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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 March 31, 2011



| ̈ | 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    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 May 13, 2011 were 1,036,074.









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PIONEER BANKSHARES, INC.

INDEX



|         |  |                                                                                                         |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                         |  | Page |   
|         |  |                                                                                                        
|PART I   |  | FINANCIAL INFORMATION                                                                                   |  |      | 3  | 
|         |  |                                                                                                        
|Item 1.  |  | Financial Statements.                                                                                   |  |      | 3  | 
|         |  |                                                                                                        
|         |  | Consolidated Balance Sheets  March 31, 2011 and December 31, 2010                                      |  |      | 3  | 
|         |  |                                                                                                        
|         |  | Consolidated Statements of Income  Three Months Ended March 31, 2011 and 2010                          |  |      | 4  | 
|         |  |                                                                                                        
|         |  | Consolidated Statements of Changes in Stockholders Equity  Three Months Ended March 31, 2011 and 2010 |  |      | 5  | 
|         |  |                                                                                                        
|         |  | Consolidated Statements of Cash Flows  Three Months Ended March 31, 2011 and 2010                      |  |      | 6  | 
|         |  |                                                                                                        
|         |  | Notes to Consolidated Financial Statements                                                              |  |      | 7  | 
|         |  |                                                                                                        
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                  |  |      | 28 | 
|         |  |                                                                                                        
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk.                                             |  |      | 39 | 
|         |  |                                                                                                        
|Item 4.  |  | Controls and Procedures.                                                                                |  |      | 39 | 
|         |  |                                                                                                        
|PART II  |  | OTHER INFORMATION                                                                                       |  |      | 39 | 
|         |  |                                                                                                        
|Item 1.  |  | Legal Proceedings.                                                                                      |  |      | 39 | 
|         |  |                                                                                                        
|Item 1A. |  | Risk Factors.                                                                                           |  |      | 39 | 
|         |  |                                                                                                        
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                            |  |      | 39 | 
|         |  |                                                                                                        
|Item 3.  |  | Defaults Upon Senior Securities.                                                                        |  |      | 39 | 
|         |  |                                                                                                        
|Item 4.  |  | Reserved.                                                                                               |  |      | 39 | 
|         |  |                                                                                                        
|Item 5.  |  | Other Information.                                                                                      |  |      | 39 | 
|         |  |                                                                                                        
|Item 6.  |  | Exhibits.                                                                                               |  |      | 40 | 
|         |  |                                                                                                        
|         |  | SIGNATURES                                                                                              |  |      | 41 | 



2



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Part I - Financial Information.



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

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)



|                                                                                     |  |               |         |  |                  |   |         | 
|------------------------------------------------------------------------------------ |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                                                                                     |  | March 31,2011 |         |  | December 31,2010 |  
|                                                                                     |  | (Unaudited)   |         |  | (Audited)        |  
|ASSETS                                                                               |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Cash and due from banks                                                              |  | $             | 3,980   |  |                  | $ | 4,373   | 
|Interest bearing deposits in banks                                                   |  |               | 19,144  |  |                  |   | 10,634  | 
|Federal funds sold                                                                   |  |               | 6,250   |  |                  |   | 2,550   | 
|Securities available for sale, at fair value                                         |  |               | 13,015  |  |                  |   | 11,168  | 
|Restricted securities                                                                |  |               | 947     |  |                  |   | 947     | 
|Loans receivable, net of allowance for loan losses of $2,455 and $2,342 respectively |  |               | 128,714 |  |                  |   | 130,786 | 
|Premises and equipment, net                                                          |  |               | 3,292   |  |                  |   | 3,359   | 
|Accrued interest receivable                                                          |  |               | 678     |  |                  |   | 681     | 
|Other real estate owned                                                              |  |               | 250     |  |                  |   | 244     | 
|Other assets                                                                         |  |               | 3,333   |  |                  |   | 3,416   | 
|                                                                                     |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Total Assets                                                                         |  | $             | 179,603 |  |                  | $ | 168,158 | 
|                                                                                     |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|LIABILITIES                                                                          |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Deposits                                                                             |  |               |         |  |                  |   |         | 
|Noninterest bearing demand                                                           |  | $             | 26,692  |  |                  | $ | 25,739  | 
|Interest bearing                                                                     |  |               |         |  |                  |   |         | 
|Demand                                                                               |  |               | 34,550  |  |                  |   | 23,104  | 
|Savings                                                                              |  |               | 16,367  |  |                  |   | 15,746  | 
|Time deposits over $100,000                                                          |  |               | 26,060  |  |                  |   | 27,545  | 
|Other time deposits                                                                  |  |               | 46,191  |  |                  |   | 43,825  | 
|                                                                                     |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Total Deposits                                                                       |  |               | 149,860 |  |                  |   | 135,959 | 
|                                                                                     |  |              
|Accrued expenses and other liabilities                                               |  |               | 2,161   |  |                  |   | 1,804   | 
|Long term debt                                                                       |  |               | 8,000   |  |                  |   | 11,000  | 
|                                                                                     |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Total Liabilities                                                                    |  |               | 160,021 |  |                  |   | 148,763 | 
|                                                                                     |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|STOCKHOLDERS EQUITY                                                                 |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Common stock; $.50 par value, authorized 5,000,000, outstanding 1,035,274 shares     |  |               | 518     |  |                  |   | 518     | 
|Retained earnings                                                                    |  |               | 18,785  |  |                  |   | 18,649  | 
|Accumulated other comprehensive income, net                                          |  |               | 279     |  |                  |   | 228     | 
|                                                                                     |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Total Stockholders Equity                                                           |  |               | 19,582  |  |                  |   | 19,395  | 
|                                                                                     |  |               |         |  |                  |   |         | 
|                                                                                     |  |              
|Total Liabilities and Stockholders Equity                                           |  | $             | 179,603 |  |                  | $ | 168,158 | 
|                                                                                     |  |               |         |  |                  |   |         | 

See Notes to Consolidated Financial Statements



3



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except share and per share data)

(UNAUDITED)



|                                                       |  |                             |           |   |      |   |           | 
|------------------------------------------------------ |  | --------------------------- | --------- | - | ---- | - | --------- | 
|                                                       |  | Three Months EndedMarch 31, |          
|                                                       |  | 2011                        |           |   | 2010 |  
|Interest and Dividend Income:                          |  |                             |           |   |      |   |           | 
|Loans including fees                                   |  | $                           | 2,190     |   |      | $ | 2,181     | 
|Interest on securities - taxable                       |  |                             | 24        |   |      |   | 52        | 
|Interest on securities - nontaxable                    |  |                             | 30        |   |      |   | 35        | 
|Interest on deposits and federal funds sold            |  |                             | 30        |   |      |   | 32        | 
|Dividends                                              |  |                             | 15        |   |      |   | 13        | 
|                                                       |  |                             |           |   |      |   |           | 
|Total Interest and Dividend Income                     |  |                             | 2,289     |   |      |   | 2,313     | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Interest Expense:                                      |  |                             |           |   |      |   |           | 
|Deposits                                               |  |                             | 350       |   |      |   | 469       | 
|Borrowings                                             |  |                             | 25        |   |      |   | 6         | 
|                                                       |  |                             |           |   |      |   |           | 
|Total Interest Expense                                 |  |                             | 375       |   |      |   | 475       | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Net Interest Income                                    |  |                             | 1,914     |   |      |   | 1,838     | 
|Provision for loan losses                              |  |                             | 356       |   |      |   | 376       | 
|                                                       |  |                             |           |   |      |   |           | 
|Net interest income after provision for loan losses    |  |                             | 1,558     |   |      |   | 1,462     | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Noninterest Income:                                    |  |                             |           |   |      |   |           | 
|Service charges and fees                               |  |                             | 208       |   |      |   | 210       | 
|Other income                                           |  |                             | 55        |   |      |   | 108       | 
|Loss on security transactions                          |  |                             | (1        | ) |      |   |          | 
|                                                       |  |                             |           |   |      |   |           | 
|Total Noninterest Income                               |  |                             | 262       |   |      |   | 318       | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Noninterest Expense:                                   |  |                             |           |   |      |   |           | 
|Salaries and benefits                                  |  |                             | 656       |   |      |   | 572       | 
|Occupancy expenses                                     |  |                             | 103       |   |      |   | 100       | 
|Equipment expenses                                     |  |                             | 89        |   |      |   | 124       | 
|Other expenses                                         |  |                             | 553       |   |      |   | 442       | 
|                                                       |  |                             |           |   |      |   |           | 
|Total Noninterest Expenses                             |  |                             | 1,401     |   |      |   | 1,238     | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Income before Income Taxes                             |  |                             | 419       |   |      |   | 542       | 
|Income Tax Expense                                     |  |                             | 128       |   |      |   | 171       | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Net Income                                             |  | $                           | 291       |   |      | $ | 371       | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Per Share Data                                         |  |                             |           |   |      |   |           | 
|Net income, basic and diluted                          |  | $                           | 0.28      |   |      | $ | 0.36      | 
|                                                       |  |                             |           |   |      |   |           | 
|Dividends                                              |  | $                           | 0.15      |   |      | $ | 0.15      | 
|                                                       |  |                             |           |   |      |   |           | 
|                                                       |  |                            
|Weighted Average Shares Outstanding, Basic and Diluted |  |                             | 1,035,274 |   |      |   | 1,029,466 | 
|                                                       |  |                             |           |   |      |   |           | 

See Notes to Consolidated Financial Statements



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(In Thousands of Dollars)

(UNAUDITED)



|                                                                               |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|------------------------------------------------------------------------------ |  | ----------- | --- |  | ---------------- | - | ------ | ----------------------------------- |  | - | ----- |  |  | - | ------ | -
|                                                                               |  | CommonStock |     |  | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome |  |   | Total | 
|                                                                               |  |             |     | 
|BALANCE DECEMBER 31, 2009                                                      |  | $           | 515 |  |                  | $ | 17,300 |                                     |  | $ | 101   |  |  | $ | 17,916 |  
|                                                                               |  |             |     | 
|Comprehensive Income                                                           |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|Net Income                                                                     |  |             |     |  |                  |   | 371    |                                     |  |   |       |  |  |   | 371    |  
|Changes in unrealized gains on securities, net of taxes                        |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $19)  |  |             |     |  |                  |   |        |                                     |  |   | 35    |  |  |   | 35     |  
|                                                                               |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|Total Comprehensive Income                                                     |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   | 406    |  
|                                                                               |  |             |     | 
|Cash Dividends                                                                 |  |             |    |  |                  |   | (155   | )                                   |  |   |      |  |  |   | (155   | )
|                                                                               |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|                                                                               |  |             |     | 
|BALANCE MARCH 31, 2010                                                         |  | $           | 515 |  |                  | $ | 17,516 |                                     |  | $ | 136   |  |  | $ | 18,167 |  
|                                                                               |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|                                                                               |  |             |     | 
|BALANCE DECEMBER 31, 2010                                                      |  | $           | 518 |  |                  | $ | 18,649 |                                     |  | $ | 228   |  |  | $ | 19,395 |  
|                                                                               |  |             |     | 
|Comprehensive Income                                                           |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|Net Income                                                                     |  |             |     |  |                  |   | 291    |                                     |  |   |       |  |  |   | 291    |  
|Changes in unrealized gains on securities, net of taxes                        |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect $30)     |  |             |     |  |                  |   |        |                                     |  |   | 50    |  |  |   |        |  
|Reclassification adjustment for losses included in net income (net of tax $ ) |  |             |     |  |                  |   |        |                                     |  |   | 1     |  |  |   | 51     |  
|                                                                               |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|Total Comprehensive Income                                                     |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   | 342    |  
|                                                                               |  |             |     | 
|Cash Dividends                                                                 |  |             |    |  |                  |   | (155   | )                                   |  |   |      |  |  |   | (155   | )
|                                                                               |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  
|                                                                               |  |             |     | 
|BALANCE MARCH 31, 2011                                                         |  | $           | 518 |  |                  | $ | 18,785 |                                     |  | $ | 279   |  |  | $ | 19,582 |  
|                                                                               |  |             |     |  |                  |   |        |                                     |  |   |       |  |  |   |        |  

