##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-QSB



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



For Quarterly Period Ended March 31, 2005



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



Commission File No. 0-30541



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PIONEER BANKSHARES, INC.

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



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



263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices)



(540) 778-2294

(Issuers telephone number)



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



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



|                                |  |                             
|------------------------------- |  | ----------------------------
|Class                           |  | Outstanding at May 11 , 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 March 31, 2005 and 2004                          |  | 3   
|         |  |                                                                                                        
|         |  | Consolidated Balance Sheets  March 31, 2005 and December 31, 2004                                      |  | 4   
|         |  |                                                                                                        
|         |  | Consolidated Statements of Changes in Stockholders Equity  Three Months Ended March 31, 2005 and 2004 |  | 5   
|         |  |                                                                                                        
|         |  | Consolidated Statements of Cash Flows  Three Months Ended March 31, 2005 and 2004                      |  | 6   
|         |  |                                                                                                        
|         |  | Notes to Consolidated Financial Statements                                                              |  | 7   
|         |  |                                                                                                        
|Item 2.  |  | Managements Discussion and Analysis or Plan of Operation                                               |  | 11  
|         |  |                                                                                                        
|Item 3.  |  | Controls and Procedures                                                                                 |  | 21  
|         |  |                                                                                                        
|PART II  |  | OTHER INFORMATION                                                                                       |  | 21  
|         |  |                                                                                                        
|Item 1.  |  | Legal Proceedings                                                                                       |  | 21  
|         |  |                                                                                                        
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                             |  | 21  
|         |  |                                                                                                        
|Item 3.  |  | Defaults Upon Senior Securities                                                                         |  | 21  
|         |  |                                                                                                        
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                     |  | 21  
|         |  |                                                                                                        
|Item 5.  |  | Other Information                                                                                       |  | 21  
|         |  |                                                                                                        
|Item 5a. |  | Required 8-K Disclosures                                                                                |  | 21  
|         |  |                                                                                                        
|Item 5b. |  | Changes in Procedures for Director Nomination by Security Holders                                       |  | 22  
|         |  |                                                                                                        
|Item 6.  |  | Exhibits                                                                                                |  | 22  
|         |  |                                                                                                        
|         |  | SIGNATURES                                                                                              |  | 23  



2



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##### Table of Contents

Part I - Financial Information

Item 1. Financial Statements



PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except per share data)

(UNAUDITED)



|                                                                  |  |                              |           |      |   |           |  
|----------------------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | --------- | -
|                                                                  |  | Three Months Ended March 31, |          
|                                                                  |  | 2005                         |           | 2004 |  
|Interest and Dividend Income:                                     |  |                              |           |      |   |           |  
|Loans including fees                                              |  | $                            | 1,833     |      | $ | 1,758     |  
|Interest on securities  taxable                                  |  |                              | 110       |      |   | 91        |  
|Interest on securities - nontaxable                               |  |                              | 2         |      |   | 14        |  
|Interest on deposits and federal funds sold                       |  |                              | 51        |      |   | 56        |  
|Dividends                                                         |  |                              | 15        |      |   | 14        |  
|                                                                  |  |                              |           |      |   |           |  
|Total Interest and Dividend Income                                |  |                              | 2,011     |      |   | 1,933     |  
|                                                                  |  |                              |           |      |   |           |  
|Interest Expense:                                                 |  |                              |           |      |   |           |  
|Deposits                                                          |  |                              | 340       |      |   | 355       |  
|Long term debt                                                    |  |                              | 159       |      |   | 111       |  
|                                                                  |  |                              |           |      |   |           |  
|Total Interest Expense                                            |  |                              | 499       |      |   | 466       |  
|                                                                  |  |                              |           |      |   |           |  
|Net Interest Income                                               |  |                              | 1,512     |      |   | 1,467     |  
|Provision for (recovery of) loan losses                           |  |                              | 90        |      |   | (9        | )
|                                                                  |  |                              |           |      |   |           |  
|Net interest income after provision for (recovery of) loan losses |  |                              | 1,422     |      |   | 1,476     |  
|                                                                  |  |                              |           |      |   |           |  
|Noninterest Income:                                               |  |                              |           |      |   |           |  
|Service charges and fees                                          |  |                              | 166       |      |   | 198       |  
|Other income                                                      |  |                              | 60        |      |   | 35        |  
|Gain on security transactions                                     |  |                              | 44        |      |   | 249       |  
|                                                                  |  |                              |           |      |   |           |  
|Total Noninterest Income                                          |  |                              | 270       |      |   | 482       |  
|                                                                  |  |                              |           |      |   |           |  
|Noninterest Expense:                                              |  |                              |           |      |   |           |  
|Salaries and benefits                                             |  |                              | 569       |      |   | 557       |  
|Occupancy expenses                                                |  |                              | 78        |      |   | 75        |  
|Equipment expenses                                                |  |                              | 199       |      |   | 200       |  
|Other expenses                                                    |  |                              | 387       |      |   | 326       |  
|                                                                  |  |                              |           |      |   |           |  
|Total Noninterest Expenses                                        |  |                              | 1,233     |      |   | 1,158     |  
|                                                                  |  |                              |           |      |   |           |  
|Income before Income Taxes                                        |  |                              | 459       |      |   | 800       |  
|Income Tax Expense                                                |  |                              | 155       |      |   | 270       |  
|                                                                  |  |                              |           |      |   |           |  
|Net Income                                                        |  | $                            | 304       |      | $ | 530       |  
|                                                                  |  |                              |           |      |   |           |  
|Per Share Data, basic and diluted                                 |  |                              |           |      |   |           |  
|Net income                                                        |  | $                            | 0.29      |      | $ | 0.49      |  
|                                                                  |  |                              |           |      |   |           |  
|Dividends                                                         |  | $                            | 0.12      |      | $ | 0.12      |  
|                                                                  |  |                              |           |      |   |           |  
|Weighted Average Shares Outstanding, Basic                        |  |                              | 1,034,045 |      |   | 1,073,650 |  
|                                                                  |  |                              |           |      |   |           |  
|Weighted Average Shares Outstanding, Diluted                      |  |                              | 1,035,201 |      |   | 1,074,637 |  
|                                                                  |  |                              |           |      |   |           |  



