652  |   |                  |   | 13,367  |  
|Time deposits over $100,000                                                                          |  |              | 17,535  |   |                  |   | 15,822  |  
|Other time deposits                                                                                  |  |              | 57,334  |   |                  |   | 54,505  |  
|                                                                                                     |  |              |         |   |                  |   |         |  
|Total Deposits                                                                                       |  |              | 131,471 |   |                  |   | 127,355 |  
|Accrued expenses and other liabilities                                                               |  |              | 1,142   |   |                  |   | 1,295   |  
|Long term debt                                                                                       |  |              | 17,000  |   |                  |   | 6,900   |  
|                                                                                                     |  |              |         |   |                  |   |         |  
|Total Liabilities                                                                                    |  |              | 149,613 |   |                  |   | 135,550 |  
|                                                                                                     |  |              |         |   |                  |   |         |  
|STOCKHOLDERS EQUITY                                                                                 |  |              |         |   |                  |   |         |  
|Common stock; $.50 par value, authorized 5,000,000, outstanding 1,014,458 and 1,011,481 respectively |  |              | 507     |   |                  |   | 506     |  
|Retained earnings                                                                                    |  |              | 16,316  |   |                  |   | 15,805  |  
|Accumulated other comprehensive loss, net                                                            |  |              | (319    | ) |                  |   | (36     | )
|                                                                                                     |  |              |         |   |                  |   |         |  
|Total Stockholders Equity                                                                           |  |              | 16,504  |   |                  |   | 16,275  |  
|                                                                                                     |  |              |         |   |                  |   |         |  
|Total Liabilities and Stockholders Equity                                                           |  | $            | 166,117 |   |                  | $ | 151,825 |  
|                                                                                                     |  |              |         |   |                  |   |         |  

See Notes to Consolidated Financial Statements



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)



|                                                    |  |                            |           |   |      |   |          
|--------------------------------------------------- |  | -------------------------- | --------- | - | ---- | - | ---------
|                                                    |  | Three Months EndedJune 30,
|                                                    |  | 2008                       |           |   | 2007
|Interest and Dividend Income:                       |  |                            |           |   |      |   |          
|Loans including fees                                |  | $                          | 2,342     |   |      | $ | 2,411    
|Interest on securities - taxable                    |  |                            | 158       |   |      |   | 113      
|Interest on securities - nontaxable                 |  |                            | 3         |   |      |   | 2        
|Interest on deposits and federal funds sold         |  |                            | 117       |   |      |   | 88       
|Dividends                                           |  |                            | 20        |   |      |   | 29       
|                                                    |  |                            |           |   |      |   |          
|Total Interest and Dividend Income                  |  |                            | 2,640     |   |      |   | 2,643    
|                                                    |  |                            |           |   |      |   |          
|Interest Expense:                                   |  |                            |           |   |      |   |          
|Deposits                                            |  |                            | 874       |   |      |   | 890      
|Long term debt                                      |  |                            | 121       |   |      |   | 88       
|                                                    |  |                            |           |   |      |   |          
|Total Interest Expense                              |  |                            | 995       |   |      |   | 978      
|                                                    |  |                            |           |   |      |   |          
|Net Interest Income                                 |  |                            | 1,645     |   |      |   | 1,665    
|Provision for loan losses                           |  |                            | 91        |   |      |   | 95       
|                                                    |  |                            |           |   |      |   |          
|Net interest income after provision for loan losses |  |                            | 1,554     |   |      |   | 1,570    
|                                                    |  |                            |           |   |      |   |          
|Noninterest Income:                                 |  |                            |           |   |      |   |          
|Service charges and fees                            |  |                            | 213       |   |      |   | 209      
|Other income                                        |  |                            | 47        |   |      |   | 30       
|Gain (loss) on securities transactions              |  |                            | (6        | ) |      |   | 32       
|                                                    |  |                            |           |   |      |   |          
|Total Noninterest Income                            |  |                            | 254       |   |      |   | 271      
|                                                    |  |                            |           |   |      |   |          
|Noninterest Expense:                                |  |                            |           |   |      |   |          
|Salaries and benefits                               |  |                            | 666       |   |      |   | 625      
|Occupancy expenses                                  |  |                            | 87        |   |      |   | 98       
|Equipment expenses                                  |  |                            | 166       |   |      |   | 180      
|Other expenses                                      |  |                            | 434       |   |      |   | 388      
|                                                    |  |                            |           |   |      |   |          
|Total Noninterest Expenses                          |  |                            | 1,353     |   |      |   | 1,291    
|                                                    |  |                            |           |   |      |   |          
|Income before Income Taxes                          |  |                            | 455       |   |      |   | 550      
|Income Tax Expense                                  |  |                            | 151       |   |      |   | 185      
|                                                    |  |                            |           |   |      |   |          
|Net Income                                          |  | $                          | 304       |   |      | $ | 365      
|                                                    |  |                            |           |   |      |   |          
|Per Share Data                                      |  |                            |           |   |      |   |          
|Net income, basic and diluted                       |  | $                          | 0.30      |   |      | $ | 0.36     
|                                                    |  |                            |           |   |      |   |          
|Dividends                                           |  | $                          | 0.14      |   |      | $ | 0.14     
|                                                    |  |                            |           |   |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                            | 1,013,285 |   |      |   | 1,011,481
|                                                    |  |                            |           |   |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                            | 1,013,666 |   |      |   | 1,013,923
|                                                    |  |                            |           |   |      |   |          

See Notes to Consolidated Financial Statements



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)