See Notes to Consolidated Financial Statements



5



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three Months EndedMarch 31, |        
|                                                                                  |  | 2011                        |         |   | 2010 |  
|                                                                                  |  |                            
|Cash Flows from Operating Activities:                                             |  |                             |         |   |      |   |         |  
|Net income                                                                        |  | $                           | 291     |   |      | $ | 371     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Provision for loan losses                                                         |  |                             | 356     |   |      |   | 376     |  
|Depreciation and amortization                                                     |  |                             | 84      |   |      |   | 92      |  
|Loss on sale of securities                                                        |  |                             | 1       |   |      |   |        |  
|Net amortization on securities                                                    |  |                             | 5       |   |      |   | 8       |  
|Loss (gain) on sale of other real estate                                          |  |                             | 10      |   |      |   | (7      | )
|Net change in:                                                                    |  |                             |         |   |      |   |         |  
|Accrued interest receivable                                                       |  |                             | 3       |   |      |   | 23      |  
|Other assets                                                                      |  |                             | 53      |   |      |   | 349     |  
|Accrued expense and other liabilities                                             |  |                             | 357     |   |      |   | (71     | )
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Net Cash Provided by Operating Activities                                         |  |                             | 1,160   |   |      |   | 1,141   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Cash Flows from Investing Activities:                                             |  |                             |         |   |      |   |         |  
|Net change in federal funds sold                                                  |  |                             | (3,700  | ) |      |   | 600     |  
|Net change in interest bearing deposits                                           |  |                             | (8,510  | ) |      |   | (9,851  | )
|Net change in restricted securities                                               |  |                             |        |   |      |   | (103    | )
|Proceeds from maturities and sales of securities available for sale               |  |                             | 4,250   |   |      |   | 2,488   |  
|Purchase of securities available for sale                                         |  |                             | (6,022  | ) |      |   | (3,500  | )
|Net decrease (increase) in loans                                                  |  |                             | 1,630   |   |      |   | (2,075  | )
|Proceeds from sale of other real estate                                           |  |                             | 70      |   |      |   | 148     |  
|Purchase of bank premises and equipment                                           |  |                             | (17     | ) |      |   | (18     | )
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Net Cash (Used in) Investing Activities                                           |  |                             | (12,299 | ) |      |   | (12,311 | )
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Cash Flows from Financing Activities:                                             |  |                             |         |   |      |   |         |  
|Net change in:                                                                    |  |                             |         |   |      |   |         |  
|Demand and savings deposits                                                       |  |                             | 13,020  |   |      |   | 4,283   |  
|Time deposits                                                                     |  |                             | 881     |   |      |   | 377     |  
|Proceeds from borrowings                                                          |  |                             |        |   |      |   | 13,500  |  
|Curtailments of borrowings                                                        |  |                             | (3,000  | ) |      |   | (10,000 | )
|Dividends paid                                                                    |  |                             | (155    | ) |      |   | (155    | )
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Net Cash Provided by Financing Activities                                         |  |                             | 10,746  |   |      |   | 8,005   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Cash and Cash Equivalents:                                                        |  |                             |         |   |      |   |         |  
|Net (decrease) in cash and cash equivalents                                       |  |                             | (393    | ) |      |   | (3,165  | )
|Cash and Cash Equivalents, beginning of year                                      |  |                             | 4,373   |   |      |   | 5,252   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Cash and Cash Equivalents, End of Period                                          |  | $                           | 3,980   |   |      | $ | 2,087   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|                                                                                  |  |                            
|Supplemental Disclosure of Cash Paid During the Period for Interest               |  | $                           | 309     |   |      | $ | 500     |  
|                                                                                  |  |                            
|Supplemental Disclosure of non-cash activity:                                     |  |                             |         |   |      |   |         |  
|Unrealized gain on securities available for sale                                  |  | $                           | 81      |   |      | $ | 54      |  
|Loans transferred to other real estate owned                                      |  |                             | 86      |   |      |   | 89      |  

See Notes to
Consolidated Financial Statements



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|NOTE 1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|------ | -------------------------------------------

The accounting and reporting policies of Pioneer Bankshares, Inc. (Company), and its subsidiary Pioneer Bank (Bank), conform to accounting principles generally accepted in the
United States of America and to accepted practices within the banking industry. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2011. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.

A summary of significant accounting policies is as follows:

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

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

Subsequent Events  In preparing these financial statements, management has evaluated subsequent events and transactions for potential
recognition or disclosure through the date these financial statements were issued. Management has concluded there were no material subsequent events to be disclosed.

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

Securities
which the Company intends to hold for indefinite periods of time, including securities used as part of the Companys asset/liability management strategy, are classified as available for sale. These securities are carried at fair value. Net
unrealized gains and losses, net of deferred income taxes, are excluded from earnings and reported as a separate component of stockholders equity until realized. As of March 31, 2011 and December 31, 2010 the Company classified all
securities as available for sale.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For
debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell
the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-than-likely that the Company will be required to sell the security before recovery, management must
determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit
loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other
comprehensive income.

For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the
investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in income. The Company regularly reviews each security for other-than-temporary impairment based on
criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected
from debt securities, our intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.



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

The Company classifies all loans past due when
the payment of principal and interest based upon contractual terms is greater than 30 days delinquent.

The accrual of interest on loans is
generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection for all loan classes. Commercial non-real estate classes are placed on nonaccrual status when it is probable that
principal or interest is not fully collectible, or generally when principal or interest becomes 90 days past due, whichever occurs first. Real estate loans, which includes the residential, commercial, and construction land categories, are generally
placed on nonaccrual status when principal and interest becomes 90 days past due. Consumer non-real estate loans, including personal auto mobile loans and all other individual loans are placed on nonaccrual status at varying intervals, based on the
type of product, generally when principal and interest becomes between 90 days and 120 days past due. Revolving consumer credit card loans are not placed on nonaccrual but are generally charged-off if they reach 120 days past due, with unpaid fees
and finance charges reversed against interest income. Consumer non-real estate loans are typically charged off between 90 and 120 days past due unless the loan is well secured and in the process of collection and are subject to mandatory charge-off
at a specified delinquency date consistent with regulatory guidelines. In most cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All other loan classes are
generally charged off within the range of 90 to 180 days, unless there are specific or extenuating circumstances that warrant further collection or legal actions.

Interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Payments received on
nonaccrual loans are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are generally removed from nonaccrual status when the concern no longer exists as to the
collectability of principal and interest and the borrower has been able to demonstrate a specific period of payment performance.

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

The allowance consists of specific and various general components. The specific component relates to loans that are classified as either substandard or
doubtful. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The
general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.



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A loan is considered impaired when, based on current information and events, it is probable that the Company
will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted
at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large commercial real estate loans and construction land loans are reviewed and evaluated
on an annual basis or as they become delinquent so as to determine any possible impairment. Residential real estate loans are specifically evaluated for possible impairment on a case by case basis as they become delinquent or are identified as a
potential problem credit. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not generally separately identify individual consumer loans for impairment disclosures.

Troubled Debt Restructurings  In situations where, for economic or legal reasons related to a borrowers financial condition,
management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them
to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to
avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired
loan.

Restructured loans totaled $3.6 million as of March 31, 2011 compared to $875,000 as of December 31, 2010. The increase in
the amount of loans being reported as restructured for the period ending March 31, 2011 is the result of managements internal review of previously modified loans and is primarily associated with such loans being reclassified to comply
with changes in regulatory guidance. As of March 31, 2011, approximately $2.7 million of these restructured loan balances were considered to be performing and in compliance with their modified terms, leaving approximately $900,000 classified as
non-performing based on their past due or nonaccrual status. Restructured loans classified as performing as of December 31, 2010 were $432,000, with approximately $443,000 being classified as nonperforming based on their past due or nonaccrual
status.

Transfers of Financial Assets  Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank  put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other
receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

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



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

Income Taxes  Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under income tax laws.
Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis
of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

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

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

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

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

Advertising Costs  The
Company follows the policy of charging the production costs of advertising to expense as incurred.

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

Stock Compensation Plans  Accounting guidance requires that costs
resulting from all share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted. The Companys 1998 Stock Incentive Plan (the Plan) was adopted by the Board
of Directors on June 11, 1998 and approved by the shareholders on June 11, 1999. This ten year Plan expired in June of 2008 with respect to the issuance of new option grants. However, grants previously issued under this Plan may still be
exercised within the original terms.

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



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The accounting standard relating to Stock Compensation 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. All outstanding shares are fully vested and all compensation expense relating to outstanding stock options under this plan
have been previously recorded. There is no additional compensation expense expected to be booked relating to this plan.

The fair value of
each previously issued stock option grant was estimated at the grant date using the Black-Scholes option-pricing model. The expected volatility was based on historical volatility. The risk-free interest rates for periods within the contractual life
of the awards were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend paid assumptions were based on the Companys history and expectation of
dividend payments.

The following summarizes the stock options outstanding as of March 31, 2011:



|                              |  |        |       |  |                              |   |       |                                                    |  |  |                                                                |  |  |   |   | 
|----------------------------- |  | ------ | ----- |  | ---------------------------- | - | ----- | -------------------------------------------------- |  |  | -------------------------------------------------------------- |  |  | - | - | 
|                              |  | Shares |       |  | WeightedAverageExercisePrice |   |       | WeightedAverageRemainingContractual Term(In Years) |  |  | Intrinsic Valueof UnexercisedIn-the-MoneyOptions(In Thousands) | 
|Options outstanding, 12/31/10 |  |        | 5,600 |  |                              | $ | 17.13 |                                                    |  |  | 3.50                                                           |  |  | $ | 5 | 
|Options Granted               |  |        |      |  |                              |   |       |                                                    |  |  |                                                                |  |  |   |   | 
|Options Exercised             |  |        |      |  |                              |   |       |                                                    |  |  |                                                                |  |  |   |   | 
|Options Forfeited             |  |        |      |  |                              |   |       |                                                    |  |  |                                                                |  |  |   |   | 
|Options outstanding, 3/31/11  |  |        | 5,600 |  |                              | $ | 17.13 |                                                    |  |  | 3.25                                                           |  |  |   |   | 
|                              |  |        |       |  |                              |   |       |                                                    |  |  |                                                                |  |  |   |   | 
|Options exercisable, 3/31/11  |  |        | 5,600 |  |                              | $ | 17.13 |                                                    |  |  | 3.25                                                           |  |  | $ | 5 | 
|                              |  |        |       |  |                              |   |       |                                                    |  |  |                                                                |  |  |   |   | 



|NOTE 2 | INVESTMENT SECURITIES:
|------ | ----------------------

The amounts at
which investment securities are carried in the consolidated balance sheets and their approximate market values at March 31, 2011 are as follows:



|                                      |  |                |        |  |                      |   |     |                       |  |   |           |   |  |   |        | 
|------------------------------------- |  | -------------- | ------ |  | -------------------- | - | --- | --------------------- |  | - | --------- | - |  | - | ------ | 
|                                      |  | AmortizedCost  |        |  | GrossUnrealizedGains |   |     | GrossUnrealizedLosses |  |   | FairValue |  
|                                      |  | (In Thousands) |       
|                                      |  |                |        | 
|March 31, 2011                        |  |                |        |  |                      |   |     |                       |  |   |           |   |  |   |        | 
|                                      |  |                |        | 
|Available for Sale                    |  |                |        |  |                      |   |     |                       |  |   |           |   |  |   |        | 
|                                      |  |                |        | 
|U.S. government and agency securities |  | $              | 6,000  |  |                      | $ |    |                       |  | $ |          |   |  | $ | 6,000  | 
|                                      |  |                |        | 
|Mortgage-backed securities            |  |                | 927    |  |                      |   | 66  |                       |  |   |          |   |  |   | 993    | 
|                                      |  |                |        | 
|State and municipals                  |  |                | 3,756  |  |                      |   | 206 |                       |  |   |          |   |  |   | 3,962  | 
|                                      |  |                |        | 
|Corporate Securities                  |  |                | 477    |  |                      |   | 35  |                       |  |   |          |   |  |   | 512    | 
|                                      |  |                |        | 
|Equity securities                     |  |                | 1,421  |  |                      |   | 129 |                       |  |   | (2        | ) |  |   | 1,548  | 
|                                      |  |                |        |  |                      |   |     |                       |  |   |           |   |  |   |        | 
|                                      |  | $              | 12,581 |  |                      | $ | 436 |                       |  | $ | (2        | ) |  | $ | 13,015 | 
|                                      |  |                |        |  |                      |   |     |                       |  |   |           |   |  |   |        | 



