##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-QSB



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



For Quarterly Period Ended September 30, 2005



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



Commission File No. 0-30541



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PIONEER BANKSHARES, INC.

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



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



263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices)



(540) 778-2294

(Issuers telephone number)



---



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



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



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



|                                |  |                                 
|------------------------------- |  | --------------------------------
|Class                           |  | Outstanding at November 10, 2005
|Common Stock, par value - $0.50 |  | 1,034,045 shares                



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



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##### Table of Contents

PIONEER BANKSHARES, INC.



INDEX



|         |  |                                                                                                             |  |     
|-------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                             |  | Page
|         |  |                                                                                                            
|PART I   |  | FINANCIAL INFORMATION                                                                                       |  | 3   
|         |  |                                                                                                            
|Item 1.  |  | Financial Statements                                                                                        |  |     
|         |  |                                                                                                            
|         |  | Consolidated Statements of Income - Three Months Ended September 30, 2005 and 2004                          |  | 3   
|         |  |                                                                                                            
|         |  | Consolidated Statements of Income - Nine Months Ended September 30, 2005 and 2004                           |  | 4   
|         |  |                                                                                                            
|         |  | Consolidated Balance Sheets - September 30, 2005 and December 31, 2004                                      |  | 5   
|         |  |                                                                                                            
|         |  | Consolidated Statements of Changes in Stockholders Equity - Three Months Ended September 30, 2005 and 2004 |  | 6   
|         |  |                                                                                                            
|         |  | Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2005 and 2004                       |  | 7   
|         |  |                                                                                                            
|         |  | Notes to Consolidated Financial Statements                                                                  |  | 8   
|         |  |                                                                                                            
|Item 2.  |  | Managements Discussion and Analysis or Plan of Operation                                                   |  | 12  
|         |  |                                                                                                            
|Item 3.  |  | Controls and Procedures                                                                                     |  | 25  
|         |  |                                                                                                            
|PART II  |  | OTHER INFORMATION                                                                                           |  | 25  
|         |  |                                                                                                            
|Item 1.  |  | Legal Proceedings                                                                                           |  | 25  
|         |  |                                                                                                            
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 25  
|         |  |                                                                                                            
|Item 3.  |  | Defaults Upon Senior Securities                                                                             |  | 25  
|         |  |                                                                                                            
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                         |  | 26  
|         |  |                                                                                                            
|Item 5.  |  | Other Information                                                                                           |  | 26  
|         |  |                                                                                                            
|Item 5a. |  | Required 8-K Disclosures                                                                                    |  | 26  
|         |  |                                                                                                            
|Item 5b. |  | Changes in Procedures for Director Nominations by Security Holders                                          |  | 26  
|         |  |                                                                                                            
|Item 6.  |  | Exhibits                                                                                                    |  | 26  
|         |  |                                                                                                            
|         |  | SIGNATURES                                                                                                  |  | 27  



2



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##### Table of Contents

Part I - Financial Information



Item 1. Financial Statements



PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)



|                                                    |  |                                  |           |      |   |           |  
|--------------------------------------------------- |  | -------------------------------- | --------- | ---- | - | --------- | -
|                                                    |  | Three Months Ended September 30, |          
|                                                    |  | 2005                             |           | 2004 |  
|Interest and Dividend Income:                       |  |                                  |           |      |   |           |  
|Loans including fees                                |  | $                                | 1,975     |      | $ | 1,847     |  
|Interest on securities - taxable                    |  |                                  | 87        |      |   | 89        |  
|Interest on securities - nontaxable                 |  |                                  | 2         |      |   | 1         |  
|Interest on deposits and federal funds sold         |  |                                  | 93        |      |   | 45        |  
|Dividends                                           |  |                                  | 13        |      |   | 15        |  
|                                                    |  |                                  |           |      |   |           |  
|Total Interest and Dividend Income                  |  |                                  | 2,170     |      |   | 1,997     |  
|                                                    |  |                                  |           |      |   |           |  
|Interest Expense:                                   |  |                                  |           |      |   |           |  
|Deposits                                            |  |                                  | 438       |      |   | 318       |  
|Long term debt                                      |  |                                  | 173       |      |   | 109       |  
|                                                    |  |                                  |           |      |   |           |  
|Total Interest Expense                              |  |                                  | 611       |      |   | 427       |  
|                                                    |  |                                  |           |      |   |           |  
|Net Interest Income                                 |  |                                  | 1,559     |      |   | 1,570     |  
|Provision for loan losses                           |  |                                  | 107       |      |   | 16        |  
|                                                    |  |                                  |           |      |   |           |  
|Net interest income after provision for loan losses |  |                                  | 1,452     |      |   | 1,554     |  
|                                                    |  |                                  |           |      |   |           |  
|Noninterest Income:                                 |  |                                  |           |      |   |           |  
|Service charges and fees                            |  |                                  | 204       |      |   | 195       |  
|Other income                                        |  |                                  | 18        |      |   | 10        |  
|Gain (loss) on securities transactions              |  |                                  | 39        |      |   | (5        | )
|                                                    |  |                                  |           |      |   |           |  
|Total Noninterest Income                            |  |                                  | 261       |      |   | 200       |  
|                                                    |  |                                  |           |      |   |           |  
|Noninterest Expense:                                |  |                                  |           |      |   |           |  
|Salaries and benefits                               |  |                                  | 582       |      |   | 534       |  
|Occupancy expenses                                  |  |                                  | 82        |      |   | 69        |  
|Equipment expenses                                  |  |                                  | 185       |      |   | 198       |  
|Other expenses                                      |  |                                  | 398       |      |   | 331       |  
|                                                    |  |                                  |           |      |   |           |  
|Total Noninterest Expenses                          |  |                                  | 1,247     |      |   | 1,132     |  
|                                                    |  |                                  |           |      |   |           |  
|Income before Income Taxes                          |  |                                  | 466       |      |   | 622       |  
|Income Tax Expense                                  |  |                                  | 157       |      |   | 209       |  
|                                                    |  |                                  |           |      |   |           |  
|Net Income                                          |  | $                                | 309       |      | $ | 413       |  
|                                                    |  |                                  |           |      |   |           |  
|Per Share Data                                      |  |                                  |           |      |   |           |  
|Net income, basic and diluted                       |  | $                                | 0.30      |      | $ | 0.38      |  
|                                                    |  |                                  |           |      |   |           |  
|Dividends                                           |  | $                                | 0.12      |      | $ | 0.12      |  
|                                                    |  |                                  |           |      |   |           |  
|Weighted Average Shares Outstanding, Basic          |  |                                  | 1,034,045 |      |   | 1,073,650 |  
|                                                    |  |                                  |           |      |   |           |  
|Weighted Average Shares Outstanding, Diluted        |  |                                  | 1,035,253 |      |   | 1,074,798 |  
|                                                    |  |                                  |           |      |   |           |  