|                                                    |  |                          |           |      |   |          
|--------------------------------------------------- |  | ------------------------ | --------- | ---- | - | ---------
|                                                    |  | Six Months EndedJune 30,
|                                                    |  | 2008                     |           | 2007
|Interest and Dividend Income:                       |  |                          |           |      |   |          
|Loans including fees                                |  | $                        | 4,753     |      | $ | 4,756    
|Interest on securities - taxable                    |  |                          | 273       |      |   | 216      
|Interest on securities - nontaxable                 |  |                          | 5         |      |   | 5        
|Interest on deposits and federal funds sold         |  |                          | 225       |      |   | 199      
|Dividends                                           |  |                          | 37        |      |   | 60       
|                                                    |  |                          |           |      |   |          
|Total Interest and Dividend Income                  |  |                          | 5,293     |      |   | 5,236    
|                                                    |  |                          |           |      |   |          
|Interest Expense:                                   |  |                          |           |      |   |          
|Deposits                                            |  |                          | 1,755     |      |   | 1,706    
|Long term debt                                      |  |                          | 235       |      |   | 175      
|                                                    |  |                          |           |      |   |          
|Total Interest Expense                              |  |                          | 1,990     |      |   | 1,881    
|                                                    |  |                          |           |      |   |          
|Net Interest Income                                 |  |                          | 3,303     |      |   | 3,355    
|Provision for loan losses                           |  |                          | 196       |      |   | 140      
|                                                    |  |                          |           |      |   |          
|Net interest income after provision for loan losses |  |                          | 3,107     |      |   | 3,215    
|                                                    |  |                          |           |      |   |          
|Noninterest Income:                                 |  |                          |           |      |   |          
|Service charges and fees                            |  |                          | 414       |      |   | 397      
|Other income                                        |  |                          | 116       |      |   | 97       
|Gain on security transactions                       |  |                          | 145       |      |   | 59       
|                                                    |  |                          |           |      |   |          
|Total Noninterest Income                            |  |                          | 675       |      |   | 553      
|                                                    |  |                          |           |      |   |          
|Noninterest Expense:                                |  |                          |           |      |   |          
|Salaries and benefits                               |  |                          | 1,305     |      |   | 1,264    
|Occupancy expenses                                  |  |                          | 179       |      |   | 196      
|Equipment expenses                                  |  |                          | 341       |      |   | 360      
|Other expenses                                      |  |                          | 854       |      |   | 744      
|                                                    |  |                          |           |      |   |          
|Total Noninterest Expenses                          |  |                          | 2,679     |      |   | 2,564    
|                                                    |  |                          |           |      |   |          
|Income before Income Taxes                          |  |                          | 1,103     |      |   | 1,204    
|Income Tax Expense                                  |  |                          | 367       |      |   | 405      
|                                                    |  |                          |           |      |   |          
|Net Income                                          |  | $                        | 736       |      | $ | 799      
|                                                    |  |                          |           |      |   |          
|Per Share Data                                      |  |                          |           |      |   |          
|Net income, basic and diluted                       |  | $                        | 0.73      |      | $ | 0.79     
|                                                    |  |                          |           |      |   |          
|Dividends                                           |  | $                        | 0.29      |      | $ | 0.28     
|                                                    |  |                          |           |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                          | 1,013,285 |      |   | 1,011,481
|                                                    |  |                          |           |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                          | 1,013,858 |      |   | 1,013,783
|                                                    |  |                          |           |      |   |          

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, 2006                                                               |  | $           | 506 |                  | $ | 14,615 |                                            |  | $ | 97    |   |  | $ | 15,218 |  
|Comprehensive Income                                                                    |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net Income                                                                              |  |             |     |                  |   | 799    |                                            |  |   |       |   |  |   | 799    |  
|Changes in unrealized gains (losses) on securities, net of taxes                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $23)           |  |             |     |                  |   |        |                                            |  |   | 43    |   |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $22) |  |             |     |                  |   |        |                                            |  |   | (37   | ) |  |   | 6      |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                            |  |   |       |   |  |   | 805    |  
|Cash Dividends                                                                          |  |             |    |                  |   | (283   | )                                          |  |   |      |   |  |   | (283   | )
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE JUNE 30, 2007                                                                   |  | $           | 506 |                  | $ | 15,131 |                                            |  | $ | 103   |   |  | $ | 15,740 |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE DECEMBER 31, 2007                                                               |  | $           | 506 |                  | $ | 15,805 |                                            |  | $ | (36   | ) |  | $ | 16,275 |  
|Comprehensive Income                                                                    |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net Income                                                                              |  |             |     |                  |   | 736    |                                            |  |   |       |   |  |   | 736    |  
|Changes in unrealized gains (losses) on securities, net of taxes                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding losses arising during the period (net of tax effect of $111)         |  |             |     |                  |   |        |                                            |  |   | (187  | ) |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $49) |  |             |     |                  |   |        |                                            |  |   | (96   | ) |  |   | (283   | )
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Stock issued for compensation                                                           |  |             | 1   |                  |   | 69     |                                            |  |   |       |   |  |   | 70     |  
|Cash Dividends                                                                          |  |             |    |                  |   | (294   | )                                          |  |   |      |   |  |   | (294   | )
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE JUNE 30, 2008                                                                   |  | $           | 507 |                  | $ | 16,316 |                                            |  | $ | (319  | ) |  | $ | 16,504 |  
|                                                                                        |  |             |     |                  |   |        |                                            |  |   |       |   |  |   |        |  

See Notes to Consolidated Financial Statements



6



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)



|                                                                                  |  |                          |         |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | -
|                                                                                  |  | Six Months EndedJune 30, |        
|                                                                                  |  | 2008                     |         |   | 2007 |  
|Cash Flows from Operating Activities:                                             |  |                          |         |   |      |   |        |  
|Net income                                                                        |  | $                        | 736     |   |      | $ | 799    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |        |  
|Provision for loan losses                                                         |  |                          | 196     |   |      |   | 140    |  
|Depreciation and amortization                                                     |  |                          | 253     |   |      |   | 275    |  
|Gain on sale of securities                                                        |  |                          | (145    | ) |      |   | (59    | )
|Net amortization on securities                                                    |  |                          | 5       |   |      |   | (5     | )
|Stock issued for compensation                                                     |  |                          | 70      |   |      |   |       |  
|Net change in:                                                                    |  |                          |         |   |      |   |        |  
|Accrued interest receivable                                                       |  |                          | (2      | ) |      |   | (2     | )
|Other assets                                                                      |  |                          | (404    | ) |      |   | (97    | )
|Accrued expense and other liabilities                                             |  |                          | (153    | ) |      |   | 165    |  
|                                                                                  |  |                          |         |   |      |   |        |  
|Net Cash Provided by Operating Activities                                         |  |                          | 556     |   |      |   | 1,216  |  
|                                                                                  |  |                          |         |   |      |   |        |  
|Cash Flows from Investing Activities:                                             |  |                          |         |   |      |   |        |  
|Net change in federal funds sold                                                  |  |                          | (2,900  | ) |      |   | (1,800 | )
|Net change in interest bearing deposits                                           |  |                          | (9,456  | ) |      |   | 1,261  |  
|Net change in restricted securities                                               |  |                          | (454    | ) |      |   | 8      |  
|Proceeds from maturities and sales of securities available for sale               |  |                          | 8,891   |   |      |   | 10,627 |  
|Proceeds from maturities and calls of securities held to maturity                 |  |                          |        |   |      |   | 1      |  
|Purchase of securities available for sale                                         |  |                          | (17,373 | ) |      |   | (9,097 | )
|Net decrease (increase) in loans                                                  |  |                          | 4,880   |   |      |   | (8,144 | )
|Purchase of bank premises and equipment                                           |  |                          | (164    | ) |      |   | (62    | )
|                                                                                  |  |                          |         |   |      |   |        |  
|Net Cash Used in Investing Activities                                             |  |                          | (16,576 | ) |      |   | (7,206 | )
|                                                                                  |  |                          |         |   |      |   |        |  
|Cash Flows from Financing Activities:                                             |  |                          |         |   |      |   |        |  
|Net change in:                                                                    |  |                          |         |   |      |   |        |  
|Demand and savings deposits                                                       |  |                          | (426    | ) |      |   | 3,717  |  
|Time deposits                                                                     |  |                          | 4,542   |   |      |   | 5,948  |  
|Proceeds from borrowings                                                          |  |                          | 12,000  |   |      |   | 2,000  |  
|Curtailments of borrowings                                                        |  |                          | (1,900  | ) |      |   | (1,900 | )
|Dividends paid                                                                    |  |                          | (294    | ) |      |   | (283   | )
|                                                                                  |  |                          |         |   |      |   |        |  
|Net Cash Provided by Financing Activities                                         |  |                          | 13,922  |   |      |   | 9,482  |  
|                                                                                  |  |                          |         |   |      |   |        |  
|Cash and Cash Equivalents:                                                        |  |                          |         |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                              |  |                          | (2,098  | ) |      |   | 3,492  |  
|Cash and Cash Equivalents, beginning of year                                      |  |                          | 6,106   |   |      |   | 5,197  |  
|                                                                                  |  |                          |         |   |      |   |        |  
|Cash and Cash Equivalents, End of Period                                          |  | $                        | 4,008   |   |      | $ | 8,689  |  
|                                                                                  |  |                          |         |   |      |   |        |  
|Supplemental Disclosure of Cash Paid                                              |  |                          |         |   |      |   |        |  
|During the Period for:                                                            |  |                          |         |   |      |   |        |  
|Interest                                                                          |  | $                        | 2,013   |   |      | $ | 1,814  |  
|Income taxes                                                                      |  | $                        | 499     |   |      | $ | 226    |  
|Supplemental Disclosure of non-cash activity:                                     |  |                          |         |   |      |   |        |  
|Unrealized gain (loss) on securities available for sale                           |  |                          | (443    | ) |      |   | 13     |  
|Loan balances transferred to OREO                                                 |  |                          | 254     |   |      |   |       |  