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The amounts at which investment securities are carried in the consolidated balance sheets and their
approximate market values at December 31, 2010 are as follows:



|                                      |  |                |        |  |                      |   |     |                       |  |   |           |  |  |   |        | 
|------------------------------------- |  | -------------- | ------ |  | -------------------- | - | --- | --------------------- |  | - | --------- |  |  | - | ------ | 
|                                      |  | AmortizedCost  |        |  | GrossUnrealizedGains |   |     | GrossUnrealizedLosses |  |   | FairValue | 
|                                      |  | (In Thousands) |       
|                                      |  |                |        | 
|December 31, 2010                     |  |                |        |  |                      |   |     |                       |  |   |           |  |  |   |        | 
|                                      |  |                |        | 
|Available for Sale                    |  |                |        |  |                      |   |     |                       |  |   |           |  |  |   |        | 
|                                      |  |                |        | 
|U.S. government and agency securities |  | $              | 4,500  |  |                      | $ | 4   |                       |  | $ |          |  |  | $ | 4,504  | 
|                                      |  |                |        | 
|Mortgage-backed securities            |  |                | 1,040  |  |                      |   | 75  |                       |  |   |          |  |  |   | 1,115  | 
|                                      |  |                |        | 
|State and municipals                  |  |                | 3,760  |  |                      |   | 156 |                       |  |   |          |  |  |   | 3,916  | 
|                                      |  |                |        | 
|Corporate Securities                  |  |                | 478    |  |                      |   | 35  |                       |  |   |          |  |  |   | 513    | 
|                                      |  |                |        | 
|Equity securities                     |  |                | 1,037  |  |                      |   | 83  |                       |  |   |          |  |  |   | 1,120  | 
|                                      |  |                |        |  |                      |   |     |                       |  |   |           |  |  |   |        | 
|                                      |  | $              | 10,815 |  |                      | $ | 353 |                       |  | $ |          |  |  | $ | 11,168 | 
|                                      |  |                |        |  |                      |   |     |                       |  |   |           |  |  |   |        | 

Management recognizes that current economic conditions and market trends may result in other than temporary impairment
classifications for certain securities or equity investments. Managements evaluation of the individual stocks and securities within the investment portfolios is performed on a quarterly basis and assesses the unrealized loss positions that
exist to determine whether there is potential other than temporary impairment. The key factors considered during this evaluation process are the amount of unrealized loss, percentage decline in value, length of time in loss position, near-term
prospects of the issuer, current market trading activity, financial strength ratings from industry reports, credit quality, credit ratings, continued dividend payments of the issuer, diversification or multiple holdings within particular funds, as
well as managements intent and ability to hold stocks until such time that they can recover in value and further assessment and determination that the institution will not be required to sell such investments to meet operational cash flow
needs in the near future. In analyzing an issuers financial condition, management also considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and
industry analysts reports. As of March 31, 2011, management has determined that the unrealized losses in the investment portfolio are temporary. Management does not expect to be required to sell these securities before such time that they
recover in value and will continue to monitor the securities in a loss position for future impairment. Securities in an unrealized loss position at March 31, 2011 and December 31, 2010, by duration of the unrealized loss are shown in the
following table.



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##### Table of Contents

|NOTE 2 | INVESTMENT SECURITIES (continued):
|------ | ----------------------------------



As of March 31, 2011 there were 2 securities in the portfolio with unrealized losses, which were
considered to be temporary. The schedule of losses on theses securities is as follows:



|                    |  |                   |  |                  |    |   |       |   |    |  
|------------------- |  | ----------------- |  | ---------------- | -- | - | ----- | - | -- | -
|Unrealized Losses   |  |                   |  |                  |    |   |       |   |    |  
|                    |  |                   | 
|                    |  |                   |  | EquitySecurities |    |   | Total |  
|                    |  |                   | 
|Less than 12 Months |  | Fair Value        |  | $                | 69 |   |       | $ | 69 |  
|                    |  | Unrealized Losses |  |                  | (2 | ) |       |   | (2 | )
|                    |  |                   | 
|More than 12 Months |  | Fair Value        |  |                  |   |   |       |   |   |  
|                    |  | Unrealized Losses |  |                  |   |   |       |   |   |  
|                    |  |                   | 
|Total               |  | Fair Value        |  |                  | 69 |   |       |   | 69 |  
|                    |  | Unrealized Losses |  |                  | (2 | ) |       |   | (2 | )

As of December 31, 2010, there were
no securities in an unrealized loss position. Should unrealized losses exist within the securities portfolio, managements practice is to perform a quarterly evaluation and assess numerous factors in determining if any such losses are
considered to be other-than-temporarily impaired as previously discussed.

The Bank also holds additional investments in Federal Home Loan
Bank of Atlanta (FHLB) in the form of FHLB stock, which is a membership requirement. Loan advances from FHLB are subject to additional stock purchase requirements, which are generally redeemed as outstanding loan balances are repaid,
subject to FHLBs quarterly excess capital evaluation process.

FHLB evaluates the excess capital stock of its members on a quarterly
basis to determine stock repurchase activities. Additionally, FHLB generally pays quarterly dividends on the outstanding stock investment of each of its members.

FHLB stock is generally viewed as a long term investment and is considered to be a restricted security, which is carried at cost, because there is no market for the stock other than FHLB or other member
institutions. As of March 31, 2011, the Banks investment in FHLB stock totaled approximately $871,000.

Managements
evaluation of FHLB stock for possible impairment is based on the ultimate recoverability of par value rather than recognizing temporary declines in value. Managements evaluation of FHLB stock as of March 31, 2011 did not consider this
investment to be other than temporarily impaired, and therefore, no impairment has been recognized.



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##### Table of Contents

|NOTE 3 | LOANS:
|------ | ------

Loans outstanding are summarized
as follows:



|                                        |  |                |         |   |                  |   |         |  
|--------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                        |  | March 31,2011  |         |   | December 31,2010 |  
|                                        |  | (In Thousands) |         |   |                  |  
|Real Estate Loans                       |  |                |         |   |                  |   |         |  
|Construction & land loans               |  | $              | 5,932   |   |                  | $ | 6,283   |  
|Residential Equity lines of credit      |  |                | 1,595   |   |                  |   | 1,534   |  
|Residential 1-4 family                  |  |                | 49,630  |   |                  |   | 48,573  |  
|Residential second mortgages 1-4 family |  |                | 3,821   |   |                  |   | 4,161   |  
|Residential Multifamily                 |  |                | 5,472   |   |                  |   | 5,439   |  
|Commercial Agricultural loans           |  |                | 4,094   |   |                  |   | 4,125   |  
|Commercial Municipal loans              |  |                | 153     |   |                  |   | 164     |  
|Commercial Owner & Non-owner occupied   |  |                | 38,146  |   |                  |   | 40,911  |  
|                                        |  |                |         |   |                  |   |         |  
|                                        |  |               
|Total real estate loans                 |  |                | 108,843 |   |                  |   | 111,190 |  
|                                        |  |               
|Commercial Non Real Estate loans        |  |                | 5,188   |   |                  |   | 4,891   |  
|                                        |  |               
|Consumer Non Real Estate loans          |  |                |         |   |                  |   |         |  
|Personal Installments                   |  |                | 16,800  |   |                  |   | 16,688  |  
|Credit Cards                            |  |                | 630     |   |                  |   | 659     |  
|Overdrafts/Other                        |  |                | 54      |   |                  |   | 73      |  
|                                        |  |                |         |   |                  |   |         |  
|                                        |  |               
|Total consumer installment loans        |  |                | 17,484  |   |                  |   | 17,420  |  
|                                        |  |                |         |   |                  |   |         |  
|                                        |  |               
|Gross Loans                             |  |                | 131,515 |   |                  |   | 133,501 |  
|Less unearned discount on loans         |  |                | (346    | ) |                  |   | (373    | )
|                                        |  |                |         |   |                  |   |         |  
|                                        |  |               
|Loans, less unearned discount           |  |                | 131,169 |   |                  |   | 133,128 |  
|Less allowance for loan losses          |  |                | (2,455  | ) |                  |   | (2,342  | )
|                                        |  |                |         |   |                  |   |         |  
|                                        |  |               
|Net Loans Receivable                    |  | $              | 128,714 |   |                  | $ | 130,786 |  
|                                        |  |                |         |   |                  |   |         |  

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

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 established specific lending criteria relating to real estate loans as a means of mitigating the
risk inherent in the portfolio.

Deposit account overdrafts are also classified as loans and totaled $54,000 and $74,000 as of March 31,
2011 and December 31, 2010, respectively.



14



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##### Table of Contents

The following table reflects the detailed breakdown of impaired loans with a recorded allowance by loan
class for period ending March 31, 2011 (in thousands):



|                                                              |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |   | 
|------------------------------------------------------------- |  | ------------------ | ----- |  | --------------- | - | ----- | ---------------- |  | - | ------------------------- |  |  | ------------------------ | ----- |  |  | - | - | 
|Impaired Loans with a Recorded Allowance as of March 31, 2011 |  | RecordedInvestment |       |  | UnpaidPrincipal |   |       | RelatedAllowance |  |   | AverageRecordedInvestment |  |  | InterestIncomeRecognized |      
|                                                              |  |                    |       |  |                
|Construction & Land Loans                                     |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |   | 
|Commercial properties                                         |  | $                  | 1,592 |  |                 | $ | 2,034 |                  |  | $ | 690                       |  |  | $                        | 1,592 |  |  | $ |  | 
|                                                              |  |                    |       |  |                
|Residential Real Estate                                       |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |   | 
|1-4 Family Residences                                         |  | $                  | 1,098 |  |                 | $ | 1,098 |                  |  | $ | 165                       |  |  | $                        | 1,098 |  |  | $ | 3 | 
|                                                              |  |                    |       |  |                
|Commercial  Non Real Estate                                  |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |   | 
|Industrial loans                                              |  | $                  | 337   |  |                 | $ | 337   |                  |  | $ | 194                       |  |  | $                        | 337   |  |  | $ | 6 | 
|                                                              |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |   | 
|                                                              |  |                    |       |  |                
|Totals                                                        |  | $                  | 3,027 |  |                 | $ | 3,469 |                  |  | $ | 1,049                     |  |  | $                        | 3,027 |  |  | $ | 9 | 
|                                                              |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |   | 

There were no impaired loans without a recorded allowance as of March 31, 2011.

The following table reflects the detailed breakdown of impaired loans with a recorded allowance by loan class for the year ended December 31, 2010
(in thousands):



|                                                                 |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |    | 
|---------------------------------------------------------------- |  | ------------------ | ----- |  | --------------- | - | ----- | ---------------- |  | - | ------------------------- |  |  | ------------------------ | ----- |  |  | - | -- | 
|Impaired Loans with a Recorded Allowance as of December 31, 2010 |  | RecordedInvestment |       |  | UnpaidPrincipal |   |       | RelatedAllowance |  |   | AverageRecordedInvestment |  |  | InterestIncomeRecognized |      
|                                                                 |  |                    |       |  |                
|Construction & Land Loans                                        |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |    | 
|Commercial properties                                            |  | $                  | 1,378 |  |                 | $ | 1,378 |                  |  | $ | 540                       |  |  | $                        | 1,416 |  |  | $ | 4  | 
|                                                                 |  |                    |       |  |                
|Residential Real Estate                                          |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |    | 
|1-4 Family Residences                                            |  | $                  | 982   |  |                 | $ | 982   |                  |  | $ | 180                       |  |  | $                        | 651   |  |  | $ | 35 | 
|                                                                 |  |                    |       |  |                
|Commercial Real Estate                                           |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |    | 
|Non-owner occupied                                               |  | $                  | 220   |  |                 | $ | 662   |                  |  | $ | 175                       |  |  | $                        | 220   |  |  | $ |   | 
|                                                                 |  |                    |       |  |                
|Commercial  Non Real Estate                                     |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |    | 
|Industrial loans                                                 |  | $                  | 241   |  |                 | $ | 241   |                  |  | $ | 120                       |  |  | $                        | 202   |  |  | $ | 16 | 
|                                                                 |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |    | 
|                                                                 |  |                    |       |  |                
|Totals                                                           |  | $                  | 2,821 |  |                 | $ | 3,263 |                  |  | $ | 1,015                     |  |  | $                        | 2,489 |  |  | $ | 55 | 
|                                                                 |  |                    |       |  |                 |   |       |                  |  |   |                           |  |  |                          |       |  |  |   |    | 

There were no impaired loans without a recorded allowance as of December 31, 2010.