See Notes to
Consolidated Financial Statements



3



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)



|                                                    |  |                                 |           |      |   |          
|--------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | ---------
|                                                    |  | Nine Months Ended September 30,
|                                                    |  | 2005                            |           | 2004
|Interest and Dividend Income:                       |  |                                 |           |      |   |          
|Loans including fees                                |  | $                               | 5,710     |      | $ | 5,376    
|Interest on securities - taxable                    |  |                                 | 306       |      |   | 244      
|Interest on securities - nontaxable                 |  |                                 | 7         |      |   | 18       
|Interest on deposits and federal funds sold         |  |                                 | 200       |      |   | 148      
|Dividends                                           |  |                                 | 66        |      |   | 43       
|                                                    |  |                                 |           |      |   |          
|Total Interest and Dividend Income                  |  |                                 | 6,289     |      |   | 5,829    
|                                                    |  |                                 |           |      |   |          
|Interest Expense:                                   |  |                                 |           |      |   |          
|Deposits                                            |  |                                 | 1,146     |      |   | 1,009    
|Long term debt                                      |  |                                 | 504       |      |   | 330      
|                                                    |  |                                 |           |      |   |          
|Total Interest Expense                              |  |                                 | 1,650     |      |   | 1,339    
|                                                    |  |                                 |           |      |   |          
|Net Interest Income                                 |  |                                 | 4,639     |      |   | 4,490    
|Provision for loan losses                           |  |                                 | 273       |      |   | 62       
|                                                    |  |                                 |           |      |   |          
|Net interest income after provision for loan losses |  |                                 | 4,366     |      |   | 4,428    
|                                                    |  |                                 |           |      |   |          
|Noninterest Income:                                 |  |                                 |           |      |   |          
|Service charges and fees                            |  |                                 | 576       |      |   | 611      
|Other income                                        |  |                                 | 90        |      |   | 44       
|Gain on securities transactions                     |  |                                 | 119       |      |   | 226      
|                                                    |  |                                 |           |      |   |          
|Total Noninterest Income                            |  |                                 | 785       |      |   | 881      
|                                                    |  |                                 |           |      |   |          
|Noninterest Expense:                                |  |                                 |           |      |   |          
|Salaries and benefits                               |  |                                 | 1,749     |      |   | 1,642    
|Occupancy expenses                                  |  |                                 | 241       |      |   | 223      
|Equipment expenses                                  |  |                                 | 560       |      |   | 599      
|Other expenses                                      |  |                                 | 1,169     |      |   | 1,009    
|                                                    |  |                                 |           |      |   |          
|Total Noninterest Expenses                          |  |                                 | 3,719     |      |   | 3,473    
|                                                    |  |                                 |           |      |   |          
|Income before Income Taxes                          |  |                                 | 1,432     |      |   | 1,836    
|Income Tax Expense                                  |  |                                 | 483       |      |   | 615      
|                                                    |  |                                 |           |      |   |          
|Net Income                                          |  | $                               | 949       |      | $ | 1,221    
|                                                    |  |                                 |           |      |   |          
|Per Share Data                                      |  |                                 |           |      |   |          
|Net income, basic and diluted                       |  | $                               | 0.92      |      | $ | 1.14     
|                                                    |  |                                 |           |      |   |          
|Dividends                                           |  | $                               | 0.36      |      | $ | 0.36     
|                                                    |  |                                 |           |      |   |          
|Weighted Average Shares Outstanding, Basic          |  |                                 | 1,034,045 |      |   | 1,073,650
|                                                    |  |                                 |           |      |   |          
|Weighted Average Shares Outstanding, Diluted        |  |                                 | 1,035,253 |      |   | 1,074,705
|                                                    |  |                                 |           |      |   |          



See Notes to
Consolidated Financial Statements



4



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)



|                                                                                     |  |                   |         |                  |   |        
|------------------------------------------------------------------------------------ |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                     |  | September 30,2005 |         | December 31,2004
|                                                                                     |  | (Unaudited)       |         | (Audited)       
|ASSETS                                                                               |  |                   |         |                  |   |        
|Cash and due from banks                                                              |  | $                 | 9,073   |                  | $ | 9,896  
|Federal funds sold                                                                   |  |                   | 300     |                  |   | 950    
|Interest bearing deposits in banks                                                   |  |                   | 4,184   |                  |   | 10,480 
|Securities available for sale, at fair value                                         |  |                   | 16,669  |                  |   | 12,331 
|Securities held to maturity                                                          |  |                   | 10      |                  |   | 16     
|Restricted securities                                                                |  |                   | 1,016   |                  |   | 1,181  
|Loans receivable, net of allowance for loan losses of $1,291 and $1,346 respectively |  |                   | 104,423 |                  |   | 92,283 
|Premises and equipment, net                                                          |  |                   | 4,588   |                  |   | 4,150  
|Accrued interest receivable                                                          |  |                   | 522     |                  |   | 491    
|Other assets                                                                         |  |                   | 1,600   |                  |   | 1,487  
|                                                                                     |  |                   |         |                  |   |        
|Total Assets                                                                         |  | $                 | 142,385 |                  | $ | 133,265
|                                                                                     |  |                   |         |                  |   |        
|LIABILITIES                                                                          |  |                   |         |                  |   |        
|                                                                                     |  |                  
|Deposits                                                                             |  |                   |         |                  |   |        
|Noninterest bearing demand                                                           |  | $                 | 29,746  |                  |   | 26,194 
|Interest bearing                                                                     |  |                   |         |                  |   |        
|Demand                                                                               |  |                   | 14,516  |                  |   | 14,890 
|Savings                                                                              |  |                   | 14,090  |                  |   | 13,954 
|Time deposits over $100,000                                                          |  |                   | 12,150  |                  |   | 8,236  
|Other time deposits                                                                  |  |                   | 41,963  |                  |   | 37,523 
|                                                                                     |  |                   |         |                  |   |        
|Total Deposits                                                                       |  |                   | 112,465 |                  |   | 100,797
|Accrued expenses and other liabilities                                               |  |                   | 798     |                  |   | 631    
|Long term debt                                                                       |  |                   | 15,100  |                  |   | 18,300 
|                                                                                     |  |                   |         |                  |   |        
|Total Liabilities                                                                    |  |                   | 128,363 |                  |   | 119,728
|                                                                                     |  |                   |         |                  |   |        
|STOCKHOLDERS EQUITY                                                                 |  |                   |         |                  |   |        
|                                                                                     |  |                  
|Common stock; $.50 par value, authorized 5,000,000, outstanding 1,034,045            |  |                   | 517     |                  |   | 517    
|Retained earnings                                                                    |  |                   | 13,495  |                  |   | 12,918 
|Accumulated other comprehensive income, net                                          |  |                   | 10      |                  |   | 102    
|                                                                                     |  |                   |         |                  |   |        
|Total Stockholders Equity                                                           |  |                   | 14,022  |                  |   | 13,537 
|                                                                                     |  |                   |         |                  |   |        
|Total Liabilities and Stockholders Equity                                           |  | $                 | 142,385 |                  | $ | 133,265
|                                                                                     |  |                   |         |                  |   |        



See Notes to
Consolidated Financial Statements



5



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(In Thousands)