See Notes to Consolidated Financial Statements



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 ACCOUNTING PRINCIPLES:

The consolidated financial statements conform to generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2008 and the results of operations for the three and six month periods ended June 30, 2008 and June 30, 2007. The notes
included herein should be read in conjunction with the notes to financial statements included in the 2007 annual report to stockholders of Pioneer Bankshares, Inc. (the Company) and its Form 10-KSB for the year ended December 31,
2007, as filed with the Securities and Exchange Commission.

Fair Value Measurements -SFAS No. 157, Fair Value Measurements, defines fair
value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:



|  |  |         |  |                                                                                                                                                                                                                                                                       
|- |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1 |  | inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.                                                                                                                                             
|  |  |        
| |  | Level 2 |  | inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.
|  |  |        
| |  | Level 3 |  | inputs to the valuation methodology are unobservable and significant to the fair value measurement.                                                                                                                                                                   

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as
the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid
government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.
Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity
or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of the Companys securities are considered to be Level 2 securities.

Impaired loans

SFAS No. 157 applies to loans measured for
impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the
loans collateral (if the loan is collateral dependent). Fair value of the loans collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to
liquidation of the collateral.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157. As of June 30, 2008, the
outstanding balance in OREO was approximately $254,000, resulting from foreclosure proceedings held during the second quarter of 2008. It is not managements intent to hold these properties or maintain them as a part of the Companys
permanent fixed assets and premises. Management is actively marketing these properties and anticipates being able to sell them within a reasonable time period.



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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 Accounting Principles Board (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 expense relating to previously issued stock
options, as of June 30, 2008, is approximately $2,057 compared to $2,191 for June 30, 2007. The expense related to stock option compensation is generally recognized over a vesting period of one year for each option granted. There were no
additional stock options granted during the first six months of 2008. There were 700 stock option shares exercised by non-employee directors during this reporting period totaled at an exercise price of $18.00 per share.

The following summarizes the stock options outstanding as of June 30, 2008:



|                              |  |        |  |                              |       |                                          |     |                                                                |   |   
|----------------------------- |  | ------ |  | ---------------------------- | ----- | ---------------------------------------- | --- | -------------------------------------------------------------- | - | --
|                              |  | Shares |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractual Term |     | Intrinsic Valueof UnexercisedIn-the-MoneyOptions(In Thousands)
|Options outstanding, 12/31/07 |  | 7,900  |  | $                            | 16.32 |                                          | 5.1 |                                                                |   |   
|New Options Granted           |  |       |  |                              |      |                                          |     |                                                                |   |   
|Options Exercised             |  | 700    |  |                              | 18.00 |                                          |     |                                                                |   |   
|Options Forfeited             |  |       |  |                              |      |                                          |     |                                                                |   |   
|Options outstanding, 6/30/08  |  | 7,200  |  | $                            | 16.16 |                                          | 5.0 |                                                                |   |   
|Options exercisable, 6/30/08  |  | 7,200  |  | $                            | 16.16 |                                          | 5.0 |                                                                | $ | 21



|(1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2008. This amount changes based on changes in the market value of the Companys
stock. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 2 INVESTMENT SECURITIES:

The amounts at which investment
securities are carried in the consolidated balance sheets and their approximate market values at June 30, 2008 and December 31, 2007 follows:



|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|------------------------------------ |  | -------------- | ------ | ----------------- | - | ------------- |  | ----------- | ------ |  | - | ------
|                                     |  | (In Thousands)
|                                     |  | June 30, 2008  |        | December 31, 2007
|                                     |  | CarryingValue  |        | MarketValue       |   | CarryingValue |  | MarketValue
|Securities available for sale:       |  |                |        |                   |   |               |  |             |        |  |   |       
|U.S. Treasury and agency obligations |  | $              | 5,993  |                   | $ | 6,035         |  | $           | 5,962  |  | $ | 6,088 
|Mortgage-backed                      |  |                | 9,958  |                   |   | 9,845         |  |             | 1,999  |  |   | 2,007 
|Municipal securities                 |  |                | 636    |                   |   | 637           |  |             | 215    |  |   | 218   
|Equity securities                    |  |                | 2,671  |                   |   | 2,731         |  |             | 2,961  |  |   | 2,756 
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $              | 19,258 |                   | $ | 19,248        |  | $           | 11,137 |  | $ | 11,069
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       



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NOTE 2 INVESTMENT SECURITIES: (continued)