15



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##### Table of Contents

The following table reflects the amounts of outstanding delinquencies by loan class as of March 31,
2011 (in thousands):



|                                             |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|-------------------------------------------- |  | --------- | ----- |  | --------- | - | --- | -------------- |  | - | ------------- |  |  | ------------ | ----- |  | ---------- | - | ------- |  |  | - | ------- | 
|Past Due Loans by Class as of March 31, 2011 |  | 30-59Days |       |  | 60-89Days |   |     | 90 Daysor More |  |   | TotalPast Due |  |  | TotalCurrent |       |  | TotalLoans |  
|                                             |  |           |       |  |           |  
|Construction & Land Loans                    |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Residential                                  |  | $         |      |  |           | $ |    |                |  | $ |              |  |  | $            |      |  |            | $ | 787     |  |  | $ | 787     | 
|Commercial                                   |  |           |      |  |           |   |    |                |  |   | 1,009         |  |  |              | 1,009 |  |            |   | 3,014   |  |  |   | 4,023   | 
|Other  Land only                            |  |           | 61    |  |           |   |    |                |  |   |              |  |  |              | 61    |  |            |   | 1,061   |  |  |   | 1,122   | 
|                                             |  |           |       |  |           |  
|Residential Real Estate                      |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Equity Lines of Credit                       |  |           |      |  |           |   |    |                |  |   |              |  |  |              |      |  |            |   | 1,595   |  |  |   | 1,595   | 
|1-4 Family Residences                        |  |           | 3,011 |  |           |   |    |                |  |   | 560           |  |  |              | 3,571 |  |            |   | 49,880  |  |  |   | 53,451  | 
|Multifamily Dwellings                        |  |           |      |  |           |   |    |                |  |   |              |  |  |              |      |  |            |   | 5,472   |  |  |   | 5,472   | 
|                                             |  |           |       |  |           |  
|Commercial Real Estate                       |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Owner occupied                               |  |           | 213   |  |           |   | 69  |                |  |   |              |  |  |              | 282   |  |            |   | 23,125  |  |  |   | 23,407  | 
|Non-owner occupied                           |  |           | 79    |  |           |   |    |                |  |   |              |  |  |              | 79    |  |            |   | 14,660  |  |  |   | 14,739  | 
|Agricultural / Farm loans                    |  |           |      |  |           |   |    |                |  |   |              |  |  |              |      |  |            |   | 4,094   |  |  |   | 4,094   | 
|Municipals                                   |  |           |      |  |           |   |    |                |  |   |              |  |  |              |      |  |            |   | 153     |  |  |   | 153     | 
|                                             |  |           |       |  |           |  
|Commercial  Non Real Estate                 |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Agricultural                                 |  |           |      |  |           |   |    |                |  |   | 17            |  |  |              | 17    |  |            |   | 119     |  |  |   | 136     | 
|Industrial                                   |  |           | 3     |  |           |   | 3   |                |  |   |              |  |  |              | 6     |  |            |   | 5,017   |  |  |   | 5,023   | 
|Municipals                                   |  |           |      |  |           |   |    |                |  |   |              |  |  |              |      |  |            |   | 29      |  |  |   | 29      | 
|                                             |  |           |       |  |           |  
|Consumer  Non Real Estate                   |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Credit Cards                                 |  |           | 17    |  |           |   | 5   |                |  |   | 4             |  |  |              | 26    |  |            |   | 604     |  |  |   | 630     | 
|Automobile loans                             |  |           | 239   |  |           |   | 104 |                |  |   | 32            |  |  |              | 375   |  |            |   | 13,060  |  |  |   | 13,435  | 
|Other personal loans                         |  |           | 47    |  |           |   | 21  |                |  |   |              |  |  |              | 68    |  |            |   | 3,351   |  |  |   | 3,419   | 
|                                             |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|                                             |  |           |       |  |           |  
|Totals Gross Loans                           |  | $         | 3,670 |  |           | $ | 202 |                |  | $ | 1,622         |  |  | $            | 5,494 |  |            | $ | 126,021 |  |  | $ | 131,515 | 
|                                             |  |           |       |  |           |   |     |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 

The following table represents loans 90 days delinquent and still accruing interest and loans in a nonaccrual status as of
March 31, 2011 by loan class (in thousands):



|                           |  |                                            |    |  |                 |   |       | 
|-------------------------- |  | ------------------------------------------ | -- |  | --------------- | - | ----- | 
|                           |  | 90 days past due& 
still accruing interest |    |  | NonaccrualLoans |  
|                           |  |                                           
|Construction & Land Loans  |  |                                            |    |  |                 |   |       | 
|Commercial                 |  | $                                          |   |  |                 | $ | 1,593 | 
|                           |  |                                           
|Residential Real Estate    |  |                                            |    |  |                 |   |       | 
|1-4 Family Residences      |  |                                            |   |  |                 |   | 560   | 
|                           |  |                                           
|Commercial Real Estate     |  |                                            |    |  |                 |   |       | 
|Non-owner occupied         |  |                                            |   |  |                 |   | 188   | 
|                           |  |                                           
|Commercial Non-Real Estate |  |                                            |    |  |                 |   |       | 
|Agricultural               |  |                                            | 17 |  |                 |   |      | 
|Industrial                 |  |                                            |   |  |                 |   | 131   | 
|                           |  |                                           
|Consumer  Non Real Estate |  |                                            |    |  |                 |   |       | 
|Credit cards               |  |                                            | 4  |  |                 |   |      | 
|Automobile loans           |  |                                            | 12 |  |                 |   | 21    | 
|                           |  |                                            |    |  |                 |   |       | 
|                           |  |                                           
|Totals Gross Loans         |  | $                                          | 33 |  |                 | $ | 2,493 | 
|                           |  |                                            |    |  |                 |   |       | 



16



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##### Table of Contents

The following table reflects the amounts of outstanding delinquencies by loan class as of December 31,
2010 (in thousands):



|                                                |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|----------------------------------------------- |  | --------- | ----- |  | --------- | - | ----- | -------------- |  | - | ------------- |  |  | ------------ | ----- |  | ---------- | - | ------- |  |  | - | ------- | 
|Past Due Loans by Class as of December 31, 2010 |  | 30-59Days |       |  | 60-89Days |   |       | 90 Daysor More |  |   | TotalPast Due |  |  | TotalCurrent |       |  | TotalLoans |  
|                                                |  |           |       |  |           |  
|Construction & Land Loans                       |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Residential                                     |  | $         |      |  |           | $ |      |                |  | $ |              |  |  | $            |      |  |            | $ | 708     |  |  | $ | 708     | 
|Commercial                                      |  |           |      |  |           |   |      |                |  |   | 589           |  |  |              | 589   |  |            |   | 3,878   |  |  |   | 4,467   | 
|Other  Land only                               |  |           | 118   |  |           |   | 88    |                |  |   |              |  |  |              | 206   |  |            |   | 902     |  |  |   | 1,108   | 
|                                                |  |           |       |  |           |  
|Residential Real Estate                         |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Equity Lines of Credit                          |  |           | 27    |  |           |   |      |                |  |   |              |  |  |              | 27    |  |            |   | 1,507   |  |  |   | 1,534   | 
|1-4 Family Residences                           |  |           | 2,894 |  |           |   | 1,011 |                |  |   | 623           |  |  |              | 4,528 |  |            |   | 48,206  |  |  |   | 52,734  | 
|Multifamily Dwellings                           |  |           |      |  |           |   |      |                |  |   |              |  |  |              |      |  |            |   | 5,439   |  |  |   | 5,439   | 
|                                                |  |           |       |  |           |  
|Commercial Real Estate                          |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Owner occupied                                  |  |           | 69    |  |           |   | 402   |                |  |   |              |  |  |              | 471   |  |            |   | 24,763  |  |  |   | 25,234  | 
|Non-owner occupied                              |  |           | 182   |  |           |   |      |                |  |   | 220           |  |  |              | 402   |  |            |   | 15,275  |  |  |   | 15,677  | 
|Agricultural / Farm loans                       |  |           |      |  |           |   |      |                |  |   | 5             |  |  |              | 5     |  |            |   | 4,120   |  |  |   | 4,125   | 
|Municipals                                      |  |           |      |  |           |   |      |                |  |   |              |  |  |              |      |  |            |   | 164     |  |  |   | 164     | 
|                                                |  |           |       |  |           |  
|Commercial  Non Real Estate                    |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Agricultural                                    |  | $         |      |  |           | $ | 5     |                |  | $ |              |  |  | $            | 5     |  |            | $ | 159     |  |  | $ | 164     | 
|Industrial                                      |  |           | 517   |  |           |   | 47    |                |  |   | 46            |  |  |              | 610   |  |            |   | 4,082   |  |  |   | 4,692   | 
|Municipals                                      |  |           |      |  |           |   |      |                |  |   |              |  |  |              |      |  |            |   | 35      |  |  |   | 35      | 
|                                                |  |           |       |  |           |  
|Consumer  Non Real Estate                      |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|Credit Cards                                    |  |           | 26    |  |           |   | 5     |                |  |   |              |  |  |              | 31    |  |            |   | 628     |  |  |   | 659     | 
|Automobile loans                                |  |           | 368   |  |           |   | 144   |                |  |   | 96            |  |  |              | 608   |  |            |   | 11,903  |  |  |   | 12,511  | 
|Other personal loans                            |  |           | 108   |  |           |   | 28    |                |  |   | 7             |  |  |              | 143   |  |            |   | 4,107   |  |  |   | 4,250   | 
|                                                |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 
|                                                |  |           |       |  |           |  
|Totals Gross Loans                              |  | $         | 4,309 |  |           | $ | 1,730 |                |  | $ | 1,586         |  |  | $            | 7,625 |  |            | $ | 125,876 |  |  | $ | 133,501 | 
|                                                |  |           |       |  |           |   |       |                |  |   |               |  |  |              |       |  |            |   |         |  |  |   |         | 

The following table represents loans 90 days delinquent and still accruing interest and loans in a nonaccrual status as of
December 31, 2010 by loan class (in thousands):



|                           |  |                                            |    |  |                 |   |       | 
|-------------------------- |  | ------------------------------------------ | -- |  | --------------- | - | ----- | 
|                           |  | 90 days past due& 
still accruing interest |    |  | NonaccrualLoans |  
|                           |  |                                           
|Construction & Land Loans  |  |                                            |    |  |                 |   |       | 
|Commercial                 |  | $                                          |   |  |                 | $ | 1,378 | 
|                           |  |                                           
|Residential Real Estate    |  |                                            |    |  |                 |   |       | 
|1-4 Family Residences      |  |                                            |   |  |                 |   | 652   | 
|                           |  |                                           
|Commercial Real Estate     |  |                                            |    |  |                 |   |       | 
|Non-owner occupied         |  |                                            |   |  |                 |   | 412   | 
|Agricultural / Farm loans  |  |                                            | 5  |  |                 |   |      | 
|                           |  |                                           
|Commercial Non-Real Estate |  |                                            |    |  |                 |   |       | 
|Industrial                 |  | $                                          | 46 |  |                 | $ | 123   | 
|                           |  |                                           
|Consumer  Non Real Estate |  |                                            |    |  |                 |   |       | 
|Automobile loans           |  |                                            | 18 |  |                 |   | 24    | 
|Other personal loans       |  |                                            | 7  |  |                 |   |      | 
|                           |  |                                            |    |  |                 |   |       | 
|                           |  |                                           
|Totals Gross Loans         |  | $                                          | 76 |  |                 | $ | 2,589 | 
|                           |  |                                            |    |  |                 |   |       | 



17



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##### Table of Contents

Loans past due greater than 90 days and still accruing interest at March 31, 2011 and December 31,
2010 totaled $33,000 and $76,000, respectively. Management continually monitors past due accounts and places these accounts in nonaccrual status if the payment plans are not adhered to. Nonaccrual loans excluded from impaired loan disclosure
amounted to $238,000 and $216,000, at March 31, 2011 and December 31, 2010, respectively. The nonaccrual loans excluded from impaired loan disclosure at March 31, 2011 and December 31, 2010 consisted primarily of two small
business loans and several small consumer installment loans. A collateral evaluation has been performed on these accounts and management has concluded that a specific allocation was not warranted at this time.

Management has developed an internal loan risk rating system as part of its credit analysis process. Loans are assigned an appropriate risk grade at the
time of origination based on specific assessment factors relating to the borrowers ability to meet contractual obligations under the loan agreement. This process includes reviewing borrowers financial information, historical payment
experience, credit documentation, public information, and other information specific to each borrower. Commercial loan grade assessments also include consideration of business cash flow and debt obligations. Risk grades are generally reviewed on an
annual basis for credit relationships with total credit exposure of $500,000 or more, or at any point management becomes aware of information affecting the borrowers ability to fulfill their obligations. Management utilizes both internal and
external loan review processes as a means of monitoring the appropriateness of risk ratings across the loan portfolio.