(UNAUDITED)



|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|--------------------------------------------------------------------------------------- |  | ----------- | --- | ---------------- | - | ------ | ----------------------------------- |  | - | ----- | - |  | - | ------ | -
|                                                                                        |  | CommonStock |     | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome |  |   | Total |  
|BALANCE DECEMBER 31, 2003                                                               |  |             | 537 |                  |   | 12,464 |                                     |  |   | 164   |   |  |   | 13,165 |  
|                                                                                        |  |             |     |                 
|Comprehensive Income                                                                    |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Net Income                                                                              |  |             |     |                  |   | 1,221  |                                     |  |   |       |   |  |   | 1,221  |  
|Changes in unrealized gains (losses) on securities, net of taxes                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $37)           |  |             |     |                  |   |        |                                     |  |   | 70    |   |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $77) |  |             |     |                  |   |        |                                     |  |   | (149  | ) |  |   | (79    | )
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                     |  |   |       |   |  |   | 1,142  |  
|                                                                                        |  |             |     |                 
|Cash Dividends                                                                          |  |             |     |                  |   | (387   | )                                   |  |   |       |   |  |   | (387   | )
|Retirement of common stock                                                              |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|                                                                                        |  |             |    |                  |   |       |                                     |  |   |      |   |  |   |       |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|BALANCE SEPTEMBER 30, 2004                                                              |  | $           | 537 |                  | $ | 13,298 |                                     |  | $ | 85    |   |  | $ | 13,920 |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|BALANCE DECEMBER 31, 2004                                                               |  |             | 517 |                  |   | 12,918 |                                     |  |   | 102   |   |  |   | 13,537 |  
|                                                                                        |  |             |     |                 
|Comprehensive Income                                                                    |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Net Income                                                                              |  |             |     |                  |   | 949    |                                     |  |   |       |   |  |   | 949    |  
|Changes in unrealized gains (losses) on securities, net of taxes                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $8)            |  |             |     |                  |   |        |                                     |  |   | (18   | ) |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $45) |  |             |     |                  |   |        |                                     |  |   | (74   | ) |  |   | (92    | )
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                     |  |   |       |   |  |   | 14,394 |  
|                                                                                        |  |             |     |                 
|Cash Dividends                                                                          |  |             |     |                  |   | (372   | )                                   |  |   |       |   |  |   | (372   | )
|Retirement of common stock                                                              |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|                                                                                        |  |             |    |                  |   |       |                                     |  |   |      |   |  |   |       |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|BALANCE SEPTEMBER 30, 2005                                                              |  | $           | 517 |                  | $ | 13,495 |                                     |  | $ | 10    |   |  | $ | 14,022 |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  



See Notes to
Consolidated Financial Statements



6



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |        
|                                                                                  |  | 2005                           |         |   | 2004 |  
|Cash Flows from Operating Activities:                                             |  |                                |         |   |      |   |         |  
|Net income                                                                        |  | $                              | 949     |   |      | $ | 1,221   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Provision for loan losses                                                         |  |                                | 273     |   |      |   | 62      |  
|Depreciation and amortization                                                     |  |                                | 374     |   |      |   | 807     |  
|Gain on sale of securities                                                        |  |                                | (119    | ) |      |   | (226    | )
|Net Amortization on securities                                                    |  |                                | 80      |   |      |   |         |  
|Net change in:                                                                    |  |                                |         |   |      |   |         |  
|Accrued interest receivable                                                       |  |                                | (31     | ) |      |   | (18     | )
|Other assets                                                                      |  |                                | (60     | ) |      |   | (207    | )
|Accrued expense and other liabilities                                             |  |                                | 167     |   |      |   | (23     | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                         |  |                                | 1,633   |   |      |   | 1,616   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash Flows from Investing Activities:                                             |  |                                |         |   |      |   |         |  
|Net change in federal funds sold                                                  |  |                                | 650     |   |      |   | 1,700   |  
|Net change in interest bearing deposits                                           |  |                                | 6,296   |   |      |   | (1,337  | )
|Net change in restricted securities                                               |  |                                | 165     |   |      |   | (231    | )
|Proceeds from maturities and sales of securities available for sale               |  |                                | 10,944  |   |      |   | 16,683  |  
|Proceeds from maturities and calls of securities held to maturity                 |  |                                | 6       |   |      |   | 12      |  
|Purchase of securities available for sale                                         |  |                                | (15,388 | ) |      |   | (11,700 | )
|Net increase in loans                                                             |  |                                | (12,413 | ) |      |   | (11,951 | )
|Purchase of bank premises and equipment                                           |  |                                | (812    | ) |      |   | (734    | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net Cash Used in Investing Activities                                             |  |                                | (10,552 | ) |      |   | (7,558  | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash Flows from Financing Activities:                                             |  |                                |         |   |      |   |         |  
|Net change in:                                                                    |  |                                |         |   |      |   |         |  
|Demand and savings deposits                                                       |  |                                | 3,314   |   |      |   | 4,342   |  
|Time deposits                                                                     |  |                                | 8,354   |   |      |   | (6,628  | )
|Proceeds from borrowings                                                          |  |                                | 5,000   |   |      |   | 8,000   |  
|Curtailments of borrowings                                                        |  |                                | (8,200  | ) |      |   | (1,188  | )
|Dividends paid                                                                    |  |                                | (372    | ) |      |   | (387    | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net Cash Provided by Financing Activities                                         |  |                                | 8,096   |   |      |   | 4,139   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and Cash Equivalents                                                         |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                                | (823    | ) |      |   | (1,803  | )
|Cash and Cash Equivalents, beginning of year                                      |  |                                | 9,896   |   |      |   | 7,579   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and Cash Equivalents, End of Period                                          |  | $                              | 9,073   |   |      | $ | 5,776   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Supplemental Disclosure of Cash Paid                                              |  |                                |         |   |      |   |         |  
|During the Period for:                                                            |  |                                |         |   |      |   |         |  
|Interest                                                                          |  | $                              | 1,547   |   |      | $ | 1,674   |  
|Income taxes                                                                      |  | $                              | 303     |   |      | $ | 406     |  



See Notes to
Consolidated Financial Statements



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 ACCOUNTING PRINCIPLES:



The consolidated financial statements conform to accounting principles generally accepted in
the United States of America and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position as of September 30, 2005 and the results of operations for the three-month periods and year to date periods ended September 30, 2005 and September 30, 2004. The notes included herein should be read in
conjunction with the notes to consolidated financial statements included in the 2004 annual report to stockholders of Pioneer Bankshares, Inc. (the Company) and its Form 10-KSB for the year ended December 31, 2004, as filed with the
Securities and Exchange Commission.



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



Stock Compensation Plans - The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. The following
table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of the Financial Account Standards Boards Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based compensation: (dollars in thousands except per share amounts):



|                                                                                                 |  |                                        |      |   |      |   |       |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ---- | - | ---- | - | ----- | -
|                                                                                                 |  | For the Nine Months EndedSeptember 30, |     
|                                                                                                 |  | 2005                                   |      |   | 2004 |  
|Net Income, as reported                                                                          |  | $                                      | 949  |   |      | $ | 1,221 |  
|Total stock-based compensation expenses determined under fair value based method for all rewards |  |                                        | (1   | ) |      |   | (1    | )
|                                                                                                 |  |                                        |      |   |      |   |       |  
|Pro forma net income                                                                             |  | $                                      | 948  |   |      | $ | 1,220 |  
|                                                                                                 |  |                                        |      |   |      |   |       |  
|Basic earnings per share                                                                         |  |                                        |      |   |      |   |       |  
|As reported                                                                                      |  | $                                      | 0.92 |   |      | $ | 1.14  |  
|                                                                                                 |  |                                        |      |   |      |   |       |  
|Pro forma                                                                                        |  | $                                      | 0.92 |   |      | $ | 1.14  |  
|                                                                                                 |  |                                        |      |   |      |   |       |  
|Diluted earnings per share                                                                       |  |                                        |      |   |      |   |       |  
|As reported                                                                                      |  | $                                      | 0.92 |   |      | $ | 1.14  |  
|                                                                                                 |  |                                        |      |   |      |   |       |  
|Pro forma                                                                                        |  | $                                      | 0.92 |   |      | $ | 1.14  |  
|                                                                                                 |  |                                        |      |   |      |   |       |  



The fair value of each grant is
estimated at the grant date using the Black-Scholes option-pricing model. The estimates were calculated using the following weighted-average assumptions for grants in 2005 and 2004: Dividend rate of 3.22% and 3.43%, price volatility of 14.97% and
19.94%, risk-free interest rate of 4.11% and 4.81%, and expected lives of 10 years.