As of June 30, 2008, there were 3 investment securities that had been in a loss position for more than 12 consecutive months and 19 additional securities that had been in a loss position for less than one year.
In analyzing an issuers financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts reports and
overall credit quality. No impairment has been recognized on any of the securities in a loss position because of managements intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value.
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 June 30, 2008, is as follows:



|                    |  |                   |  |                               |   |                           |   |       |                  |  |   |       |   |  |   |        |  
|------------------- |  | ----------------- |  | ----------------------------- | - | ------------------------- | - | ----- | ---------------- |  | - | ----- | - |  | - | ------ | -
|LOSSES              |  | (In Thousands)    |  | US GovernmentAgencySecurities |   | Mortgage-BackedSecurities |   |       | EquitySecurities |  |   | Total |  
|Less than 12 Months |  | Fair Value        |  | $                             |  |                           | $ | 8,344 |                  |  | $ | 2,574 |   |  | $ | 10,918 |  
|                    |  | Unrealized Losses |  |                               |  |                           |   | (111  | )                |  |   | (366  | ) |  |   | (477   | )
|More than 12 Months |  | Fair Value        |  |                               |  |                           |   | 71    |                  |  |   | 157   |   |  |   | 228    |  
|                    |  | Unrealized Losses |  |                               |  |                           |   | (1    | )                |  |   | (74   | ) |  |   | (75    | )
|                    |  |                   |  |                               |   |                           |   |       |                  |  |   |       |   |  |   |        |  
|Total               |  | Fair Value        |  | $                             |  |                           | $ | 8,415 |                  |  | $ | 2,731 |   |  | $ | 11,146 |  
|                    |  | Unrealized Losses |  |                               |  |                           |   | (112  | )                |  |   | (440  | ) |  |   | (552   | )
|                    |  |                   |  |                               |   |                           |   |       |                  |  |   |       |   |  |   |        |  

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



|                    |  |                   |  |                           |     |   |                  |   |       |       |  |   |       |  
|------------------- |  | ----------------- |  | ------------------------- | --- | - | ---------------- | - | ----- | ----- |  | - | ----- | -
|LOSSES              |  |                   |  | Mortgage-BackedSecurities |     |   | EquitySecurities |   |       | Total | 
|                    |  |                   |  | (In Thousands)            |     |   |                  |   |       |       | 
|Less than 12 Months |  | Fair Value        |  | $                         |    |   |                  | $ | 2,756 |       |  | $ | 2,756 |  
|                    |  | Unrealized Losses |  |                           |    |   |                  |   | (205  | )     |  |   | (205  | )
|More than 12 Months |  | Fair Value        |  |                           | 273 |   |                  |   |      |       |  |   | 273   |  
|                    |  | Unrealized Losses |  |                           | (5  | ) |                  |   |      |       |  |   | (5    | )
|Total               |  | Fair Value        |  |                           | 273 |   |                  |   | 2,756 |       |  |   | 3,029 |  
|                    |  | Unrealized Losses |  |                           | (5  | ) |                  |   | (205  | )     |  |   | (210  | )



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NOTE 3 LOANS:

Loans
outstanding are summarized as follows:



|                                 |  |                |         |   |                  |   |         |  
|-------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                 |  | (In Thousands) |        
|                                 |  | June 30,2008   |         |   | December 31,2007 |  
|Mortgage loans on real estate    |  |                |         |   |                  |   |         |  
|Construction loans               |  | $              | 9,813   |   |                  | $ | 12,979  |  
|Agricultural                     |  |                | 4,387   |   |                  |   | 4,573   |  
|Equity lines of credit           |  |                | 1,815   |   |                  |   | 2,431   |  
|Residential 1-4 family           |  |                | 41,182  |   |                  |   | 41,579  |  
|Second Mortgages                 |  |                | 4,686   |   |                  |   | 5,055   |  
|Multifamily                      |  |                | 3,887   |   |                  |   | 3,946   |  
|Commercial                       |  |                | 34,526  |   |                  |   | 32,332  |  
|                                 |  |                |         |   |                  |   |         |  
|Total real estate loans          |  |                | 100,296 |   |                  |   | 102,895 |  
|Commercial and industrial loans  |  |                | 6,185   |   |                  |   | 7,204   |  
|Consumer installment loans       |  |                |         |   |                  |   |         |  
|Personal                         |  |                | 15,773  |   |                  |   | 17,165  |  
|Credit cards                     |  |                | 574     |   |                  |   | 587     |  
|                                 |  |                |         |   |                  |   |         |  
|Total consumer installment loans |  |                | 16,347  |   |                  |   | 17,752  |  
|All other loans                  |  |                | 203     |   |                  |   | 323     |  
|                                 |  |                |         |   |                  |   |         |  
|Gross Loans                      |  |                | 123,031 |   |                  |   | 128,174 |  
|Less unearned income on loans    |  |                | (829    | ) |                  |   | (990    | )
|                                 |  |                |         |   |                  |   |         |  
|Loans, less unearned discount    |  |                | 122,202 |   |                  |   | 127,184 |  
|Less allowance for loan losses   |  |                | (1,667  | ) |                  |   | (1,573  | )
|                                 |  |                |         |   |                  |   |         |  
|Net Loans Receivable             |  | $              | 120,535 |   |                  | $ | 125,611 |  
|                                 |  |                |         |   |                  |   |         |  

Pioneer Banks loan portfolio is concentrated in real estate loans, including those secured by residential
consumer properties and small business commercial properties. Management has limited its exposure to risk in the real estate lending market by establishing specific criteria relating to real estate lending practices and continuing to engage
primarily in only traditional mortgage products. Management has also limited its risk exposure by establishing caps for long-term fixed rate mortgage programs.

Management recognizes that prevailing economic conditions may have the potential to impact borrowers within the Banks real estate portfolio and continues to monitor this on an on-going basis.

As June 30, 2008, management considers the risk of loss in the real estate loan categories to be low to moderate.



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NOTE 4 ALLOWANCE FOR LOAN LOSSES:

A summary of transactions in the allowance for loan losses for the six months ended June 30, 2008 and the year ending December 31, 2007 is as follows:



|                                        |  |                |       |   |                  |   |       |  
|--------------------------------------- |  | -------------- | ----- | - | ---------------- | - | ----- | -
|                                        |  | June 30,2008   |       |   | December 31,2007 |  
|                                        |  | (Unaudited)    |       |   | (Audited)        |  
|                                        |  | (In Thousands) |      
|Balance, beginning of period            |  | $              | 1,573 |   |                  | $ | 1,476 |  
|Provision charged to operating expenses |  |                | 196   |   |                  |   | 309   |  
|Recoveries of loans charged off         |  |                | 92    |   |                  |   | 262   |  
|Loans charged off                       |  |                | (194  | ) |                  |   | (474  | )
|                                        |  |                |       |   |                  |   |       |  
|Balance, end of period                  |  | $              | 1,667 |   |                  | $ | 1,573 |  
|                                        |  |                |       |   |                  |   |       |  

The total amount of impaired loans as of June 30, 2008 was $2.1 million compared to $785,000 at
December 31, 2007. Specific valuation allowances totaling $361,000 have been made as a precautionary measure to cover these potential losses.