See Notes to
Consolidated Financial Statements



3



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)



|                                                                                     |  |               |         |                 |   |        
|------------------------------------------------------------------------------------ |  | ------------- | ------- | --------------- | - | -------
|                                                                                     |  | March 31,2005 |         | December 312004
|                                                                                     |  | (Unaudited)   |         | (Audited)      
|ASSETS                                                                               |  |               |         |                 |   |        
|                                                                                     |  |              
|Cash and due from banks                                                              |  | $             | 6,265   |                 | $ | 9,896  
|Federal funds sold                                                                   |  |               | 100     |                 |   | 950    
|Interest bearing deposits in banks                                                   |  |               | 5,216   |                 |   | 10,480 
|Securities available for sale, at fair value                                         |  |               | 18,422  |                 |   | 12,331 
|Securities held to maturity                                                          |  |               | 14      |                 |   | 16     
|Restricted securities                                                                |  |               | 1,101   |                 |   | 1,181  
|Loans receivable, net of allowance for loan losses of $1,381 and $1,346 respectively |  |               | 93,807  |                 |   | 92,283 
|Premises and equipment, net                                                          |  |               | 4,269   |                 |   | 4,150  
|Accrued interest receivable                                                          |  |               | 515     |                 |   | 491    
|Other assets                                                                         |  |               | 1,406   |                 |   | 1,487  
|                                                                                     |  |               |         |                 |   |        
|Total Assets                                                                         |  | $             | 131,115 |                 | $ | 133,265
|                                                                                     |  |               |         |                 |   |        
|LIABILITIES                                                                          |  |               |         |                 |   |        
|                                                                                     |  |              
|Deposits                                                                             |  |               |         |                 |   |        
|Noninterest bearing demand                                                           |  | $             | 24,380  |                 |   | 26,194 
|Interest bearing                                                                     |  |               |         |                 |   |        
|Demand                                                                               |  |               | 15,067  |                 |   | 14,890 
|Savings                                                                              |  |               | 13,931  |                 |   | 13,954 
|Time deposits over $100,000                                                          |  |               | 9,045   |                 |   | 8,236  
|Other time deposits                                                                  |  |               | 37,303  |                 |   | 37,523 
|                                                                                     |  |               |         |                 |   |        
|Total Deposits                                                                       |  |               | 99,726  |                 |   | 100,797
|                                                                                     |  |              
|Accrued expenses and other liabilities                                               |  |               | 731     |                 |   | 631    
|Long term debt                                                                       |  |               | 17,000  |                 |   | 18,300 
|                                                                                     |  |               |         |                 |   |        
|Total Liabilities                                                                    |  |               | 117,457 |                 |   | 119,728
|                                                                                     |  |               |         |                 |   |        
|STOCKHOLDERS EQUITY                                                                 |  |               |         |                 |   |        
|Common stock; $.50 par value, authorized 5,000,000, outstanding 1,034,045            |  |               | 517     |                 |   | 517    
|Retained earnings                                                                    |  |               | 13,098  |                 |   | 12,918 
|Accumulated other comprehensive income, net                                          |  |               | 43      |                 |   | 102    
|                                                                                     |  |               |         |                 |   |        
|Total Stockholders Equity                                                           |  |               | 13,658  |                 |   | 13,537 
|                                                                                     |  |               |         |                 |   |        
|Total Liabilities and Stockholders Equity                                           |  | $             | 131,115 |                 | $ | 133,265
|                                                                                     |  |               |         |                 |   |        