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NOTE 2 INVESTMENT SECURITIES:



The amounts at which investment securities are carried in the consolidated balance sheets and their approximate market values at
September 30, 2005 and December 31, 2004 follows:



|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|------------------------------------ |  | ------------------ | ------ | ----------------- | - | ------------- |  | ----------- | ------ |  | - | ------
|                                     |  | (In Thousands)    
|                                     |  | September 30, 2005 |        | December 31, 2004
|                                     |  | CarryingValue      |        | MarketValue       |   | CarryingValue |  | MarketValue
|Securities held to maturity:         |  |                    |        |                   |   |               |  |             |        |  |   |       
|Mortgage-backed securities           |  | $                  | 10     |                   | $ | 11            |  | $           | 16     |  | $ | 16    
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $                  | 10     |                   | $ | 11            |  | $           | 16     |  | $ | 16    
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|Securities available for sale:       |  |                    |        |                   |   |               |  |             |        |  |   |       
|U.S. Treasury and agency obligations |  | $                  | 15,368 |                   | $ | 15,252        |  | $           | 10,154 |  | $ | 10,078
|Municipal securities                 |  |                    | 214    |                   |   | 223           |  |             | 214    |  |   | 229   
|Equity securities                    |  |                    | 1,063  |                   |   | 1,194         |  |             | 1,794  |  |   | 2,024 
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $                  | 16,645 |                   | $ | 16,669        |  | $           | 12,162 |  | $ | 12,331
|                                     |  |                    |        |                   |   |               |  |             |        |  |   |       



As of September 30, 2005, there
were 6 investment securities that have been at a loss position for 12 consecutive months or more and 6 additional securities that have been in a loss position for less than one year. Management has the intent and ability to hold securities to the
scheduled maturity or call date, and considers any current market value losses to be temporary. One factor considered in the determination and evaluation of temporary losses is credit quality of the issuer. Managements conclusion for this
reporting period is that the temporary losses are the result of current economic conditions and market interest rate change. The temporary losses are not considered to be related to credit quality.



|The | schedule of losses on the securities as of September 30, 2005, is as follows:
|--- | -----------------------------------------------------------------------------



|                  |  |                   |  |                                |       |   |                           |   |     |       |  |   |       |  
|----------------- |  | ----------------- |  | ------------------------------ | ----- | - | ------------------------- | - | --- | ----- |  | - | ----- | -
|                  |  |                   |  | (In Thousands)                 |       |   |                           |  
|                  |  |                   |  | US GovernmentAgency Securities |       |   | Mortgage-BackedSecurities |   |     | Total | 
|Less than 12 Mths |  | Fair Value        |  | $                              | 3,967 |   |                           | $ | 377 |       |  | $ | 4,344 |  
|                  |  |                   |  |                               
|                  |  | Unrealized Losses |  |                                | (43   | ) |                           |   | (7  | )     |  |   | (50   | )
|More than 12 Mths |  | Fair Value        |  | $                              | 4,729 |   |                           | $ | 181 |       |  | $ | 4,910 |  
|                  |  |                   |  |                               
|                  |  | Unrealized Losses |  |                                | (61   | ) |                           |   | (5  | )     |  |   | (66   | )
|Total             |  | Fair Value        |  | $                              | 8,696 |   |                           | $ | 558 |       |  | $ | 9,254 |  
|                  |  | Unrealized Losses |  |                                | (104  | ) |                           |   | (12 | )     |  |   | (116  | )



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NOTE 2 INVESTMENT SECURITIES: (cont)



As of December 31, 2004, there were 10 securities in the portfolio that have losses, which are considered to be temporary. The schedule
of losses on these securities is as follows:



|                  |  |                   |  |                                |       |   |                           |   |     |       |  |   |       |  
|----------------- |  | ----------------- |  | ------------------------------ | ----- | - | ------------------------- | - | --- | ----- |  | - | ----- | -
|                  |  |                   |  | (In Thousands)                 |       |   |                           |  
|                  |  |                   |  | US GovernmentAgency Securities |       |   | Mortgage-BackedSecurities |   |     | Total | 
|Less than 12 Mths |  | Fair Value        |  | $                              | 7,778 |   |                           |   |    |       |  | $ | 7,778 |  
|                  |  | Unrealized Losses |  |                                | (76   | ) |                           |   |    |       |  |   | (76   | )
|                  |  |                   |  |                               
|More than 12 Mths |  | Fair Value        |  |                                |      |   |                           | $ | 254 |       |  | $ | 254   |  
|                  |  | Unrealized Losses |  |                                |      |   |                           |   | (3  | )     |  |   | (3    | )
|                  |  |                   |  |                               
|Total             |  | Fair Value        |  | $                              | 7,778 |   |                           | $ | 254 |       |  | $ | 8,032 |  
|                  |  | Unrealized Losses |  |                                | (76   | ) |                           |   | (3  | )     |  |   | (79   | )



NOTE 3 LOANS:



Loans outstanding are summarized as follows:



|                                 |  |                   |         |   |                  |   |        |  
|-------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------ | -
|                                 |  | (In Thousands)    |        
|                                 |  | September 30,2005 |         |   | December 31,2004 |  
|Mortgage loans on real estate    |  |                   |         |   |                  |   |        |  
|Construction loans               |  | $                 | 10,042  |   |                  | $ | 7,193  |  
|Agricultural                     |  |                   | 4,094   |   |                  |   | 4,607  |  
|Equity lines of credit           |  |                   | 1,679   |   |                  |   | 1,738  |  
|Residential 1-4 family           |  |                   | 42,805  |   |                  |   | 41,125 |  
|Second Mortgages                 |  |                   | 3,573   |   |                  |   | 3,305  |  
|Multifamily                      |  |                   | 3,301   |   |                  |   | 1,853  |  
|Commercial                       |  |                   | 20,887  |   |                  |   | 17,046 |  
|                                 |  |                   |         |   |                  |   |        |  
|Total real estate loans          |  |                   | 86,381  |   |                  |   | 76,867 |  
|                                 |  |                  
|Commercial and industrial loans  |  |                   | 4,998   |   |                  |   | 3,548  |  
|Consumer installment loans       |  |                   |         |   |                  |   |        |  
|Personal                         |  |                   | 14,924  |   |                  |   | 13,641 |  
|Credit cards                     |  |                   | 611     |   |                  |   | 729    |  
|                                 |  |                   |         |   |                  |   |        |  
|Total consumer installment loans |  |                   | 15,535  |   |                  |   | 14,370 |  
|All other loans                  |  |                   | 158     |   |                  |   | 166    |  
|                                 |  |                   |         |   |                  |   |        |  
|Gross Loans                      |  |                   | 107,072 |   |                  |   | 94,951 |  
|                                 |  |                  
|Less unearned income on loans    |  |                   | (1,358  | ) |                  |   | (1,322 | )
|                                 |  |                   |         |   |                  |   |        |  
|Loans, less unearned discount    |  |                   | 105,714 |   |                  |   | 93,629 |  
|                                 |  |                  
|Less allowance for loan losses   |  |                   | (1,291  | ) |                  |   | (1,346 | )
|                                 |  |                   |         |   |                  |   |        |  
|Net Loans Receivable             |  | $                 | 104,423 |   |                  | $ | 92,283 |  
|                                 |  |                   |         |   |                  |   |        |  