NOTE
5 EARNINGS PER SHARE:

The following shows the weighted average number of shares for the six month period ending June 30, 2008 and 2007, used in
computing earnings per share and the effect on weighted average number of shares diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.



|                               |  |                               |  |                               |      |        |           |                 |   |     
|------------------------------ |  | ----------------------------- |  | ----------------------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | Six Months EndedJune 30, 2008 |  | Six Months EndedJune 30, 2007
|                               |  | Shares                        |  | Per ShareAmount               |      | Shares |           | Per ShareAmount
|Basic earnings per share       |  | 1,013,285                     |  | $                             | 0.73 |        | 1,011,481 |                 | $ | 0.79
|                               |  |                               |  |                               |      |        |           |                 |   |     
|Effect of dilutive securities: |  |                               |  |                               |      |        |           |                 |   |     
|Stock Options                  |  | 573                           |  |                               |      |        | 2,302     |                 |   |     
|                               |  |                               |  |                               |      |        |           |                 |   |     
|Diluted earnings per share     |  | 1,013,858                     |  | $                             | 0.73 |        | 1,013,783 |                 | $ | 0.79
|                               |  |                               |  |                               |      |        |           |                 |   |     

As of June 30, 2008 and 2007, stock options representing 3,200 and 800 shares, respectively, were not
included in computing diluted earnings per share because their effects were anti-dilutive.

The weighted average number of shares for the three month
period ending June 30, 2008 and 2007, used in computing earnings per share and the effect on weighted average number of shares diluted potential common stock are shown below.



|                               |  |                                 |  |                                |      |        |           |                 |   |     
|------------------------------ |  | ------------------------------- |  | ------------------------------ | ---- | ------ | --------- | --------------- | - | ----
|                               |  | Three Months EndedJune 30, 2008 |  | Three Month EndedJune 30, 2007
|                               |  | Shares                          |  | Per ShareAmount                |      | Shares |           | Per ShareAmount
|Basic earnings per share       |  | 1,013,285                       |  | $                              | 0.30 |        | 1,011,481 |                 | $ | 0.36
|                               |  |                                 |  |                                |      |        |           |                 |   |     
|Effect of dilutive securities: |  |                                 |  |                                |      |        |           |                 |   |     
|Stock Options                  |  | 381                             |  |                                |      |        | 2,442     |                 |   |     
|                               |  |                                 |  |                                |      |        |           |                 |   |     
|Diluted earnings per share     |  | 1,013,666                       |  | $                              | 0.30 |        | 1,013,923 |                 | $ | 0.36
|                               |  |                                 |  |                                |      |        |           |                 |   |     



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NOTE 6 LONG TERM DEBT:

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

Total outstanding borrowings have increased by approximately $10.1 million during the first six months of 2008. This increase is the result of fixed low-rate borrowings
that were obtained from the FHLB primarily for investment purposes with funds generally being placed in matching term investment instruments. The investment instruments were placed at a rate of interest higher than the borrowing rate in an effort to
produce additional interest income.

As of June 30, 2008, total outstanding borrowings with FHLB were $17.0 million, which mature through
January 18, 2011. The interest rates on these fixed-rate notes payable range from 2.47% to 3.92%. The maturities of FHLB advances as of June 30, 2008 are shown in TABLE II of this report.

NOTE 7 OTHER EXPENSES:

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



|                      |  |                |     |      |   |    
|--------------------- |  | -------------- | --- | ---- | - | ---
|                      |  | June 30,      
|                      |  | 2008           |     | 2007
|                      |  | (In Thousands)
|Director Fees         |  | $              | 66  |      | $ | 84 
|Legal Fees            |  |                | 80  |      |   | 14 
|Professional Fees     |  |                | 110 |      |   | 74 
|Supplies and Printing |  |                | 82  |      |   | 72 
|Telephone Expense     |  |                | 65  |      |   | 76 
|Other                 |  |                | 451 |      |   | 424
|                      |  |                |     |      |   |    
|Total                 |  | $              | 854 |      | $ | 744
|                      |  |                |     |      |   |    



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

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

Forward-Looking Statements

This quarterly report on Form 10-Q
contains forward-looking statements with respect to the 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.



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Overview

The
Company reported year-to-date net earnings of $736,000 as of June 30, 2008 as compared to net earnings for the same period last year of $799,000. This represents a decrease of approximately $63,000 or 7.88%, and is primarily attributed to
interest expense related to deposit growth, additional loan loss reserve allocations, and increased operating expenses. Earnings per share for the quarter ended June 30, 2008 were $0.30 compared to the second quarter of 2007 earnings per share
of $0.36. Cumulative year-to-date earnings per share as of June 30, 2008 were $0.73 as compared to $0.79 for the same period last year.

The Company
had asset growth of approximately $14.3 million during the first half of 2008. Approximately $339,000 in asset growth occurred during the second quarter. The year-to-date asset growth for the Company is primarily attributed to investment and
borrowing activities. Total investments in securities available for sale have increased by $8.2 million for the six month period ending June 30, 2008, as compared to total securities at December 31, 2007. Investments in interest bearing
deposits increased by approximately $9.5 million for the six month period ending June 30, 2008, as compared to December 31, 2007. Total outstanding borrowings increased by approximately $10.1 million as the result of fixed low-rate
advances that were obtained from the Federal Home Loan Bank of Atlanta. These borrowings were initiated primarily for investment purposes with funds generally being placed in matching term investment instruments, at a rate of interest higher than
the borrowing rate.

The Companys loan portfolio decreased by approximately $5.1 million or 4.04% during the six month period ending June 30,
2008. This decrease is primarily attributed to commercial and residential real estate loan payoffs and consumer refinancing activities. The deposit portfolio increased by $4.1 million or 3.23% during the same period, with the majority of this growth
being in savings accounts and time deposits. The Companys capital position as of June 30, 2008 was $16.5 million, or 9.94% as a percentage of total assets.

The Companys book value as of June 30, 2008 was $16.27 per share, as compared to a book value of $16.09 per share as of December 31, 2007. This represents an increase of 1.12%. Additionally,
shareholder dividend payments for the six month period ending June 30, 2008 increased by 3.57%, as compared to the same period last year.

Management
recognizes that prevailing economic conditions have the potential to adversely impact the Companys operational results, including future earnings, liquidity, and capital resources. Management continually monitors economic factors in an effort
to promptly identify specific trends that could have a direct material effect on the Company.

Critical Accounting Policies

General

The 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) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable, and 2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the market and the loan balance.



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##### Table of Contents

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 (FASB) issued SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for
the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent
to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review, and more frequently if
certain impairment indicators are 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 June 30, 2008 and December 31, 2007. The goodwill is no longer amortized, but instead is tested for impairment at least annually.

Results of Operations

Net Interest Income

Total interest income increased $57,000 or 1.09% during the first six months 2008 as compared to the same period for 2007. Total interest expense increased $109,000 or
5.79% in the first six months of 2008 compared to the same period of 2007. The increases in interest income and interest expense resulted in a net interest income decrease of $52,000 or 1.55% for the period ending June 30, 2008 compared to the
period ending June 30, 2007. This net decrease is primarily attributed to increased time deposit interest expense of $49,000 as compared to the same period last year. A large portion of the time deposit portfolio are at fixed interest rates and
re-pricing maturity terms of 12 -18 months. The interest rates on these accounts were established during a higher interest rate market and will be subject to current rates as they mature. The average interest rate being paid on time deposits
decreased from 4.50% as of June 30, 2007 to 4.48% as of June 30, 2008.