See Notes to
Consolidated Financial Statements



4



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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                                                                              |  |             |     |                  |   | 530    |                                     |  |   |       |   |  |   | 530    |  
|Changes in unrealized gains on securities, net of taxes                                 |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Unrealized holding gains (losses) arising during the period (net of tax effect $34)     |  |             |     |                  |   |        |                                     |  |   | 76    |   |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $85) |  |             |     |                  |   |        |                                     |  |   | (164  | ) |  |   | (88    | )
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                     |  |   |       |   |  |   | 442    |  
|                                                                                        |  |             |     |                 
|Cash Dividends                                                                          |  |             |     |                  |   | (129   | )                                   |  |   |       |   |  |   | (129   | )
|Retirement of common stock                                                              |  |             |    |                  |   |       |                                     |  |   |      |   |  |   |       |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|BALANCE MARCH 31, 2004                                                                  |  |             | 537 |                  |   | 12,865 |                                     |  |   | 76    |   |  |   | 13,478 |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|BALANCE DECEMBER 31, 2004                                                               |  |             | 517 |                  |   | 12,918 |                                     |  |   | 102   |   |  |   | 13,537 |  
|                                                                                        |  |             |     |                 
|Comprehensive Income                                                                    |  |             |     |                  |   | 304    |                                     |  |   |       |   |  |   | 304    |  
|Net Income                                                                              |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Changes in unrealized gains (losses) on securities, net of taxes                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $19)           |  |             |     |                  |   |        |                                     |  |   | (30   | ) |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of 15)  |  |             |     |                  |   |        |                                     |  |   | (29   | ) |  |   | (59    | )
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                              |  |             |     |                  |   |        |                                     |  |   |       |   |  |   | 13,782 |  
|                                                                                        |  |             |     |                 
|Cash Dividends                                                                          |  |             |     |                  |   | (124   | )                                   |  |   |       |   |  |   | (124   | )
|Retirement of common stock                                                              |  |             |    |                  |   |       |                                     |  |   |      |   |  |   |       |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  
|BALANCE MARCH 31, 2005                                                                  |  | $           | 517 |                  | $ | 13,098 |                                     |  | $ | 43    |   |  | $ | 13,658 |  
|                                                                                        |  |             |     |                  |   |        |                                     |  |   |       |   |  |   |        |  



See Notes to
Consolidated Financial Statements



5



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)