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NOTE 4 ALLOWANCE FOR LOAN LOSSES:



A summary of transactions in the allowance for loan losses for the nine months ended September 30,
2005 and 2004 follows:



|                                        |  |                |       |   |      |   |       |  
|--------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                        |  | (In Thousands) |      
|                                        |  | 2005           |       |   | 2004 |  
|Balance, beginning of period            |  | $              | 1,346 |   |      | $ | 1,433 |  
|Provision charged to operating expenses |  |                | 273   |   |      |   | 62    |  
|Recoveries of loans charged off         |  |                | 222   |   |      |   | 381   |  
|Loans charged off                       |  |                | (550  | ) |      |   | (412  | )
|                                        |  |                |       |   |      |   |       |  
|Balance, End of Period                  |  | $              | 1,291 |   |      | $ | 1,464 |  
|                                        |  |                |       |   |      |   |       |  



NOTE 5 EARNINGS PER SHARE:



The following shows the weighted average number of shares as of
September 30, 2005 and 2004, 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.



|                               |  |                    |  |                    |      |        |           |                 |   |     
|------------------------------ |  | ------------------ |  | ------------------ | ---- | ------ | --------- | --------------- | - | ----
|                               |  | September 30, 2005 |  | September 30, 2004
|                               |  | Shares             |  | Per ShareAmount    |      | Shares |           | Per ShareAmount
|Basic earnings per share       |  | 1,034,045          |  | $                  | 0.92 |        | 1,073,650 |                 | $ | 1.14
|                               |  |                    |  |                    |      |        |           |                 |   |     
|Effect of dilutive securities: |  |                    |  |                    |      |        |           |                 |   |     
|Stock Options                  |  | 1,208              |  |                    |      |        | 1,055     |                 |   |     
|                               |  |                    |  |                    |      |        |           |                 |   |     
|Diluted earnings per share     |  | 1,035,253          |  | $                  | 0.92 |        | 1,074,705 |                 | $ | 1.14
|                               |  |                    |  |                    |      |        |           |                 |   |     



There were no stock options that had
an anti-dilutive effect on the earnings per share calculation as of September 30, 2005.



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NOTE 6 OTHER EXPENSES:



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



|                      |  |                |       |      |   |      
|--------------------- |  | -------------- | ----- | ---- | - | -----
|                      |  | September 30, 
|                      |  | 2005           |       | 2004
|                      |  | (In Thousands)
|Director Fees         |  | $              | 135   |      | $ | 124  
|Insurance Expense     |  |                | 71    |      |   | 48   
|Professional Fees     |  |                | 174   |      |   | 59   
|Postage Expense       |  |                | 54    |      |   | 47   
|Supplies and Printing |  |                | 102   |      |   | 104  
|Telephone Expense     |  |                | 106   |      |   | 89   
|Other                 |  |                | 527   |      |   | 538  
|                      |  |                |       |      |   |      
|Total                 |  | $              | 1,169 |      | $ | 1,009
|                      |  |                |       |      |   |      



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



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



Forward-Looking Statements



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



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



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Overview



In the first nine months of 2005, net income including securities transactions was $949,000 ($0.92 per share) compared with $1,221,000
($1.14 per share) for the first nine months of 2004. This represents a decrease of $272,000 or approximately 22.27%. The decrease in net income can be accounted for primarily in the category of gains on securities transactions and provision for loan
losses. Total gains on securities as of September 30, 2005 were $119,000 compared to gains in the same period last year of $226,000. This decrease of $107,000 had a net tax effect on income of approximately $71,000. The provision for loan loss
expense has increased by approximately $211,000 over the same period last year. This increase had a net tax effect on income of approximately $139,000, which accounts for approximately 51.10% of the overall decrease in net income compared to the
prior year.



Total assets for the Company as of September 30, 2005 were
$142.4 million compared to $133.3 million at year-end 2004. This is an increase of approximately $9.1 million or 6.83%. Total net loans have increased from $92.3 million as of December 31, 2004 to $104.4 million as of September 30, 2005.
This represents an increase of $12.1 million or 13.16%. The majority of this increase in loans is in the area of commercial and residential real estate properties.



Total liabilities for the Company as of September 30, 2005 were $128.4 million compared to $119.7 million at year-end 2004. This
represents an increase of approximately $8.6 million or 7.21%. The primary increases in liability accounts have been in time deposits. Time deposits increased by $8.4 million during the first nine months of 2005 or 18.26%.



The Companys total capital position remains strong and exceeds regulatory guidelines.
As of September 30, 2005, total capital was $14.0 million.



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



Critical Accounting Policies



General



The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained
within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained
either when earning income, recognizing an expense, recovering an asset, or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ
significantly from the historical factors. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our
transactions could change.



Allowance for Loan Losses



The allowance for loan losses is an estimate of the losses that may be sustained in our loan
portfolio. The allowance is based on two basis principles of accounting: 1) Statement of Financial Accounting Standard (SFAS) 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and
estimatable and 2) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the
market and the loan balance.



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##### Table of Contents

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



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



Goodwill



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



Goodwill is included in other assets and totaled $360,000 at September 30, 2005 and December 31, 2004. The goodwill is no longer amortized, but instead is tested for impairment at least annually.



Results of Operations



Net Interest Income



Total interest income increased by $460,000 or 7.89% in the first nine months of 2005
compared to the first nine months of 2004. Total interest expense increased $311,000 or 23.23% in the first nine months of 2005 compared to the same period of 2004. The increases in interest income and interest expense resulted in a total overall
increase in net interest income of $149,000 or 3.32% for the period ending September 30, 2005 compared to the period ending September 30, 2004. The net interest margin decreased from 5.32% for the first nine months of 2004 to 4.95% for the
first nine months of 2005. Managements decision to focus on commercial and residential real estate lending as opposed to higher yielding consumer loans, as well as the increased market interest rates on deposits and borrowings were the main
contributors to the decrease in net interest margin. The average yield on earning assets decreased from 6.90% as of September 30, 2004 to 6.70% as of September 30, 2005.



The average interest rate being paid on time deposits increased from 2.52% as of September 30, 2004 to 2.89% as of September 30,
2005. The banks overall average cost of funds has increased from 2.06% as of September 30, 2004 to 2.31% as of September 30, 2005. These increases in funding costs are directly related to the recent increases in market interest rates
and the increased deposit volume during the reporting period.



The Company
plans to continue its efforts to expand the commercial loan and residential real estate portfolios during the remainder of 2005. The Company will also continue to offer consumer installment loans to its customer base.