The net interest margin decreased from 4.71% for the period ending
June 30, 2007 to 4.33% for the period ending June 30, 2008, and is primarily related to the time deposit pricing discussed above. Additionally, the average yield on loans decreased from 7.76% for the first six months of 2007 to 7.57% for
the first six months of 2008. This is primarily the result of loan refinancing and re-pricing activities in a lower interest rate environment, as well as, managements continued efforts with a dealer loan program for auto financing, which
offers lower interest rates to well qualified buyers. The overall average yield on earning assets decreased from 7.34% as of June 30, 2007 to 6.94% as of June 30, 2008, as a result of the previously mentioned factors.



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##### Table of Contents

Noninterest Income

During the first half of 2008, non-interest income increased by $122,000 when compared to the same period last year. This increase can be accounted for primarily in the category of gains on securities transactions. Securities gains during
the first half of 2008 increased by $86,000 as compared to the prior year and were the result of strategic restructuring of the Banks investment portfolio in the current economic environment. Additionally, service charge income and other
income increased by $17,000 and $19,000 respectively and is primarily the result of nominal fee increases.

Noninterest Expense

During the first half of 2008, non-interest expense increased by $115,000 or 4.49% in comparison to the first half of 2007. The primary factor contributing to this
overall increase is legal fee expenses incurred primarily relating to shareholder and proxy litigation.

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, as of June 20, 2008 consists of securities classified as available for sale. Securities available for sale include
securities that may be sold in response to general market fluctuations, general liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses of available for sale
securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of shareholders equity.

As of
June 30, 2008, the net amortized cost of securities available for sale was approximately $10,000 more 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 $8.6 million during the first half of 2008. 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, 14.19% (based on market value) are invested in equities, some of which are dividend
producing and subject to the corporate dividend exclusion for taxation purposes. These investments generally have the potential for increases in value and have historically produced a high rate of return for the Company. Management recognizes that
these investments are subject to market conditions and can be also impacted by economic downturns.

Loan Portfolio

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

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

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



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##### Table of Contents

During the first half of 2008, net loans decreased by approximately $5.1 million or 4.04%, which is primarily attributed
to residential and commercial real estate loan payoffs and other refinance activities. 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
$867,000 at June 30, 2008 compared to $386,000 at December 31, 2007. This represents an increase of $481,000 and is mainly attributed to one specific loan customer with real estate accounts in which foreclosure proceedings are in process.
Management has evaluated the value of collateral related to this account as of June 30, 2008 and has made a specific allocation to the allowance for loan loss account for a potential loss amount of approximately $95,000.

Management continually monitors past due and non-accrual accounts and takes necessary collection actions on a consistent basis to minimize losses in the portfolio.
Management monitors all non-performing assets in order to promptly identify any loss allocations that should be made. Although the potential exists for additional losses, management believes the Bank is generally well secured and continues to
actively work with these customers to effect payment.

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 June 30,
2008 was $2.1 million compared to $785,000 at December 31, 2007. This represents an increase of approximately $1.3 million and is primarily the result of managements proactive efforts to promptly identify additional potential problem
credits. Based on current collateral values, management has identified potential losses relating to these credits of approximately $361,000 as of June 30, 2008. Specific valuation allowances have been made as a preventative measure to cover
potential losses should they occur in the future.

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 as of June 30, 2008 that are not included in the past dues, non-accrual or impaired loans referred above.

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



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##### Table of Contents

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

The provision for loan losses and changes in the allowance for loan losses are shown in note 4 of the financial statements included in this report.

The allowance for loan loss balance of $1.667 million at June 30, 2008, increased by approximately $94,000 from its level at December 31, 2007. The increase in the allowance balance is primarily attributed to specific allocations
related to impaired loans, as well as, an increased percentage of non-performing assets, including nonaccruals, past dues, and classified loans. The increase in non-performing assets is partially attributed to a declining economic environment.
Management has made additional allocations based on the declining economic trends and increases in non-performing assets, as a means of providing sufficient funding for possible losses. Additionally, management has performed an evaluation of various
concentrations within the loan portfolio and has established appropriate allocations in accordance with the levels of risk identified with each concentration category.

The increased allowance allocations noted above have contributed to an overall increase in the cumulative funding as a percentage of total loans. The cumulative balance in the allowance for loan loss account was equal
to 1.36% and 1.24% of total loans as of June 30, 2008 and December 31, 2007, respectively. Management believes the increase in the allowance for loan loss as a percentage of total loans is directionally consistent with the changes and
trends that have been identified within the loan portfolio as of June 30, 2008.

The allowance is deemed to be within an acceptable range based on
managements evaluation of the losses inherent in the loan portfolio at the end of this reporting period. The evaluation of the allowance for loan loss account as of June 30, 2008 included specific allocations for certain borrowers, in
which the payment performance and collateral value assessment indicates possible future losses. Management exercises the utmost caution and due diligence in allocating for possible loan losses, and follows a consistent methodology in order to
protect its investors and to minimize the potential for large fluctuations in future provision expenses. Managements practice of funding the allowance for loan loss account is to make necessary adjustments on a quarterly basis for the
foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary allowance for loan loss reserves are recorded
directly to income or expense in the reporting period.

The provision expense related to the allowance for loan loss as of June 30, 2008 was $196,000
as compared to $140,000 for the first half of 2007. This increase is directly related to the increased loan portfolio allocations previously discussed.

Managements evaluation of the allowance for loan losses as of June 30, 2008 and December 31, 2007 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan loss account is
monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.

Premises, Equipment and Software

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

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



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##### Table of Contents

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 deposit portfolio has increased by approximately $4.1 million or 3.23% during the first half of 2008. This increase was primarily in the categories of savings accounts and time deposits. The Company monitors its
deposits carefully on an on-going basis in order to provide adequate funding for investments and loan growth opportunities.

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank (the FHLB) of Atlanta upon which credit advances can be made up to 40% of
total assets, subject to certain eligibility requirements. As of June 30, 2008, total borrowings were $17.0 million compared to $6.9 million at December 31, 2007. This represents an increase of approximately $10.1 million, which is
primarily attributed to new advances obtained at fixed low interest rates. These borrowings were initiated primarily for investment purposes with funds generally being placed in matching term investment instruments, with a rate of interest higher
than the borrowing rate. The Companys borrowing activities are discussed in Note 6 of the financial statements included in this report.

Capital

The Company seeks to maintain a strong capital structure in order to provide adequate funding for future expansion, asset
growth opportunities, operational needs, shareholder dividends, and to promote public confidence. The adequacy of the Companys capital is reviewed by management on an ongoing basis with reference to its size, composition, quality of assets and
liability levels, and consistency with regulatory requirements and industry standards.