The specific loan risk
rating categories included in the Banks internal rating system include pass credits, pass-watch, special mention, substandard, doubtful, and loss. Pass credits generally consist of loans secured by cash or cash equivalents and loans to
borrowers with a strong cash flow ratio, stable financial net worth and above average sources of liquidity to meet financial obligations. Pass-watch credits generally consist of loans to borrowers that may have minor, yet manageable, weaknesses
related to the stability of cash flow and repayment sources and may require periodic monitoring. Special mention credits are loans that have identified weaknesses or adverse trends in the borrowers financial position that could potentially
impact the banks credit position at some future date if not monitored closely. Substandard credits are those loans that have been identified as having a well-defined, specific, or major weakness in the primary cash flow sources or upon which
significant reliance is being placed on secondary sources of repayment due to the borrowers financial difficulties. Potential for losses related to substandard credits is evaluated on a regular basis with specific allocations being made as
needed, as well as other corrective actions necessary to protect the institution. Loans categorized as doubtful also have well defined weaknesses with the added characteristic of the likelihood that collection of payment in full is highly
questionable or perhaps improbable. Loans classified as loss are considered to be totally uncollectible or of such little value that their continuance on the banks books as an asset is not warranted.



18



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##### Table of Contents

The following table represents a summary of the Banks loan portfolio by class and internal risk rating
as of March 31, 2011 (in thousands):



|                                                             |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|------------------------------------------------------------ |  | ---- | ------ |  | ---------- | - | ------ | -------------- |  | - | ----------- |  |  | -------- | ----- |  | ---- | - | --- | ---------- |  | - | - |  |  | - | ------- | 
|Loans By Class and Internal Risk Rating as of March 31, 2011 |  | Pass |        |  | Pass-Watch |   |        | SpecialMention |  |   | Substandard |  |  | Doubtful |       |  | Loss |   |     | TotalLoans | 
|                                                             |  |      |        |  |            |   |       
|Construction & Land Loans                                    |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Residential                                                  |  | $    | 779    |  |            | $ | 8      |                |  | $ |            |  |  | $        |      |  |      | $ |    |            |  | $ |  |  |  | $ | 787     | 
|Commercial                                                   |  |      | 178    |  |            |   | 2,253  |                |  |   |            |  |  |          | 1,372 |  |      |   | 220 |            |  |   |  |  |  |   | 4,023   | 
|Other  Land only                                            |  |      | 929    |  |            |   | 167    |                |  |   | 26          |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 1,122   | 
|                                                             |  |      |        |  |            |   |       
|Residential Real Estate                                      |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Equity Lines of Credit                                       |  |      | 1,576  |  |            |   | 19     |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 1,595   | 
|1-4 Family Residences                                        |  |      | 44,585 |  |            |   | 5,243  |                |  |   | 3,360       |  |  |          | 263   |  |      |   |    |            |  |   |  |  |  |   | 53,451  | 
|Multifamily Dwellings                                        |  |      | 2,780  |  |            |   | 763    |                |  |   | 1,173       |  |  |          | 756   |  |      |   |    |            |  |   |  |  |  |   | 5,472   | 
|                                                             |  |      |        |  |            |   |       
|Commercial Real Estate                                       |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Owner occupied                                               |  |      | 9,999  |  |            |   | 11,338 |                |  |   | 1,489       |  |  |          | 581   |  |      |   |    |            |  |   |  |  |  |   | 23,407  | 
|Non-owner occupied                                           |  |      | 2,190  |  |            |   | 10,765 |                |  |   |            |  |  |          | 1,784 |  |      |   |    |            |  |   |  |  |  |   | 14,739  | 
|Agricultural / Farm loans                                    |  |      | 1,218  |  |            |   | 2,280  |                |  |   | 596         |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 4,094   | 
|Municipals                                                   |  |      | 134    |  |            |   | 19     |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 153     | 
|                                                             |  |      |        |  |            |   |       
|Commercial  Non Real Estate                                 |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Agricultural                                                 |  |      | 10     |  |            |   | 126    |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 136     | 
|Industrial                                                   |  |      | 1,950  |  |            |   | 2,350  |                |  |   | 602         |  |  |          |      |  |      |   | 121 |            |  |   |  |  |  |   | 5,023   | 
|Municipals                                                   |  |      | 29     |  |            |   |       |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 29      | 
|                                                             |  |      |        |  |            |   |       
|Consumer  Non Real Estate                                   |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Credit Cards                                                 |  |      | 604    |  |            |   | 22     |                |  |   | 4           |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 630     | 
|Automobile loans                                             |  |      | 13,403 |  |            |   |       |                |  |   | 32          |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 13,435  | 
|Other personal loans                                         |  |      | 3,323  |  |            |   | 55     |                |  |   | 40          |  |  |          | 1     |  |      |   |    |            |  |   |  |  |  |   | 3,419   | 
|                                                             |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|                                                             |  |      |        |  |            |   |       
|Totals Gross Loans                                           |  | $    | 83,687 |  |            | $ | 35,408 |                |  | $ | 7,322       |  |  | $        | 4,757 |  |      | $ | 341 |            |  |   |  |  |  | $ | 131,515 | 
|                                                             |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 



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The following table represents a summary of the Banks loan portfolio by class and internal risk rating
as of December 31, 2010 (in thousands):



|                                                                |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|--------------------------------------------------------------- |  | ---- | ------ |  | ---------- | - | ------ | -------------- |  | - | ----------- |  |  | -------- | ----- |  | ---- | - | --- | ---------- |  | - | - |  |  | - | ------- | 
|Loans By Class and Internal Risk Rating as of December 31, 2010 |  | Pass |        |  | Pass-Watch |   |        | SpecialMention |  |   | Substandard |  |  | Doubtful |       |  | Loss |   |     | TotalLoans | 
|                                                                |  |      |        |  |            |   |       
|Construction & Land Loans                                       |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Residential                                                     |  | $    | 699    |  |            | $ | 9      |                |  | $ |            |  |  | $        |      |  |      | $ |    |            |  | $ |  |  |  | $ | 708     | 
|Commercial                                                      |  |      | 778    |  |            |   | 2,117  |                |  |   |            |  |  |          | 1,572 |  |      |   |    |            |  |   |  |  |  |   | 4,467   | 
|Other  Land only                                               |  |      | 898    |  |            |   | 183    |                |  |   | 27          |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 1,108   | 
|                                                                |  |      |        |  |            |   |       
|Residential Real Estate                                         |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Equity Lines of Credit                                          |  |      | 1,514  |  |            |   | 20     |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 1,534   | 
|1-4 Family Residences                                           |  |      | 44,943 |  |            |   | 5,094  |                |  |   | 2,490       |  |  |          | 207   |  |      |   |    |            |  |   |  |  |  |   | 52,734  | 
|Multifamily Dwellings                                           |  |      | 2,813  |  |            |   | 772    |                |  |   | 1,180       |  |  |          | 674   |  |      |   |    |            |  |   |  |  |  |   | 5,439   | 
|                                                                |  |      |        |  |            |   |       
|Commercial Real Estate                                          |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Owner occupied                                                  |  |      | 10,268 |  |            |   | 12,862 |                |  |   | 1,703       |  |  |          | 401   |  |      |   |    |            |  |   |  |  |  |   | 25,234  | 
|Non-owner occupied                                              |  |      | 2,339  |  |            |   | 11,336 |                |  |   |            |  |  |          | 1,782 |  |      |   | 220 |            |  |   |  |  |  |   | 15,677  | 
|Agricultural / Farm loans                                       |  |      | 963    |  |            |   | 2,564  |                |  |   | 598         |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 4,125   | 
|Municipals                                                      |  |      | 138    |  |            |   | 26     |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 164     | 
|                                                                |  |      |        |  |            |   |       
|Commercial  Non Real Estate                                    |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Agricultural                                                    |  |      | 11     |  |            |   | 153    |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 164     | 
|Industrial                                                      |  |      | 1,688  |  |            |   | 2,753  |                |  |   | 128         |  |  |          |      |  |      |   | 123 |            |  |   |  |  |  |   | 4,692   | 
|Municipals                                                      |  |      | 35     |  |            |   |       |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 35      | 
|                                                                |  |      |        |  |            |   |       
|Consumer  Non Real Estate                                      |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|Credit Cards                                                    |  |      | 628    |  |            |   | 31     |                |  |   |            |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 659     | 
|Automobile loans                                                |  |      | 12,470 |  |            |   | 6      |                |  |   | 35          |  |  |          |      |  |      |   |    |            |  |   |  |  |  |   | 12,511  | 
|Other personal loans                                            |  |      | 3,842  |  |            |   | 74     |                |  |   | 332         |  |  |          | 2     |  |      |   |    |            |  |   |  |  |  |   | 4,250   | 
|                                                                |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 
|                                                                |  |      |        |  |            |   |       
|Totals Gross Loans                                              |  | $    | 84,027 |  |            | $ | 38,000 |                |  | $ | 6,493       |  |  | $        | 4,638 |  |      | $ | 343 |            |  |   |  |  |  | $ | 133,501 | 
|                                                                |  |      |        |  |            |   |        |                |  |   |             |  |  |          |       |  |      |   |     |            |  |   |   |  |  |   |         | 



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|NOTE 4 | ALLOWANCE FOR LOAN LOSSES:
|------ | --------------------------

The summary
table below includes the allowance allocations and total loans evaluated both individually and collectively for impairment, as well as a roll-forward representation of the activity that has occurred in the allowance account during the quarter ending
March 31, 2011 (in thousands):



|                                      |  |                         |       |  |                        |   |        |                       |  |   |                          |   |  |                        |       |   |       |   |        |   |  |   |         |  
|------------------------------------- |  | ----------------------- | ----- |  | ---------------------- | - | ------ | --------------------- |  | - | ------------------------ | - |  | ---------------------- | ----- | - | ----- | - | ------ | - |  | - | ------- | -
|                                      |  | Construction& LandLoans |       |  | ResidentialReal Estate |   |        | CommercialReal Estate |  |   | CommercialNon-RealEstate |   |  | ConsumerNon-RealEstate |       |   | Total |  
|ALLL ending balance 12/31/2010        |  | $                       | 575   |  |                        | $ | 587    |                       |  | $ | 540                      |   |  | $                      | 222   |   |       | $ | 418    |   |  | $ | 2,342   |  
|                                      |  |                         |       |  |                        |  
|YTD Charge-offs                       |  |                         |      |  |                        |   | (208   | )                     |  |   |                         |   |  |                        | (28   | ) |       |   | (78    | ) |  |   | (314    | )
|YTD Recoveries                        |  |                         |      |  |                        |   | 3      |                       |  |   |                         |   |  |                        | 2     |   |       |   | 66     |   |  |   | 71      |  
|YTD Provision                         |  |                         | 159   |  |                        |   | 233    |                       |  |   | (137                     | ) |  |                        | 68    |   |       |   | 33     |   |  |   | 356     |  
|                                      |  |                         |       |  |                        |   |        |                       |  |   |                          |   |  |                        |       |   |       |   |        |   |  |   |         |  
|ALLL ending Balance 3/31/2011         |  | $                       | 734   |  |                        | $ | 615    |                       |  | $ | 403                      |   |  | $                      | 264   |   |       | $ | 439    |   |  | $ | 2,455   |  
|                                      |  |                         |       |  |                        |   |        |                       |  |   |                          |   |  |                        |       |   |       |   |        |   |  |   |         |  
|                                      |  |                         |       |  |                        |  
|Evaluated individually for impairment |  |                         | 690   |  |                        |   | 165    |                       |  |   |                         |   |  |                        | 194   |   |       |   |       |   |  |   | 1,049   |  
|                                      |  |                         |       |  |                        |  
|Evaluated collectively for impairment |  |                         | 44    |  |                        |   | 450    |                       |  |   | 403                      |   |  |                        | 70    |   |       |   | 439    |   |  |   | 1,406   |  
|                                      |  |                         |       |  |                        |  
|Total Gross Loans 3/31/2011           |  | $                       | 5,932 |  |                        | $ | 60,518 |                       |  | $ | 42,393                   |   |  | $                      | 5,188 |   |       | $ | 17,484 |   |  | $ | 131,515 |  
|                                      |  |                         |       |  |                        |   |        |                       |  |   |                          |   |  |                        |       |   |       |   |        |   |  |   |         |  
|Evaluated individually for impairment |  |                         | 1,592 |  |                        |   | 1,098  |                       |  |   |                         |   |  |                        | 337   |   |       |   |       |   |  |   | 3,027   |  
|                                      |  |                         |       |  |                        |  
|Evaluated collectively for impairment |  |                         | 4,340 |  |                        |   | 59,420 |                       |  |   | 42,393                   |   |  |                        | 4,851 |   |       |   | 17,484 |   |  |   | 128,488 |  