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##### Table of Contents

Noninterest Income



In the first nine months of 2005 non-interest income decreased by $96,000 when compared to the same period last year. Gains on securities
transactions in the prior year were $226,000 as compared to only $119,000 for the period ending September 30, 2005. This represents a decrease of $107,000 or 47%. Security gains are generally infrequent in nature and are considered
non-recurring income. Service charge income decreased by $35,000, while other income increased by $46,000. The decrease in service charge income is attributed to managements proactive approach to reducing overdrafts and increased regulatory
requirements relating to bounce protection products for consumer checking accounts. The increase in other income consists primarily of a one-time gain of approximately $18,000 from the sale of other real estate property, which was obtained through
foreclosure proceedings. The other income for the first nine months of 2004 included a one-time loss of approximately $25,000, which was associated with the sale of other assets.



Noninterest Expense



For the first nine months of 2005, non-interest expense increased $131,000 (7.08%) in comparison to the first nine months of 2004.
Salaries and benefits increased by $107,000 due to regular payroll adjustments and cost of living increases. Occupancy expenses increased $18,000 and equipment expense decreased by approximately $39,000. Additionally, other expenses increased by
$160,000. The primary factor included in other expenses is an increase in professional fee expense of $115,000. The increase in professional fees is related to new regulatory requirements under the Sarbanes Oxley Act of 2002, section 404 (SOX 404),
which mandates extensive documentation of internal controls and also requires testing of controls on an on-going basis. The bank has contracted with an outside consultant to assist with compliance requirements of SOX 404 and has accrued expenses
accordingly to cover the costs related to this project. However, due to recent changes in the mandated timeline for full implementation of this regulatory requirement, the bank will not incur expenses for this project during the remainder of 2005.
Expense accruals relating to SOX 404 will resume in 2006.



Financial
Condition



Securities



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



As of September 30, 2005, the net amortized cost of securities
available for sale was approximately $24,000 less than the stated market value as shown in note 2 of the financial statements included in this report. Management has traditionally held debt securities until maturity and thus it does not expect the
fluctuation in the value of these securities to have a material impact on earnings.



Investments in securities, including those which were restricted, increased by approximately $4.2 million during the first nine months of 2005. 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, 6.39% (based on market value) are invested in equities, some of which are dividend producing and subject to the corporate dividend exclusion for
taxation purposes. The Company believes these investments offer adequate returns and/or have the potential for increases in value.



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##### Table of Contents

Loan Portfolio



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



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



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



In the first nine months of 2005, net loans increased by $12.1 million
or 13.16%, as a result of managements proactive efforts to add volume in the commercial and residential real estate sectors of the lending portfolio. The Company has taken measures to reduce the risk exposure related to consumer and automobile
financing during the past two years and continues to monitor its progress in this area. A schedule of loans by type is shown in a note to the consolidated financial statements included in this report.



The risk elements in lending activities include non-accrual loans, loans 90 days or more past
due and restructured loans. Non-accrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans on which the original interest rate or repayment terms have changed due to financial
hardship. Non-accrual loans and loans 90 days or more past due totaled $212,000 at September 30, 2005 compared to $673,000 at September 30, 2004. This represents a decrease of $461,000 and is mainly due to managements continued
proactive collection efforts. These collection efforts have resulted in past due customers bringing their accounts current. Management continually monitors non-accrual accounts and all non-performing assets in order to promptly identify any loss
allocations that should be made. Although the potential exists for additional losses, management believes the Bank is generally well secured and continues to actively work with these customers to effect payment.



Impaired loans are those loans which have been identified by management as problem credits
due to various circumstances concerning the borrowers financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a nonaccrual classification, however, management has classified these
accounts as impaired and is monitoring the circumstances and payment status closely. In most cases, a specific allocation to the Banks allowance for loan loss is made for an impaired loan. The total amount of impaired loans as of
September 30, 2005 was $470,000 compared to $488,000 at September 30, 2004. Based on current collateral values, management has identified potential losses relating to impaired loans of approximately $110,000 as of September 30, 2005.
Specific valuation allowances have been made as a precautionary measure to cover these potential losses.



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Problem loans (serious doubt loans) are loans whereby information known by management indicates that the borrower may not
be able to comply with present payment terms. Management was not aware of any problem loans at September 30, 2005 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. Additional allocation factors relating to identified loan concentrations, unfunded
commitments, and loan growth trends are also included in the calculation of the adequacy of the loan loss reserve. The periodic review of the allowance for loan loss and funding provision considers concentrations of loans in terms of geography,
business type or level of risk. Management evaluates the risk elements involved in loans relative to collateral values and maintains the allowance for loan losses at a level which is adequate to absorb credit losses considered to be inherent in the
loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about
information available to them at the time of their examination.



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



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



The allowance for loan loss balance of $1,291,000 at September 30, 2005 decreased by $55,000 from its level at December 31, 2004. The decrease in the allowance account is deemed to be within an acceptable range based on
managements evaluation of the losses inherent in the loan portfolio at the end of this reporting period. The evaluation of the allowance for loan loss account for the period ending September 30, 2005 included specific allocations for
certain borrowers, whose payment performance and collateral values have recently shown improvement. These specific allocations are expected to be reduced in future allowance calculations and were a factor in managements conclusions concerning
the adequacy of the loan loss reserves at September 30, 2005. 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.



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The cumulative balance in the allowance for loan loss account was equal to 1.22% and 1.44% of total loans at
September 30, 2005 and December 31, 2004, respectively. The decrease in the overall allowance percentage has been primarily impacted by the Banks recent loan growth trend in commercial and residential real estate loans. These loans
are classified at a relatively low risk factor based on historical loss data. The Banks continued recoveries on prior period charge offs is another factor, which has effected the decrease in the banks allowance ratio. Additionally,
management has implemented changes to its internal loan policy and has tightened credit criteria, which has improved credit quality. Managements evaluation of the allowance for loan losses for the periods ending September 30, 2005 and
December 31, 2004 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 and Equipment



The Bank has been in the process of renovating the Jenkins building
during the past eighteen months, and is pleased to report that as of September 30, 2005, this project was nearly complete. The Jenkins building is located next to the main branch office in Stanley, Virginia. The renovations consisted of
extensive remodeling to the upper floor of this facility. The primary purpose of this facility is to house the Companys data processing and technology operations department, as well as the bookkeeping department. As of September 30, 2005,
the expenditures relating to this renovation project totaled $818,000.



The
Company opened a new office facility in the Charlottesville, Virginia area on March 21, 2005. This new branch facility serves primarily as a loan production office for commercial and business accounts. The annual lease amount for this new
facility is approximately $20,000. Managements decision to expand into the Charlottesville and Albermarle County area of Virginia is based on potential loan growth opportunities.



The Company may also be required to purchase additional processing equipment in conjunction with the implementation of the Check Truncation
Act of the 21stCentury (Check 21), which became effective October 28, 2004. This Act is expected
to have an impact on all financial institutions in the coming months by creating an electronic means of clearing checks. The estimated costs of equipment and check processing software related to Check 21 are expected to be approximately $35,000.



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



Deposits



The Companys main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Companys service area. Deposit accounts include demand deposits,
savings, money market and certificates of deposit. The Companys total deposit portfolio has historically remained relatively stable. During the first nine months of 2005, total deposits increased by $11.7 million or 11.58%. This increase was
mainly in the area of time deposits. This increase is believed to be the result of consumer demand for higher income opportunities on interest bearing accounts in the current rising interest rate environment.