As of June 30, 2008 and December 31, 2007, the
Companys total capital-to-asset ratio was 9.94% and 10.72%, respectively. The Companys capital ratios exceed regulatory minimums and earnings have been sufficient to allow for a 3.57% increase in dividend payments during the first half
of 2008. Dividend payments to shareholders are generally declared on a quarterly basis and management has no reason to believe this payment schedule will not continue.

Liquidity

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

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

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

Liquidity as of June 30, 2008 remains adequate.



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##### Table of Contents

Interest Rate Sensitivity

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

The Company reviews its interest rate gap, loan and deposit
maturities and repricing schedules on a regular basis. Table II contains an analysis, which shows the re-pricing opportunities of earning assets and interest bearing liabilities as of June 30, 2008.

As of June 30, 2008, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 39.21% for the one year re-pricing period, compared with a negative
cumulative Gap Rate Sensitivity of 39.65% at December 31, 2007. 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 December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination
transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.
Acquisition related costs including finders fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 and early implementation is not permitted. The Company does not expect the implementation to have a material impact on its consolidated financial statements at this time.

In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, Noncontrolling Interests in Consolidated Financial Statements
(SFAS 160). SFAS 160 requires the Company to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements at
this time.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. No. 161, Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entitys financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not
expect the implementation of SFAS 161 to have a material impact on its consolidated financial statements at this time.

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)



|                                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|---------------------------------- |  | ----------------------------- | ------- | -------------- | ----------------------------- | ----- |  | ----- | -------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Six Months EndedJune 30, 2008 |         |                | Six Months EndedJune 30, 2007 |      
|                                   |  | AverageBalance                |         | Income/Expense |                               | Rates |  |       | AverageBalance |  | Income/Expense |         | Rates |  
|Interest Income                    |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Loans1                             |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Commercial                         |  | $                             | 8,008   |                | $                             | 324   |  | 8.09  | %              |  | $              | 8,128   |       | $ | 362   |  | 8.91  | %
|Real estate                        |  |                               | 99,777  |                |                               | 3,487 |  | 6.99  | %              |  |                | 98,757  |       |   | 3,488 |  | 7.06  | %
|Installment                        |  |                               | 17,224  |                |                               | 884   |  | 10.26 | %              |  |                | 15,151  |       |   | 846   |  | 11.17 | %
|Credit Card                        |  |                               | 539     |                |                               | 58    |  | 21.52 | %              |  |                | 559     |       |   | 60    |  | 21.47 | %
|Federal funds sold                 |  |                               | 3,238   |                |                               | 41    |  | 2.53  | %              |  |                | 3,457   |       |   | 88    |  | 5.09  | %
|Interest Bearing Deposits          |  |                               | 9,631   |                |                               | 184   |  | 3.82  | %              |  |                | 4,518   |       |   | 111   |  | 4.91  | %
|Investments                        |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Taxable                            |  |                               | 11,411  |                |                               | 303   |  | 5.31  | %              |  |                | 9,579   |       |   | 255   |  | 5.32  | %
|Nontaxable2                        |  |                               | 2,899   |                |                               | 18    |  | 1.24  | %              |  |                | 2,786   |       |   | 38    |  | 2.73  | %
|                                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total earning assets               |  |                               | 152,727 |                |                               | 5,299 |  | 6.94  | %              |  |                | 142,935 |       |   | 5,248 |  | 7.34  | %
|                                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Interest Expense                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Demand deposits                    |  |                               | 10,407  |                |                               | 28    |  | 0.54  | %              |  |                | 11,501  |       |   | 26    |  | 0.45  | %
|Savings                            |  |                               | 14,826  |                |                               | 78    |  | 1.05  | %              |  |                | 12,468  |       |   | 50    |  | 0.80  | %
|Time deposits                      |  |                               | 73,537  |                |                               | 1,649 |  | 4.48  | %              |  |                | 72,519  |       |   | 1,630 |  | 4.50  | %
|Borrowings                         |  |                               | 13,862  |                |                               | 235   |  | 3.39  | %              |  |                | 9,849   |       |   | 175   |  | 3.55  | %
|                                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                             | 112,632 |                | $                             | 1,990 |  | 3.53  | %              |  | $              | 106,337 |       | $ | 1,881 |  | 3.54  | %
|                                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Income                |  |                               |         |                |                               | 3,309 |  |       |                |  |                |         |       |   | 3,367 |  |       |  
|                                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Margin                |  |                               |         |                |                               |       |  | 4.33  | %              |  |                |         |       |   |       |  | 4.71  | %
|                                   |  |                               |         |                |                               |       |  |       |                |  |                |         |       |   |       |  |       |  



|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

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|---------------------------------- |  | ------------------------------- | ------- | -------------- | ------------------------------- | ----- |  | ----- | -------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Three Months EndedJune 30, 2008 |         |                | Three Months EndedJune 30, 2007 |      
|                                   |  | AverageBalance                  |         | Income/Expense |                                 | Rates |  |       | AverageBalance |  | Income/Expense |         | Rates |  
|Interest Income                    |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Loans1                             |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Commercial                         |  | $                               | 7,684   |                | $                               | 152   |  | 7.91  | %              |  | $              | 8,733   |       | $ | 195   |  | 8.93  | %
|Real estate                        |  |                                 | 99,330  |                |                                 | 1,728 |  | 6.96  | %              |  |                | 99,537  |       |   | 1,762 |  | 7.08  | %
|Installment                        |  |                                 | 15,600  |                |                                 | 432   |  | 11.08 | %              |  |                | 15,406  |       |   | 426   |  | 11.06 | %
|Credit card                        |  |                                 | 543     |                |                                 | 30    |  | 22.10 | %              |  |                | 545     |       |   | 28    |  | 20.55 | %
|Federal funds sold                 |  |                                 | 3,085   |                |                                 | 15    |  | 1.94  | %              |  |                | 3,512   |       |   | 45    |  | 5.13  | %
|Interest Bearing Deposits          |  |                                 | 11,382  |                |                                 | 102   |  | 3.58  | %              |  |                | 4,154   |       |   | 43    |  | 4.14  | %
|Securities                         |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Taxable                            |  |                                 | 13,969  |                |                                 | 175   |  | 5.01  | %              |  |                | 9,741   |       |   | 132   |  | 3.42  | %
|Nontaxable2                        |  |                                 | 2,642   |                |                                 | 9     |  | 1.36  | %              |  |                | 3,002   |       |   | 19    |  | 2.53  | %
|                                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total earning assets               |  |                                 | 154,235 |                |                                 | 2,643 |  | 6.85  | %              |  |                | 144,630 |       |   | 2,650 |  | 7.33  | %
|                                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Interest Expense                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Demand deposits                    |  |                                 | 10,521  |                |                                 | 15    |  | 0.57  | %              |  |                | 11,110  |       |   | 13    |  | 0.47  | %
|Savings                            |  |                                 | 16,116  |                |                                 | 43    |  | 1.07  | %              |  |                | 12,742  |       |   | 31    |  | 0.97  | %
|Time deposits                      |  |                                 | 75,033  |                |                                 | 816   |  | 4.35  | %              |  |                | 73,487  |       |   | 846   |  | 4.60  | %
|Borrowings                         |  |                                 | 14,363  |                |                                 | 121   |  | 3.37  | %              |  |                | 9,481   |       |   | 88    |  | 3.71  | %
|                                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                               | 116,033 |                | $                               | 995   |  | 3.43  | %              |  | $              | 106,820 |       | $ | 978   |  | 3.66  | %
|                                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Income                |  |                                 |         |                | $                               | 1,648 |  |       |                |  |                |         |       | $ | 1,672 |  |       |  
|                                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Margin                |  |                                 |         |                |                                 |       |  | 4.27  | %              |  |                |         |       |   |       |  | 4.62  | %
|                                   |  |                                 |         |                |                                 |       |  |       |                |  |                |         |       |   |       |  |       |  