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The summary table below includes the allowance allocations and total loans evaluated both individually and
collectively for impairment by loan segment as of December 31, 2010 (in thousands):



|                                      |  |                          |       |  |                        |   |        |                       |  |   |                          |  |  |                        |       |  |       |   |        |  |  |   |         | 
|------------------------------------- |  | ------------------------ | ----- |  | ---------------------- | - | ------ | --------------------- |  | - | ------------------------ |  |  | ---------------------- | ----- |  | ----- | - | ------ |  |  | - | ------- | 
|                                      |  | Construction& Land Loans |       |  | ResidentialReal Estate |   |        | CommercialReal Estate |  |   | CommercialNon-RealEstate |  |  | ConsumerNon-RealEstate |       |  | Total |  
|ALLL ending balance 12/31/2010        |  | $                        | 575   |  |                        | $ | 587    |                       |  | $ | 540                      |  |  | $                      | 222   |  |       | $ | 418    |  |  | $ | 2,342   | 
|                                      |  |                          |       |  |                        |   |        |                       |  |   |                          |  |  |                        |       |  |       |   |        |  |  |   |         | 
|                                      |  |                          |       |  |                        |  
|Evaluated individually for impairment |  |                          | 540   |  |                        |   | 180    |                       |  |   | 175                      |  |  |                        | 120   |  |       |   |       |  |  |   | 1,015   | 
|                                      |  |                          |       |  |                        |  
|Evaluated collectively for impairment |  |                          | 35    |  |                        |   | 407    |                       |  |   | 365                      |  |  |                        | 102   |  |       |   | 418    |  |  |   | 1,327   | 
|                                      |  |                          |       |  |                        |  
|Total Gross Loans 12/31/2010          |  | $                        | 6,283 |  |                        | $ | 59,707 |                       |  | $ | 45,200                   |  |  | $                      | 4,891 |  |       | $ | 17,420 |  |  | $ | 133,501 | 
|                                      |  |                          |       |  |                        |   |        |                       |  |   |                          |  |  |                        |       |  |       |   |        |  |  |   |         | 
|                                      |  |                          |       |  |                        |  
|Evaluated individually for impairment |  |                          | 1,378 |  |                        |   | 982    |                       |  |   | 220                      |  |  |                        | 241   |  |       |   |       |  |  |   | 2,821   | 
|                                      |  |                          |       |  |                        |  
|Evaluated collectively for impairment |  |                          | 4,905 |  |                        |   | 58,725 |                       |  |   | 44,980                   |  |  |                        | 4,650 |  |       |   | 17,420 |  |  |   | 130,680 | 



|NOTE 5 | EARNINGS PER SHARE:
|------ | -------------------

The following shows
the weighted average number of shares as of March 31, 2011 and 2010, used in computing earnings per share and the effect on weighted average number of shares diluted potential common stock. Potential dilutive common stock had no effect on
income available to common shareholders.



|                               |  |                |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 
|------------------------------ |  | -------------- | --------- |  | --------------- | - | ---- | ------ |  |  | --------------- |  |  | - | ---- | 
|                               |  | March 31, 2011 |           |  | March 31, 2010  |  
|                               |  | Shares         |           |  | Per ShareAmount |   |      | Shares |  |  | Per ShareAmount | 
|                               |  |                |           | 
|Basic earnings per share       |  |                | 1,035,274 |  |                 | $ | 0.28 |        |  |  | 1,029,466       |  |  | $ | 0.36 | 
|                               |  |                |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 
|Effect of dilutive securities: |  |                |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 
|Stock Options                  |  |                |          |  |                 |   |      |        |  |  |                |  |  |   |      | 
|                               |  |                |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 
|Diluted earnings per share     |  |                | 1,035,274 |  |                 | $ | 0.28 |        |  |  | 1,029,466       |  |  | $ | 0.36 | 
|                               |  |                |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 

Stock options representing 5,600 and 6,400 shares were not included in computing diluted EPS because their effects were
anti-dilutive for the reporting period ending March 31, 2011 and March 31, 2010, respectively.



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|NOTE 6 | BORROWINGS:
|------ | -----------

The Bank has a line of
credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total Bank 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 the Banks real estate loan portfolio, with a current pledge against the institutions first lien 1-4 family residential mortgages totaling
$49.6 million, as of March 31, 2011. On certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may
repay all or part of the advance without a prepayment penalty.

At March 31, 2011, total outstanding borrowings with FHLB were $8.0
million. This outstanding balance is a fixed rate advance with scheduled principal payments due quarterly and a final maturity date of March 1, 2013.



|NOTE 7 | OTHER EXPENSES:
|------ | ---------------

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



|                        |  |                             |     |  |      |   |     | 
|----------------------- |  | --------------------------- | --- |  | ---- | - | --- | 
|                        |  | Three Months EndedMarch 31, |    
|                        |  | 2011                        |     |  | 2010 |  
|                        |  | (In Thousands)              |    
|ATM Service Fees        |  | $                           | 28  |  |      | $ | 25  | 
|Director Fees           |  |                             | 31  |  |      |   | 30  | 
|FDIC Assessment Fees    |  |                             | 68  |  |      |   | 55  | 
|Professional Fees       |  |                             | 105 |  |      |   | 90  | 
|Supplies and Printing   |  |                             | 33  |  |      |   | 23  | 
|Telephone Expense       |  |                             | 31  |  |      |   | 30  | 
|Sales & Franchise Taxes |  |                             | 33  |  |      |   | 48  | 
|Other                   |  |                             | 224 |  |      |   | 141 | 
|                        |  |                             |     |  |      |   |     | 
|Total                   |  | $                           | 553 |  |      | $ | 442 | 
|                        |  |                             |     |  |      |   |     | 



|NOTE 8 | FAIR VALUE MEASUREMENT:
|------ | -----------------------

The Company uses
fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial
instrument is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market
prices. However, in many instances, there are no quoted market prices for the Companys various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in
an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for
the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under
current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.



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Fair Value Hierarchy

In accordance with this guidance, the Company groups financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine the fair value.



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

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

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

The following table presents the balances of financial assets measured at
fair value on a recurring basis as of March 31, 2011 and December 31, 2010:



|                                     |  |                                                           |        |  |                                           |   |   |                                        |  |   |        |  |  |   |   | 
|------------------------------------ |  | --------------------------------------------------------- | ------ |  | ----------------------------------------- | - | - | -------------------------------------- |  | - | ------ |  |  | - | - | 
|Description                          |  | BalancesOutstanding(In Thousands)                         |        |  | Fair Value Measurements Using:            |  
|                                     |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1) |        |  | SignificantOtherObservableInputs(Level 2) |   |   | SignificantUnobservableInputs(Level
3) | 
|                                     |  |                                                           |        | 
|As of March 31, 2011                 |  |                                                           |        |  |                                           |   |   |                                        |  |   |        |  |  |   |   | 
|U.S. Government & Agency Securities  |  | $                                                         | 6,000  |  |                                           | $ |  |                                        |  | $ | 6,000  |  |  | $ |  | 
|Mortgage-backed Securities           |  |                                                           | 993    |  |                                           |   |  |                                        |  |   | 993    |  |  |   |  | 
|State & Municipals                   |  |                                                           | 3,962  |  |                                           |   |  |                                        |  |   | 3,962  |  |  |   |  | 
|Corporate Securities                 |  |                                                           | 512    |  |                                           |   |  |                                        |  |   | 512    |  |  |   |  | 
|Equity Securities                    |  |                                                           | 1,548  |  |                                           |   |  |                                        |  |   | 1,548  |  |  |   |  | 
|                                     |  |                                                           |        |  |                                           |   |   |                                        |  |   |        |  |  |   |   | 
|Total Available for-sale securities |  | $                                                         | 13,015 |  |                                           | $ |  |                                        |  | $ | 13,015 |  |  | $ |  | 
|                                     |  |                                                           |        |  |                                           |   |   |                                        |  |   |        |  |  |   |   | 
|                                     |  |                                                           |        | 
|As of December 31, 2010              |  |                                                           |        |  |                                           |   |   |                                        |  |   |        |  |  |   |   | 
|U.S. Government & Agency Securities  |  | $                                                         | 4,504  |  |                                           | $ |  |                                        |  | $ | 4,504  |  |  | $ |  | 
|Mortgage-backed Securities           |  |                                                           | 1,115  |  |                                           |   |  |                                        |  |   | 1,115  |  |  |   |  | 
|State & Municipals                   |  |                                                           | 3,916  |  |                                           |   |  |                                        |  |   | 3,916  |  |  |   |  | 
|Corporate Securities                 |  |                                                           | 513    |  |                                           |   |  |                                        |  |   | 513    |  |  |   |  | 
|Equity Securities                    |  |                                                           | 1,120  |  |                                           |   |  |                                        |  |   | 1,120  |  |  |   |  | 
|                                     |  |                                                           |        |  |                                           |   |   |                                        |  |   |        |  |  |   |   | 
|Total Available-for-sale securities  |  | $                                                         | 11,168 |  |                                           | $ |  |                                        |  | $ | 11,168 |  |  | $ |  | 
|                                     |  |                                                           |        |  |                                           |   |   |                                        |  |   |        |  |  |   |   | 

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



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

Impaired Loans: The Fair Value Measurement accounting standard also
applies to loans measured for impairment 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.

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

For residential and commercial real estate loans considered to be collateral dependent,
appraisals or updated collateral evaluations are generally obtained in conjunction with specific allowance allocations and/or anticipated foreclosure proceedings, on a case by case basis, depending upon the strength of additional mitigating
arrangements with individual borrowers.

The outstanding principal balance of impaired loans considered to be collateral dependent in the
level 3 category as of March 31, 2011 totaled approximately $892,000 compared to $680,000 as of December 31, 2010. These loans primarily consisted of residential real estate properties with appraisal valuations that were in the process of
being updated. As a general rule, management utilizes a significant discount factor for outdated appraisals when calculating its allowance allocation estimates and making specific reserves. Local professional realtors are also contacted regarding
potential fair market values in an effort to ensure that the discounted values are within reasonable ranges on individual properties. Additionally, updated tax assessed values are also considered in this evaluation process on a case by case basis.

Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at the lower of loan balance or fair value
less cost to sell.

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



|                                 |  |                                   |       |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |     | 
|-------------------------------- |  | --------------------------------- | ----- |  | --------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | --- | 
|Description                      |  | BalancesOutstanding(In Thousands) |       |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|Assets as of March 31, 2011      |  |                                   |       |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |     | 
|Impaired Loans, Net of allowance |  | $                                 | 1,978 |  |                                                           | $ |  |                                           |  | $ | 1,355                                  |  |  |   | 623 | 
|                                 |  |                                   |       |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |     | 
|Other Real Estate Owned          |  | $                                 | 250   |  |                                                           | $ |  |                                           |  | $ | 250                                    |  |  |   |    | 
|                                 |  |                                   |       |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |     | 
|                                 |  |                                   |       | 
|Assets as of December 31, 2010   |  |                                   |       |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |     | 
|Impaired Loans, Net of allowance |  | $                                 | 1,806 |  |                                                           | $ |  |                                           |  | $ | 1,111                                  |  |  | $ | 695 | 
|                                 |  |                                   |       |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |     | 
|Other Real Estate Owned          |  | $                                 | 244   |  |                                                           | $ |  |                                           |  | $ | 244                                    |  |  | $ |    | 
|                                 |  |                                   |       |  |                                                           |   |   |                                           |  |   |                                        |  |  |   |     | 



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##### Table of Contents

Accounting guidance defines the fair value of a financial instrument as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. As the majority of the Companys financial instruments lack an available trading market; significant estimates, assumptions
and present value calculations are required to determine estimated fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

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

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

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

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

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

Accrued Interest  The carrying amounts of accrued interest
approximates fair value.

Off-Balance-Sheet Financial Instruments The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter party. For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations
with the counter parties at the reporting date.



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##### Table of Contents

At March 31, 2011 and December 31, 2010, the fair value of loan commitments and stand-by letters
of credit was immaterial. Therefore, they have not been included in the following table.