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##### Table of Contents

Long Term Debt



The Companys subsidiary has a line of credit with the Federal Home Loan Bank of Atlanta (FHLB) upon which credit advances can be made up to 40% of total assets,
subject to certain eligibility requirements. As of September 30, 2005, total borrowings were $15.1 million compared to $18.3 million at December 31, 2004. This represents a decrease of $3.2 million or 17.49%. The decrease in borrowings for
this period is the result of paying down short-term funding, as well as, normal curtailments on long term debt. The Bank utilizes borrowings periodically as a source of funds for loan growth and other investment opportunities in order to maintain a
profitable interest spread. Long-term borrowings are generally matched with maturities of specific groups of loans, and are normally advanced for a 5 year term.



Capital



The Company maintains a strong capital base as support for possible future expansion, to promote public confidence, to support operations and for continued growth at a manageable level. As of September 30, 2005
and December 31, 2004, the Companys total capital-to-total asset ratios were 9.85% and 10.16%, respectively. The Companys capital ratios exceed regulatory minimums. Earnings have been sufficient to allow for dividends to be declared
on a quarterly basis and management has no reason to believe this payment schedule will not continue.



Liquidity



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



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



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



Liquidity as
of September 30, 2005 remains adequate and within policy guidelines.



Interest Rate Sensitivity



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



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



Table II contains an analysis, which shows the re-pricing opportunities of earning assets and interest bearing liabilities as of September 30, 2005.



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##### Table of Contents

As of September 30, 2005, the Company had a cumulative Gap Rate Sensitivity Ratio of (24.65%) for the one year
re-pricing period, compared with (26.86%) at December 31, 2004. This negative gap position generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets.
Conversely, earnings would probably decrease in periods during which interest rates are increasing. However, in actual practice, this may not be the case as deposits may not re-price concurrently with changes in rates within the general economy.
Management constantly monitors the Companys interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.



Recent Accounting Pronouncements



In May 2005, the Financial Accounting Standards Board (FASB) issued
Statement No. 154, (SFAS No. 154) Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. The new standard changes the requirements for the accounting for
and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting
principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected
by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a restatement.  The new standard is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not anticipate this revision will have a material effect on its financial statements.



On December 16, 2004, FASB issued Statement No. 123R (revised 2004), Share-Based Payment, (FAS 123R) that addresses the accounting for share-based
payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the
issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized
as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual periods beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Corporations results
of operations at the present time.



In March 2005, the SEC issued Staff
Accounting Bulleting No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staffs view regarding the valuation of share-based
payment arrangements for public companies. SAB 107 does not impact the Companys results of operations at the present time.



In November 2004, the Emerging Issues Task Force (EITF) published Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The Task Force discussed the meaning of other-than-temporary impairment and its application to certain investments carried at cost. The Task Force requested that the FASB staff consider other impairment models within U.S.
Generally Accepted Accounting Principles (GAAP) when developing its views. The Task Force also requested that the scope of the impairment issue be expanded to include equity investments and investments subject to FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and that the issue be addressed by the Task Force as a separate EITF issue. At the EITF meeting, the Task Force reached a consensus on one issue that certain
quantitative and qualitative disclosures should be required for securities accounted for under Statement 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The Board ratified the
consensus on that one issue at its November 25, 2004 meeting. In September 2004, the Financial Accounting Standards Board (FASB) directed the FASB staff to issue two proposed FASB Staff Positions (FSP): Proposed FSP
EITF Issue 03-1-a, which provides guidance for the



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##### Table of Contents

application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of interest rate and/or
sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the effective date of Issue 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases. In June 2005, the FASB reached a decision
whereby they declined to provide additional guidance on the meaning of other-than-temporary impairment. The Board directed the FASB staff to issue EITF 03-1a as final and to draft a new FSP that will replace EITF 03-01. The final FSP (retitled FAS
115-1, The Meaning of Other-Than-Temporary Impairment and it Application to Certain Investments) would be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company
does not anticipate this revision will have a material effect on its 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.



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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)



|                                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|---------------------------------- |  | ----------------------------------- | ------- | -------------- | ----------------------------------- | ----- |  | ----- | -------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Nine Months EndedSeptember 30, 2005 |         |                | Nine Months EndedSeptember 30, 2004 |      
|                                   |  | AverageBalance                      |         | Income/Expense |                                     | Rates |  |       | AverageBalance |  | Income/Expense |         | Rates |  
|Interest Income                    |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Loans1                             |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Commercial                         |  | $                                   | 3,762   |                | $                                   | 221   |  | 7.83  | %              |  | $              | 2,909   |       | $ | 165   |  | 7.56  | %
|Real estate                        |  |                                     | 80,739  |                |                                     | 4,090 |  | 6.75  | %              |  |                | 70,465  |       |   | 3,741 |  | 7.08  | %
|Installment                        |  |                                     | 13,595  |                |                                     | 1,297 |  | 12.72 | %              |  |                | 12,968  |       |   | 1,355 |  | 13.93 | %
|Credit Card                        |  |                                     | 642     |                |                                     | 102   |  | 21.18 | %              |  |                | 718     |       |   | 115   |  | 21.36 | %
|Federal funds sold                 |  |                                     | 2,333   |                |                                     | 51    |  | 2.91  | %              |  |                | 3,063   |       |   | 22    |  | 0.96  | %
|Interest Bearing                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Deposits                           |  |                                     | 6,324   |                |                                     | 149   |  | 3.14  | %              |  |                | 7,724   |       |   | 126   |  | 2.18  | %
|Investments                        |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Taxable                            |  |                                     | 16,019  |                |                                     | 346   |  | 2.88  | %              |  |                | 12,574  |       |   | 262   |  | 2.78  | %
|Nontaxable2                        |  |                                     | 2,006   |                |                                     | 48    |  | 3.19  | %              |  |                | 2,585   |       |   | 64    |  | 3.30  | %
|                                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total earning assets               |  |                                     | 125,420 |                |                                     | 6,304 |  | 6.70  | %              |  |                | 113,006 |       |   | 5,850 |  | 6.90  | %
|                                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Interest Expense                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Demand deposits                    |  |                                     | 15,051  |                |                                     | 46    |  | 0.41  | %              |  |                | 14,173  |       |   | 40    |  | 0.38  | %
|Savings                            |  |                                     | 14,170  |                |                                     | 60    |  | 0.56  | %              |  |                | 13,706  |       |   | 58    |  | 0.56  | %
|Time deposits                      |  |                                     | 47,908  |                |                                     | 1,040 |  | 2.89  | %              |  |                | 48,250  |       |   | 911   |  | 2.52  | %
|Borrowings                         |  |                                     | 18,277  |                |                                     | 504   |  | 3.68  | %              |  |                | 10,737  |       |   | 330   |  | 4.10  | %
|                                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                                   | 95,406  |                | $                                   | 1,650 |  | 2.31  | %              |  | $              | 86,866  |       | $ | 1,339 |  | 2.06  | %
|                                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Income                |  |                                     |         |                |                                     | 4,654 |  |       |                |  |                |         |       |   | 4,511 |  |       |  
|                                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Margin                |  |                                     |         |                |                                     |       |  | 4.95  | %              |  |                |         |       |   |       |  | 5.32  | %
|                                   |  |                                     |         |                |                                     |       |  |       |                |  |                |         |       |   |       |  |       |  