|                                                                                  |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Three Months Ended March 31, |       
|                                                                                  |  | 2005                         |        |   | 2004 |  
|Cash Flows from Operating Activities:                                             |  |                              |        |   |      |   |        |  
|Net income                                                                        |  | $                            | 304    |   |      | $ | 530    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |        |   |      |   |        |  
|Provision for loan losses                                                         |  |                              | 90     |   |      |   | (9     | )
|Depreciation and amortization                                                     |  |                              | 125    |   |      |   | 135    |  
|Gain on sale of securities                                                        |  |                              | (44    | ) |      |   | (249   | )
|Net amortization on securities                                                    |  |                              | 28     |   |      |   | 23     |  
|Net change in:                                                                    |  |                              |        |   |      |   |        |  
|Accrued interest receivable                                                       |  |                              | (24    | ) |      |   | 28     |  
|Other assets                                                                      |  |                              | 115    |   |      |   | 62     |  
|Accrued expense and other liabilities                                             |  |                              | 100    |   |      |   | (77    | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Net Cash Provided by Operating Activities                                         |  |                              | 694    |   |      |   | 443    |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash Flows from Investing Activities:                                             |  |                              |        |   |      |   |        |  
|Net change in federal funds sold                                                  |  |                              | 850    |   |      |   | 1,250  |  
|Net change in interest bearing deposits                                           |  |                              | 5,264  |   |      |   | (2,900 | )
|Net change in restricted securities                                               |  |                              | 80     |   |      |   | (90    | )
|Proceeds from maturities and sales of securities available for sale               |  |                              | 425    |   |      |   | 7,251  |  
|Proceeds from maturities and calls of securities held to maturity                 |  |                              | 2      |   |      |   | 8      |  
|Purchase of securities available for sale                                         |  |                              | (6,593 | ) |      |   | (6,211 | )
|Net (increase) decrease in loans                                                  |  |                              | (1,614 | ) |      |   | (2,539 | )
|Purchase of bank premises and equipment                                           |  |                              | (244   | ) |      |   | (64    | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Net Cash Used in Investing Activities                                             |  |                              | (1,830 | ) |      |   | (3,295 | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash Flows from Financing Activities:                                             |  |                              |        |   |      |   |        |  
|Net change in:                                                                    |  |                              |        |   |      |   |        |  
|Demand and savings deposits                                                       |  |                              | (1,660 | ) |      |   | 2,185  |  
|Time deposits                                                                     |  |                              | 589    |   |      |   | (2,264 | )
|Proceeds from borrowings                                                          |  |                              |       |   |      |   | 4,000  |  
|Proceeds from curtailments of borrowings                                          |  |                              | (1,300 | ) |      |   | (163   | )
|Dividends paid                                                                    |  |                              | (124   | ) |      |   | (129   | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Net Cash (Used in) Provided by Financing Activities                               |  |                              | (2,495 | ) |      |   | 3,629  |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash and Cash Equivalents                                                         |  |                              |        |   |      |   |        |  
|Net (decrease) increase in cash and cash equivalents                              |  |                              | (3,631 | ) |      |   | 777    |  
|Cash and Cash Equivalents, beginning of year                                      |  |                              | 9,896  |   |      |   | 7,579  |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash and Cash Equivalents, End of Period                                          |  | $                            | 6,265  |   |      | $ | 8,356  |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Supplemental Disclosure of Cash Paid                                              |  |                              |        |   |      |   |        |  
|During the Period for:                                                            |  |                              |        |   |      |   |        |  
|Interest                                                                          |  | $                            | 485    |   |      | $ | 496    |  
|Income taxes                                                                      |  | $                            |       |   |      | $ | 2      |  



See Notes to
Consolidated Financial Statements



6



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##### Table of Contents

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 ACCOUNTING PRINCIPLES:



The consolidated financial statements conform to generally accepted accounting principles
and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position
as of March 31, 2005 and the results of operations for the three- month periods and year to date periods ended March 31, 2005 and March 31, 2004. The notes included herein should be read in conjunction with the notes to 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 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 FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (dollars in thousands except per share amounts):



|                                                                                                 |  |                |      |      |   |     
|------------------------------------------------------------------------------------------------ |  | -------------- | ---- | ---- | - | ----
|                                                                                                 |  | March 31,     
|                                                                                                 |  | 2005           |      | 2004
|                                                                                                 |  | (In Thousands)
|Net Income, as reported                                                                          |  | $              | 304  |      | $ | 530 
|Total stock-based compensation expenses determined under fair value based method for all rewards |  |                |     |      |   |    
|                                                                                                 |  |                |      |      |   |     
|Pro forma net income                                                                             |  | $              | 304  |      | $ | 530 
|                                                                                                 |  |                |      |      |   |     
|Basic earnings per share                                                                         |  |                |      |      |   |     
|As reported                                                                                      |  | $              | 0.29 |      | $ | 0.49
|                                                                                                 |  |                |      |      |   |     
|Pro forma                                                                                        |  | $              | 0.29 |      | $ | 0.49
|                                                                                                 |  |                |      |      |   |     
|Diluted earnings per share                                                                       |  |                |      |      |   |     
|As reported                                                                                      |  | $              | 0.29 |      | $ | 0.49
|                                                                                                 |  |                |      |      |   |     
|Pro forma                                                                                        |  | $              | 0.29 |      | $ | 0.49
|                                                                                                 |  |                |      |      |   |     



The fair value of each grant is
estimated at the grant date using the Black-Scholes option-pricing model. The estimates were calculated using the following weighted-average assumptions for grants in 2004: Dividend rate of 3.43%, price volatility of 19.94%, risk-free interest rate
of 4.81%, and expected life of 10 years. No additional stock options have been granted for 2005, as of the date of this report.