Estimated fair value and the carrying value of
financial instruments at March 31, 2011 and December 31, 2010 are as follows:



|                                         |  |                |         |  |                      |  |         |               |  |   |                     |  |  |   |         | 
|---------------------------------------- |  | -------------- | ------- |  | -------------------- |  | ------- | ------------- |  | - | ------------------- |  |  | - | ------- | 
|                                         |  | March 31, 2011 |         |  | December 31, 2010    | 
|                                         |  | CarryingValue  |         |  | EstimatedFair 
Value |  |         | CarryingValue |  |   | EstimatedFair Value | 
|                                         |  | (In Thousands) |        
|                                         |  |                |         | 
|Financial Assets                         |  |                |         |  |                      |  |         |               |  |   |                     |  |  |   |         | 
|                                         |  |                |         | 
|Cash and due from banks                  |  | $              | 3,980   |  |                      |  | 3,980   |               |  | $ | 4,373               |  |  | $ | 4,373   | 
|                                         |  |                |         | 
|Interest bearing deposits in other banks |  |                | 19,144  |  |                      |  | 19,146  |               |  |   | 10,634              |  |  |   | 10,632  | 
|                                         |  |                |         | 
|Federal funds sold                       |  |                | 6,250   |  |                      |  | 6,250   |               |  |   | 2,550               |  |  |   | 2,550   | 
|                                         |  |                |         | 
|Securities available for sale            |  |                | 13,015  |  |                      |  | 13,015  |               |  |   | 11,168              |  |  |   | 11,168  | 
|                                         |  |                |         | 
|Loans, net                               |  |                | 128,714 |  |                      |  | 131,429 |               |  |   | 130,786             |  |  |   | 133,269 | 
|                                         |  |                |         | 
|Accrued interest receivable              |  |                | 678     |  |                      |  | 678     |               |  |   | 681                 |  |  |   | 681     | 
|                                         |  |                |         | 
|Financial Liabilities                    |  |                |         |  |                      |  |         |               |  |   |                     |  |  |   |         | 
|                                         |  |                |         | 
|Demand Deposits:                         |  |                |         |  |                      |  |         |               |  |   |                     |  |  |   |         | 
|                                         |  |                |         | 
|Non-interest bearing                     |  |                | 26,692  |  |                      |  | 26,692  |               |  |   | 25,739              |  |  |   | 25,739  | 
|                                         |  |                |         | 
|Interest bearing                         |  |                | 34,550  |  |                      |  | 34,550  |               |  |   | 23,104              |  |  |   | 23,104  | 
|                                         |  |                |         | 
|Savings deposits                         |  |                | 16,367  |  |                      |  | 16,367  |               |  |   | 15,746              |  |  |   | 15,746  | 
|                                         |  |                |         | 
|Time deposits                            |  |                | 72,251  |  |                      |  | 73,010  |               |  |   | 71,370              |  |  |   | 72,313  | 
|                                         |  |                |         | 
|Borrowings                               |  |                | 8,000   |  |                      |  | 8,057   |               |  |   | 11,000              |  |  |   | 11,073  | 
|                                         |  |                |         | 
|Accrued interest payable                 |  |                | 312     |  |                      |  | 312     |               |  |   | 246                 |  |  |   | 246     | 

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



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##### Table of Contents

|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.

Overview

The Company reported net earnings of $291,000 for the first quarter of
2011, as compared to $371,000 for the first quarter of 2010. Total earnings per share for the quarter ended March 31, 2011 were $0.28 compared to $0.36 for the first quarter of 2010.

The Company had asset growth of approximately $11.4 million during the first quarter of 2011. Investments in securities available for sale increased by $1.8 million for the period ending March 31,
2011, as compared to total securities available for sale at December 31, 2010. Investments in interest bearing deposits increased by $8.5 million for the first quarter of 2011 and investments in Federal Funds Sold increased by approximately
$3.7 million for the period ending March 31, 2011, as compared to balances as of December 31, 2010.

The Companys loan
portfolio decreased by approximately $2.1 million or 1.58% during the first quarter of 2011. The deposit portfolio increased by $13.9 million or 10.22% during the same period, with the majority of this growth being attributed to demand deposit
accounts, which are expected to be temporary in nature due to one large deposit customers account fluctuations. The Companys capital position as of March 31, 2011 was approximately $19.6 million, or 10.90% as a percentage of total
assets.

The Companys book value as of March 31, 2011 was $18.92 per share, as compared to a book value of $18.73 per share as of
December 31, 2010. Shareholder dividend payments for the first quarter of 2011 were $0.15 per share, and were the same as the dividend amount paid for the first quarter of 2010.

Management recognizes that prevailing economic conditions may 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.



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##### Table of Contents

Critical Accounting Policies

General

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

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

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic accounting standards: 1) Accounting for Contingencies, which
requires that losses be accrued when they are considered to be probable and can be reasonably estimated, and 2) Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of
collateral, present value of future cash flows or values that are observable in the market and the loan balance.

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

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

Goodwill

Goodwill is evaluated on an annual basis for impairments in value and adjusted accordingly. The accounting standards for Business Combinations, Goodwill
and Other Intangible Assets require 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. The provisions of these accounting standards discontinued the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review, which
must be performed at least annually or more frequently if certain impairment indicators are in evidence. The accounting standards relating to Goodwill also require that reporting units be identified for the purpose of assessing potential future
impairments.

Goodwill is included in other assets and totaled $360,000 at March 31, 2011 and December 31, 2010. Goodwill is no
longer amortized, but instead is tested for impairment at least annually.



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##### Table of Contents

Results of Operations

Net Interest Income

Total interest income decreased $24,000 or 1.04% during the first
quarter of 2011 as compared to the same period for 2010. Total interest expense decreased $100,000 or 21.05% during the three month period ending March 31, 2011, as compared to the same period of 2010. The decreases in interest income and
interest expense resulted in a net interest income increase of $76,000 or 4.13% for the period ending March 31, 2011 compared to the period ending March 31, 2010. This net increase is primarily attributed to reduced interest expense on
deposits as a result of the current low interest rate environment. The reduced interest income it also attributed to lower market rates for investments and other earning assets.

The average outstanding loan balances as of March 31, 2011 totaled $130.6 million, as compared to $128.0 million as of March 31, 2010. The average yield on loan balances outstanding has
decreased from 6.82% as of March 31, 2010 to 6.71% as of March 31, 2011. This decrease in interest yield on loans has been largely impacted by lower market interest rates and scheduled loan re-pricing activities. The overall average yield
on earning assets decreased from 6.22% as of March 31, 2010 to 5.83% as of March 31, 2011, and is attributed to the previously mentioned factors.

The Companys cost of liabilities decreased from 1.67% as of March 31, 2010 to 1.24% as of March 31, 2011. This is attributed to managements proactive re-pricing efforts to reduce
interest expense on deposit products in conjunction with lower market rates.

The Companys overall net interest margin decreased from
4.96% as of March 31, 2010 to 4.88% as of March 31, 2011.

Noninterest Income

During the first quarter of 2011, non-interest income decreased by $56,000 or 17.61%, when compared to the same period last year. This decrease in
non-interest income is primarily related to reduced commission and fee income related to the Banks subsidiary Pioneer Financial Services, LLC. Service charge was also slightly reduced, by approximately $2,000 or 0.95%.

Noninterest Expense

During the first
quarter of 2011, non-interest expense increased by $163,000 or 13.17% in comparison to the same period last year. The primary factors contributing to this increase were FDIC insurance assessment fees, professional fees related to increased audit and
consulting expenses, and increased salary and benefit expenses.

The increase in FDIC insurance assessments was $13,000 as of March 31,
2011, when compared to the prior year. This increase is directly related to the regulatory fees that are applicable to all insured banking institutions and the recent increase associated with the Federal Banking system. Federal Deposit Insurance
Coverage limits were permanently increased to $250,000 per depositor during 2010. The Bank generally pays a quarterly statutory assessment for this insurance coverage and must comply with the rules and regulations of the FDIC. Each depository
institution is assigned to a risk category based upon capital and supervisory measures. Depending upon the risk category to which it is assigned, the depository institution is then assessed insurance premiums based upon its deposits. In December
2009, federally insured banking institutions were required to prepay deposit insurance premiums through December 2012. Future FDIC assessments will be based on the Companys assigned risk category and any growth in deposits, as well as
potential regulatory changes related to the insurance coverage and assessment process.

Professional fee expenses increased by approximately
$15,000 as of March 31, 2011, when compared to the prior year. This increase is primarily associated with additional loan review services, outside consulting, and accruals for annual audit expense.

The increase in salaries and benefit expense was $84,000 as of March 31, 2011, when compared to the prior year. This increase is primarily
attributed to the addition of new salary expenses relating to staff positions that have remained vacant for an extended period of time. Managements decisions in previous years regarding salary increases and hiring activities were of a
conservative nature in an effort to control costs in the uncertain economic environment.



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##### Table of Contents

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

As of March 31, 2011, the fair market value of securities available for sale was approximately $434,000 more
than the net amortized cost value as shown in Note 2 of the financial statements included in this report. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in
value and does not expect to be required to sell these securities for operational cash flow purposes. Management continually monitors any securities in a loss position for possible impairment. At this time, management 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 approximately $1.8 million during the first quarter of 2011. 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, 11.89% (based on market value) are invested in equities, most of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The equity securities generally include common stocks, which are
purchased with the objective of generating additional income. The value of these investments is sensitive to general trends in the stock market and other economic conditions.

Loan Portfolio

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

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

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

During the first quarter of 2011, net loans decreased by approximately $2.1 million or 1.58%. The decrease in loan volume was primarily in the category
of commercial real estate loans. A schedule of loans by type is shown in Note 3 of 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, restructured and impaired loans. Non-accrual loans are loans on which interest accruals have been
suspended or discontinued permanently as previously defined in the Companys significant accounting policies. Restructured loans are loans on which the original interest rate or repayment terms have changed due to the borrowers financial
hardship and were previously discussed in Note 1.

Impaired loans are those loans which have been identified by management as problem credits
due to various circumstances concerning the borrowers financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a non-accrual classification, however, management has classified
these accounts as impaired and is monitoring the circumstances and payment status closely. In most cases, a specific allocation to the Banks allowance for loan loss is made for an impaired loan. The total amount of impaired loans as of
March 31, 2011 was $3.0 million compared to $2.8 million as of December 31, 2010.



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Management has placed approximately $2.3 million of the Banks impaired loans in a nonaccrual status as
of March 31, 2011. Impaired loans not in nonaccrual status as of March 31, 2011 were approximately $771,000. Specific allocations have been made to the allowance for loan loss account of approximately $1.0 million as of March 31,
2011, to cover potential losses that may occur relating to impaired loans.

Management continually monitors past due, non-accrual, and
impaired loans 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.

Problem loans (serious doubt loans) are loans whereby information known by management indicates that the borrower may not be able to comply with present payment terms. Management was not aware of any
problem loans at March 31, 2011 that are not included in the past due or non-accrual loans referred to 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.

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 $2.5 million, at March 31, 2011, increased by approximately $113,000 from its level at
December 31, 2010. The increase in the allowance balance is primarily attributed to additional specific allocations related to impaired loans, as well as, an increase in classified loans and managements establishment of additional
allocation factors for potential risk related to the increased volume of restructured loans. The increase in non-performing and classified assets is partially attributed to the deterioration that has occurred in the overall economic environment
during the past two years and the impact this has had on the borrowers ability to pay.



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Management has made allocations based on the declining economic trends, concentrations of credit and
increases in non-performing assets, as a means of providing sufficient funding for possible losses. 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 1.87% and 1.76% of total loans at March 31, 2011 and December 31, 2010, respectively. 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 March 31, 2011.

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 March 31,
2011 included specific allocations for certain borrowers, in which the payment performance and collateral value assessment indicates possible future losses. Management exercises the utmost caution and due diligence in allocating for possible loan
losses, and follows a conservative methodology in order to protect its investors and to minimize the potential for large fluctuations in future provision expenses. Managements practice of funding the allowance for loan loss account is to make
necessary adjustments on a quarterly basis for the foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary
allowance for loan loss reserves are recorded directly to income or expense in the reporting period.

The provision expense related to the
allowance for loan loss as of March 31, 2011 was $356,000 as compared to $376,000 for the same period last year.