---

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

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



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##### Table of Contents

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|---------------------------------- |  | ------------------------------------ | ------- | -------------- | ------------------------------------ | ----- |  | ----- | -------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                                   |  | Three Months EndedSeptember 30, 2005 |         |                | Three Months EndedSeptember 30, 2004 |      
|                                   |  | AverageBalance                       |         | Income/Expense |                                      | Rates |  |       | AverageBalance |  | Income/Expense |         | Rates |  
|Interest Income                    |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Loans1                             |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Commercial                         |  | $                                    | 4,126   |                | $                                    | 82    |  | 7.95  | %              |  | $              | 2,898   |       | $ | 57    |  | 7.87  | %
|Real estate                        |  |                                      | 83,753  |                |                                      | 1,413 |  | 6.75  | %              |  |                | 74,994  |       |   | 1,312 |  | 7.00  | %
|Installment                        |  |                                      | 14,485  |                |                                      | 448   |  | 12.37 | %              |  |                | 13,450  |       |   | 441   |  | 13.12 | %
|Credit card                        |  |                                      | 612     |                |                                      | 32    |  | 20.92 | %              |  |                | 689     |       |   | 37    |  | 21.48 | %
|Federal funds sold                 |  |                                      | 3,586   |                |                                      | 31    |  | 3.46  | %              |  |                | 1,449   |       |   | 4     |  | 1.10  | %
|Interest Bearing                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Deposits                           |  |                                      | 7,322   |                |                                      | 62    |  | 3.39  | %              |  |                | 7,351   |       |   | 41    |  | 2.23  | %
|Securities                         |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Taxable                            |  |                                      | 14,040  |                |                                      | 93    |  | 2.65  | %              |  |                | 12,062  |       |   | 96    |  | 3.18  | %
|Nontaxable2                        |  |                                      | 1,935   |                |                                      | 14    |  | 2.89  | %              |  |                | 2,113   |       |   | 14    |  | 2.65  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total earning assets               |  |                                      | 129,859 |                |                                      | 2,174 |  | 6.70  | %              |  |                | 115,990 |       |   | 2,002 |  | 6.91  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Interest Expense                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Demand deposits                    |  |                                      | 15,860  |                |                                      | 17    |  | 0.43  | %              |  |                | 14,559  |       |   | 14    |  | 0.38  | %
|Savings                            |  |                                      | 14,081  |                |                                      | 20    |  | 0.57  | %              |  |                | 14,276  |       |   | 23    |  | 0.64  | %
|Time deposits                      |  |                                      | 50,885  |                |                                      | 401   |  | 3.15  | %              |  |                | 46,200  |       |   | 281   |  | 2.44  | %
|Borrowings                         |  |                                      | 17,778  |                |                                      | 173   |  | 3.89  | %              |  |                | 10,811  |       |   | 109   |  | 4.03  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Interest Bearing Liabilities |  | $                                    | 98,604  |                | $                                    | 611   |  | 2.48  | %              |  | $              | 85,846  |       | $ | 427   |  | 1.99  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Income                |  |                                      |         |                | $                                    | 1,564 |  |       |                |  |                |         |       | $ | 1,575 |  |       |  
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Margin                |  |                                      |         |                |                                      |       |  | 4.82  | %              |  |                |         |       |   |       |  | 5.43  | %
|                                   |  |                                      |         |                |                                      |       |  |       |                |  |                |         |       |   |       |  |       |  

---

|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.
|- | ------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

TABLE II



PIONEER BANKSHARES, INC.

INTEREST
SENSITIVITY ANALYSIS

SEPTEMBER 30, 2005

(Dollar Amounts in Thousands)



|                                          |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|----------------------------------------- |  | --------- | ------- | - | ---------- | - | ------- | --------- |  | - | ----------- | - |  | ------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                          |  | 0-3Months |         |   | 4-12Months |   |         | 1-5 Years |  |   | Over 5Years |   |  | NotClassified |        |   | Total
|Uses of Funds:                            |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                          |  |           |         |   |            |  
|Loans1                                    |  | $         | 6,531   |   |            | $ | 8,841   |           |  | $ | 44,519      |   |  | $             | 45,823 |   |       | $ |       |   |  | $ | 105,714
|Interest bearing bank deposits            |  |           | 2,884   |   |            |   | 1,300   |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 4,184  
|Investment securities2                    |  |           | 6,751   |   |            |   | 4,471   |           |  |   | 4,039       |   |  |               | 224    |   |       |   | 1,194  |   |  |   | 16,679 
|Restricted stock                          |  |           |        |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   | 1,016  |   |  |   | 1,016  
|Federal funds sold                        |  |           | 300     |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 300    
|                                          |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                     |  |           | 16,466  |   |            |   | 14,612  |           |  |   | 48,558      |   |  |               | 46,047 |   |       |   | 2,210  |   |  |   | 127,893
|                                          |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Sources of Funds:                         |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                          |  |           |         |   |            |  
|Interest bearing demand deposits          |  |           | 14,516  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 14,516 
|Regular savings                           |  |           | 14,090  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 14,090 
|Certificates of deposit $100,000 and over |  |           | 1,122   |   |            |   | 6,608   |           |  |   | 4,420       |   |  |               |        |   |       |   |        |   |  |   | 12,150 
|Other certificates of deposit             |  |           | 5,972   |   |            |   | 16,498  |           |  |   | 19,493      |   |  |               |        |   |       |   |        |   |  |   | 41,963 
|Borrowings                                |  |           | 600     |   |            |   | 3,200   |           |  |   | 11,300      |   |  |               |        |   |       |   |        |   |  |   | 15,100 
|                                          |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                     |  |           | 36,300  |   |            |   | 26,306  |           |  |   | 35,213      |   |  |               | 0      |   |       |   | 0      |   |  |   | 97,819 
|                                          |  |           |         |   |            |  
|Discrete Gap                              |  |           | (19,834 | ) |            |   | (11,694 | )         |  |   | 13,345      |   |  |               | 46,047 |   |       |   | 2,210  |   |  |   | 30,074 
|                                          |  |           |         |   |            |  
|Cumulative Gap                            |  |           | (19,834 | ) |            |   | (31,528 | )         |  |   | (18,183     | ) |  |               | 27,864 |   |       |   | 30,074 |   |  |   |        
|Ratio of Cumulative                       |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Gap To Total                              |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Earning Assets at                         |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|September 30, 2005                        |  |           | -15.51  | % |            |   | -24.65  | %         |  |   | -14.22      | % |  |               | 21.79  | % |       |   | 23.51  | % |  |   |        
|                                          |  |           |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        

---

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

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



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##### Table of Contents

Item 3. Controls and Procedures



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



We have established disclosure controls and procedures to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive
officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, we evaluate the effectiveness of these disclosure controls and procedures on a
quarterly basis, and have done so as of the end of the period covered by this report. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures are adequate and effective. There were no changes in the Companys internal control over financial reporting during the nine months ended September 30, 2005 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.



Changes in Internal Controls



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



Part II - Other Information



Item 1. Legal Proceedings



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



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



The Company has a stock repurchase program authorized with 5,000 shares remaining available for repurchase. There have been no repurchase transactions during 2005.



Item 3. Defaults Upon Senior Securities



Not Applicable



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##### Table of Contents

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



None



Item 5. Other Information



|None | 
|---- | 



Item 5a. Required 8-K Disclosures



None



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



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



Item 6. Exhibits



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



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



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



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##### Table of Contents

SIGNATURES



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



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




Date: November 10, 2005



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