|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

JUNE 30, 2008

(Dollar Amounts in
Thousands)



|                                                 |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|------------------------------------------------ |  | --------- | ------- | - | ---------- | - | ------- | -------- |  | - | ----------- | - |  | ------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                                 |  | 0-3Months |         |   | 4-12Months |   |         | 1-5Years |  |   | Over 5Years |   |  | NotClassified |        |   | Total
|Uses of Funds:                                   |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                                 |  |           |         |   |            |  
|Loans1                                           |  | $         | 13,083  |   |            | $ | 11,383  |          |  | $ | 54,913      |   |  | $             | 42,823 |   |       | $ |       |   |  | $ | 122,202
|Interest bearing bank deposits                   |  |           | 3,056   |   |            |   | 4,500   |          |  |   | 3,500       |   |  |               |       |   |       |   |       |   |  |   | 11,056 
|Investment securities2                           |  |           | 3,586   |   |            |   |        |          |  |   | 2,238       |   |  |               | 10,693 |   |       |   | 2,731  |   |  |   | 19,248 
|Restricted stock                                 |  |           |        |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   | 1,134  |   |  |   | 1,134  
|Federal funds sold                               |  |           | 3,200   |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 3,200  
|                                                 |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                            |  |           | 22,925  |   |            |   | 15,883  |          |  |   | 60,651      |   |  |               | 53,516 |   |       |   | 3,865  |   |  |   | 156,840
|                                                 |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Sources of Funds:                                |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                                 |  |           |         |   |            |  
|Interest bearing demand deposits                 |  |           | 10,812  |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 10,812 
|Regular savings                                  |  |           | 16,652  |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 16,652 
|Certificates of deposit $100,000 and over        |  |           | 7,422   |   |            |   | 8,919   |          |  |   | 1,194       |   |  |               |       |   |       |   |       |   |  |   | 17,535 
|Other certificates of deposit                    |  |           | 16,033  |   |            |   | 32,151  |          |  |   | 9,150       |   |  |               |       |   |       |   |       |   |  |   | 57,334 
|Borrowings                                       |  |           | 700     |   |            |   | 6,000   |          |  |   | 10,300      |   |  |               |       |   |       |   |       |   |  |   | 17,000 
|                                                 |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                            |  | $         | 51,619  |   |            | $ | 47,070  |          |  | $ | 20,644      |   |  | $             |       |   |       | $ |       |   |  | $ | 119,333
|                                                 |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Discrete Gap                                     |  | $         | (28,694 | ) |            | $ | (31,187 | )        |  | $ | 40,007      |   |  | $             | 53,516 |   |       | $ | 3,865  |   |  | $ | 37,507 
|                                                 |  |           |         |   |            |  
|Cumulative Gap                                   |  | $         | (28,694 | ) |            | $ | (59,881 | )        |  | $ | (19,874     | ) |  | $             | 33,642 |   |       | $ | 37,507 |   |  |   |        
|                                                 |  |           |         |   |            |  
|Ratio of Cumulative                              |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Gap To Total Earning Assets at June 30, 2008     |  |           | -18.79  | % |            |   | -39.21  | %        |  |   | -13.01      | % |  |               | 22.03  | % |       |   | 24.56  | % |  |   |        
|                                                 |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Ratio of Cumulative                              |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Gap To Total Earning Assets at December 31, 2007 |  |           | -13.11  | % |            |   | -39.65  | %        |  |   | -7.82       | % |  |               | 25.96  | % |       |   | 28.40  | % |  |   |        
|                                                 |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        



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

|2 | Investment securities are reflected at fair value.
|- | --------------------------------------------------



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk.
|------- | -----------------------------------------------------------

Not
Applicable



|Item 4. | Controls and Procedures
|------- | -----------------------

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

The Company has established disclosure controls and procedures
to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive officers, and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports
are being prepared. As required, the Company evaluates the effectiveness of these disclosure controls and procedures on a quarterly basis, and has done so as of the end of the period covered by this report. Based on this evaluation, the
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 quarter ended June 30, 2008, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

Part II - Other Information



|Item 1. | Legal Proceedings
|------- | -----------------

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



|Item 1A. | Risk Factors
|-------- | ------------

Not Applicable



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

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



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not Applicable



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##### Table of Contents

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

The Annual
Shareholders Meeting of Pioneer Bankshares, Inc. was held on May 14, 2008. At this meeting, shareholder votes were cast relating to the election of directors and a shareholder proposal as presented by Richard T. Spurzem. There were 993,780
shares out of a total of 1,013,758 eligible shares, or 98% present and voted by proxy at the meeting. All three incumbent directors were re-elected by 89% of the total votes cast and the shareholder proposal presented by Richard T. Spurzem was
defeated with 81% of the total votes cast against the proposal.

The individuals elected to serve as directors were: Louis L. Bosley [votes for 885,409,
against or withheld 108,371], Edwin Powell Markowitz [votes for 885,449, against or withheld 108,331] and Mark N. Reed [votes for 884,209, against or withheld 109,571]. These directors will serve a three year term expiring in 2011.

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

The votes relating to the Shareholder Proposal by Richard T. Spurzem were as follows: votes
for 129,251, votes against 807,137, and 290 abstained.



|Item 5. | Other Information
|------- | -----------------

Not Applicable



|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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                      |  |                          |  |                                           
|--------------------- |  | ------------------------ |  | ------------------------------------------
|                      |  | PIONEER BANKSHARES, INC.
|                      |  |                         
|                      |  | By:                      |  | /s/ THOMAS R. ROSAZZA                     
|Date: August 12, 2008 |  |                          |  | Thomas R. Rosazza                         
|                      |  |                          |  | President and Chief Executive Officer     
|                      |  |                         
|Date: August 12, 2008 |  | By:                      |  | /s/ LORI G. HASSETT                       
|                      |  |                          |  | Lori G. Hassett                           
|                      |  |                          |  | Vice President and Chief Financial Officer



26