Managements
evaluation of the allowance for loan losses as of March 31, 2011 and December 31, 2010 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

During the first quarter of 2011, the Company had purchases relating to premises, equipment or other fixed assets of approximately $17,000. These
purchases were primarily related to in-house software and equipment upgrades. The Bank continually monitors technological upgrades in the banking industry, and periodically, in order to achieve higher levels of internal operational efficiency,
purchases new or additional equipment relating to such technologies. 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 Bank executed new contracts with its core data processing vendor during 2010 for various system enhancements
relating to certain daily processing functions and operational software upgrades. One major element of these new contracts was the change from an in-house daily processing system to an outsourced environment, in which the core vendor now performs
selected back-office operational support functions for the bank. The implementation of these new system functions are expected to provide cost savings and increased internal efficiencies to the Bank in future reporting periods.



33



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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 total deposit portfolio has historically remained relatively stable; however, these balances fluctuate with normal daily activity.

During the first quarter of 2011, total deposits increased by approximately $13.9 million or 10.22%, with the majority of this growth being attributed to
demand deposit accounts, which are expected to be temporary in nature due to one large deposit customers account fluctuations. Non interest-bearing demand deposits increased by $953,000 or 3.70%, while interest-bearing demand deposits
increased by $11.4 million or 49.54%. Savings deposit accounts increased by approximately $621,000 or 3.94%, while time deposits increased by approximately $881,000 or 1.23%.

The Company monitors its deposits carefully on an on-going basis in order to provide adequate funding for investment and loan opportunities.

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta
upon which credit advances can be made up to 40% of total Bank 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 the Banks real estate loan portfolio, with a current pledge against the institutions first lien 1-4 family residential mortgages totaling $49.6 million, as of March 31, 2011. On
certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may repay all or part of the advance without a
prepayment penalty.

At March 31, 2011, total outstanding borrowings with FHLB were $8.0 million. This outstanding balance is a fixed
rate advance with scheduled principal payments due quarterly and a final maturity date of March 1, 2013.

The scheduled repayments and
maturities of outstanding FHLB borrowings as of March 31, 2010 are shown in TABLE II of this report.

Capital

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

As of March 31, 2011 and December 31, 2010, the Companys total capital-to-asset ratios were 10.90% and 11.53%, respectively.
The Companys Tier 1 risk-based capital ratio was 15.32% and the total risk-based capital ratio was 16.57% as of March 31, 2011. The Banks Tier 1 risk-based capital ratio was 13.06% and total risk-based capital ratio was 14.32% as of
March 31, 2011. The capital ratios for both the Company and the Bank exceed the well-capitalized regulatory guidelines as of March 31, 2011 and earnings have historically been sufficient to allow for consistent dividends to be declared on
a quarterly basis.



34



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##### Table of Contents

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 March 31, 2011 is considered to be adequate.

Interest Rate
Sensitivity

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

As of March 31, 2011, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 25.69% for the
one year re-pricing period, compared with a negative cumulative Gap Rate Sensitivity of 34.19% at December 31, 2010. 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.

Table II contains an analysis, which shows the re-pricing opportunities of earning assets and interest bearing liabilities as of March 31, 2011.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.
ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim
and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses. The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a companys exposure to credit losses from lending arrangements. The extensive new disclosures of
information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such
as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.



35



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##### Table of Contents

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for
Business Combinations. The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of
the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been
as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU
modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have
a material impact on the Companys consolidated financial statements.

The Securities Exchange Commission (SEC) has issued Final Rule
No. 33-9002, Interactive Data to Improve Financial Reporting, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large
accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are
required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series.
This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASBs Codification. The principal changes involve revision or removal of accounting guidance
references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Companys
consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance on a creditors evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditors evaluation
of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the
beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be
impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently assessing the impact
that ASU 2011-02 will have on its consolidated financial statements.

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.



36



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##### Table of Contents

TABLE I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|---------------------------------- |  | -------------------------------- | ------- |  | -------------------------------- | - | ----- | ----- |  |  | -------------- | - |  | -------------- | ------- |  | ----- | - | ----- |  |  |  | ----- | -
|                                   |  | Three Months EndedMarch 31, 2011 |         |  | Three Months EndedMarch 31, 2010 |  
|                                   |  | AverageBalance                   |         |  | Income/Expense                   |   |       | Rates |  |  | AverageBalance |   |  | Income/Expense |         |  | Rates |  
|Interest Income Loans1             |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|Commercial                         |  | $                                | 5,476   |  |                                  | $ | 91    |       |  |  | 6.65           | % |  | $              | 7,023   |  |       | $ | 127   |  |  |  | 7.23  | %
|Real estate                        |  |                                  | 107,558 |  |                                  |   | 1,667 |       |  |  | 6.20           | % |  |                | 104,729 |  |       |   | 1,650 |  |  |  | 6.30  | %
|Installment                        |  |                                  | 16,974  |  |                                  |   | 407   |       |  |  | 9.59           | % |  |                | 15,634  |  |       |   | 377   |  |  |  | 9.65  | %
|Credit card                        |  |                                  | 620     |  |                                  |   | 25    |       |  |  | 16.13          | % |  |                | 619     |  |       |   | 27    |  |  |  | 17.45 | %
|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|Total Loans                        |  |                                  | 130,628 |  |                                  |   | 2,190 |       |  |  | 6.71           | % |  |                | 128,005 |  |       |   | 2,181 |  |  |  | 6.82  | %
|                                   |  |                                  |         |  |                                  |  
|Federal funds sold                 |  |                                  | 5,455   |  |                                  |   | 3     |       |  |  | 0.22           | % |  |                | 2,808   |  |       |   | 2     |  |  |  | 0.28  | %
|Interest Bearing Deposits          |  |                                  | 13,074  |  |                                  |   | 27    |       |  |  | 0.83           | % |  |                | 7,753   |  |       |   | 30    |  |  |  | 1.55  | %
|Securities                         |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|Taxable                            |  |                                  | 3,756   |  |                                  |   | 27    |       |  |  | 2.88           | % |  |                | 5,198   |  |       |   | 54    |  |  |  | 4.16  | %
|Nontaxable2                        |  |                                  | 5,591   |  |                                  |   | 63    |       |  |  | 4.51           | % |  |                | 6,498   |  |       |   | 70    |  |  |  | 4.31  | %
|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|                                   |  |                                  |         |  |                                  |  
|Total earning assets               |  |                                  | 158,504 |  |                                  |   | 2,310 |       |  |  | 5.83           | % |  |                | 150,262 |  |       |   | 2,337 |  |  |  | 6.22  | %
|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|                                   |  |                                  |         |  |                                  |  
|Interest Expense                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|Demand deposits                    |  |                                  | 25,666  |  |                                  |   | 44    |       |  |  | 0.69           | % |  |                | 18,881  |  |       |   | 35    |  |  |  | 0.74  | %
|Savings                            |  |                                  | 16,029  |  |                                  |   | 13    |       |  |  | 0.32           | % |  |                | 15,919  |  |       |   | 10    |  |  |  | 0.25  | %
|Time deposits                      |  |                                  | 69,584  |  |                                  |   | 293   |       |  |  | 1.68           | % |  |                | 70,925  |  |       |   | 424   |  |  |  | 2.39  | %
|Borrowings                         |  |                                  | 9,256   |  |                                  |   | 25    |       |  |  | 1.08           | % |  |                | 8,112   |  |       |   | 6     |  |  |  | 0.30  | %
|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|                                   |  |                                  |         |  |                                  |  
|Total Interest Bearing Liabilities |  | $                                | 120,535 |  |                                  | $ | 375   |       |  |  | 1.24           | % |  | $              | 113,837 |  |       | $ | 475   |  |  |  | 1.67  | %
|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|                                   |  |                                  |         |  |                                  |  
|Net Interest Income                |  |                                  |         |  |                                  | $ | 1,935 |       |  |  |                |   |  |                |         |  |       | $ | 1,862 |  |  |  |       |  
|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  
|                                   |  |                                  |         |  |                                  |  
|Net Interest Margin                |  |                                  |         |  |                                  |   |       |       |  |  | 4.88           | % |  |                |         |  |       |   |       |  |  |  | 4.96  | %
|                                   |  |                                  |         |  |                                  |   |       |       |  |  |                |   |  |                |         |  |       |   |       |  |  |  |       |  



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

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



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##### Table of Contents

TABLE II

PIONEER BANKSHARES, INC.

INTEREST SENSITIVITY ANALYSIS

MARCH 31, 2011

(Dollar Amounts in Thousands)



|                                                                     |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|-------------------------------------------------------------------- |  | --------- | ------- | - | ---------- | - | ------- | -------- |  | - | ----------- | - |  | ------------- | ------ | - | ----- | - | ------ | - |  | - | ------- | 
|                                                                     |  | 0-3Months |         |   | 4-12Months |   |         | 1-5Years |  |   | Over 5Years |   |  | NotClassified |        |   | Total |  
|Uses of Funds:                                                       |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Loans1                                                               |  | $         | 11,988  |   |            | $ | 7,801   |          |  | $ | 66,046      |   |  | $             | 45,334 |   |       | $ |       |   |  | $ | 131,169 | 
|Interest bearing bank deposits                                       |  |           | 11,394  |   |            |   | 4,750   |          |  |   | 3,000       |   |  |               |       |   |       |   |       |   |  |   | 19,144  | 
|Investment securities2                                               |  |           | 5,000   |   |            |   |        |          |  |   | 3,133       |   |  |               | 2,822  |   |       |   | 2,060  |   |  |   | 13,015  | 
|Restricted stock                                                     |  |           |        |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   | 947    |   |  |   | 947     | 
|Federal funds sold                                                   |  |           | 6,250   |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 6,250   | 
|                                                                     |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Total                                                                |  |           | 34,632  |   |            |   | 12,551  |          |  |   | 72,179      |   |  |               | 48,156 |   |       |   | 3,007  |   |  |   | 170,525 | 
|                                                                     |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Sources of Funds:                                                    |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Interest bearing demand deposits                                     |  |           | 34,550  |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 34,550  | 
|Regular savings                                                      |  |           | 16,367  |   |            |   |        |          |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 16,367  | 
|Certificates of deposit $100,000 and over                            |  |           | 6,745   |   |            |   | 9,099   |          |  |   | 10,216      |   |  |               |       |   |       |   |       |   |  |   | 26,060  | 
|Other certificates of deposit                                        |  |           | 8,637   |   |            |   | 15,593  |          |  |   | 21,961      |   |  |               |       |   |       |   |       |   |  |   | 46,191  | 
|Borrowings                                                           |  |           |        |   |            |   |        |          |  |   | 8,000       |   |  |               |       |   |       |   |       |   |  |   | 8,000   | 
|                                                                     |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Total                                                                |  | $         | 66,299  |   |            | $ | 24,692  |          |  | $ | 40,177      |   |  | $             |       |   |       | $ |       |   |  | $ | 131,168 | 
|                                                                     |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Discrete Gap                                                         |  | $         | (31,667 | ) |            | $ | (12,141 | )        |  | $ | 32,002      |   |  | $             | 48,156 |   |       | $ | 3,007  |   |  | $ | 39,357  | 
|                                                                     |  |           |         |   |            |  
|Cumulative Gap                                                       |  | $         | (31,667 | ) |            | $ | (43,808 | )        |  | $ | (11,806     | ) |  | $             | 36,350 |   |       | $ | 39,357 |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Ratio of Cumulative Gap To Total Earning Assets at March 31, 2011    |  |           | -18.57  | % |            |   | -25.69  | %        |  |   | -6.92       | % |  |               | 21.32  | % |       |   | 23.08  | % |  |   |         | 
|                                                                     |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 
|                                                                     |  |           |         |   |            |  
|Ratio of Cumulative Gap To Total Earning Assets at December 31, 2010 |  |           | -25.62  | % |            |   | -34.19  | %        |  |   | -9.92       | % |  |               | 21.86  | % |       |   | 23.49  | % |  |   |         | 
|                                                                     |  |           |         |   |            |   |         |          |  |   |             |   |  |               |        |   |       |   |        |   |  |   |         | 



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

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



38



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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 March 31, 2011, 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 2011.



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

Not
Applicable



|Item 4. | Reserved.
|------- | ---------

Not Applicable



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

Not Applicable



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##### Table of Contents

|Item 6. | Exhibits.
|------- | ---------



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



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##### Table of Contents

SIGNATURES

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: May 13, 2011 |  |  |  | Thomas R. Rosazza                         
|                   |  |  |  | President and Chief Executive Officer     
|                   |  |  | 
|Date: May 13, 2011 |  |  |  | By:                                        |  | /s/ LORI G. HASSETT  
|                   |  |  |  | Lori G. Hassett                           
|                   |  |  |  | Vice President and Chief Financial Officer



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