7



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##### Table of Contents

NOTE 2 INVESTMENT SECURITIES:



The amounts at which investment securities are carried in the consolidated balance sheets and their

|approximate | market values at March 31, 2005 and December 31, 2004 follows:
|----------- | --------------------------------------------------------------



|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|------------------------------------ |  | -------------- | ------ | ----------------- | - | ------------- |  | ----------- | ------ |  | - | ------
|                                     |  | (In Thousands)
|                                     |  | March 31, 2005 |        | December 31, 2004
|                                     |  | CarryingValue  |        | MarketValue       |   | CarryingValue |  | MarketValue
|Securities held to maturity:         |  |                |        |                   |   |               |  |             |        |  |   |       
|Mortgage-backed securities           |  | $              | 14     |                   | $ | 14            |  | $           | 16     |  | $ | 16    
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $              | 14     |                   | $ | 14            |  | $           | 16     |  | $ | 16    
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|Securities available for sale:       |  |                |        |                   |   |               |  |             |        |  |   |       
|U.S. Treasury and agency obligations |  | $              | 16,075 |                   | $ | 15,967        |  | $           | 10,154 |  | $ | 10,078
|Municipal securities                 |  |                | 214    |                   |   | 225           |  |             | 214    |  |   | 229   
|Equity securities                    |  |                | 2,058  |                   |   | 2,230         |  |             | 1,794  |  |   | 2,024 
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       
|Total                                |  | $              | 18,347 |                   | $ | 18,422        |  | $           | 12,162 |  | $ | 12,331
|                                     |  |                |        |                   |   |               |  |             |        |  |   |       



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



|                      |  |                                |  |       |                           |  |     |       |  |       |  
|--------------------- |  | ------------------------------ |  | ----- | ------------------------- |  | --- | ----- |  | ----- | -
|LOSSES (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   | )



As of March 31, 2005, there were 7
investment securities that have been at a loss position for more than 12 consecutive months and 8 additional securities that have been in a loss position for less than one year. It is managements intent and demonstrated ability to hold
securities to the scheduled maturity or call date, and therefore any current market value losses are considered temporary. The schedule of losses on the securities as of March 31, 2005, is as follows:



|                      |  |                                |  |        |                           |  |     |       |  |        |  
|--------------------- |  | ------------------------------ |  | ------ | ------------------------- |  | --- | ----- |  | ------ | -
|LOSSES (In Thousands) |  | US GovernmentAgency Securities |  |        | Mortgage-BackedSecurities |  |     | Total | 
|Less than 12 Mths     |  | Fair Value                     |  | 10,979 |                           |  | 486 |       |  | 11,465 |  
|                      |  | Unrealized Losses              |  | (44    | )                         |  | (5  | )     |  | (49    | )
|                      |  |                                |  |       
|More than 12 Mths     |  | Fair Value                     |  | 4,272  |                           |  | 238 |       |  | 4,510  |  
|                      |  | Unrealized Losses              |  | (55    | )                         |  | (5  | )     |  | (60    | )
|                      |  |                                |  |       
|Total                 |  | Fair Value                     |  | 15,251 |                           |  | 724 |       |  | 15,975 |  
|                      |  | Unrealized Losses              |  | (99    | )                         |  | (10 | )     |  | (109   | )



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##### Table of Contents

NOTE 3 LOANS:



Loans outstanding are summarized as follows:



|                                 |  |                |        |   |                  |   |        |  
|-------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                 |  | (In Thousands) |       
|                                 |  | March 31,2005  |        |   | December 31,2004 |  
|Mortgage loans on real estate    |  |                |        |   |                  |   |        |  
|Construction loans               |  | $              | 7,122  |   |                  | $ | 7,193  |  
|Agricultural                     |  |                | 3,940  |   |                  |   | 4,607  |  
|Equity lines of credit           |  |                | 1,774  |   |                  |   | 1,738  |  
|Residential 1-4 family           |  |                | 42,925 |   |                  |   | 41,125 |  
|Second Mortgages                 |  |                | 3,197  |   |                  |   | 3,305  |  
|Multifamily                      |  |                | 1,835  |   |                  |   | 1,853  |  
|Commercial                       |  |                | 17,388 |   |                  |   | 17,046 |  
|                                 |  |                |        |   |                  |   |        |  
|Total real estate loans          |  |                | 78,181 |   |                  |   | 76,867 |  
|Commercial and industrial loans  |  |                | 3,910  |   |                  |   | 3,548  |  
|Consumer installment loans       |  |                |        |   |                  |   |        |  
|Personal                         |  |                | 13,581 |   |                  |   | 13,641 |  
|Credit cards                     |  |                | 645    |   |                  |   | 729    |  
|                                 |  |                |        |   |                  |   |        |  
|Total consumer installment loans |  |                | 14,226 |   |                  |   | 14,370 |  
|All other loans                  |  |                | 169    |   |                  |   | 166    |  
|                                 |  |                |        |   |                  |   |        |  
|Gross Loans                      |  |                | 96,486 |   |                  |   | 94,951 |  
|Less unearned income on loans    |  |                | (1,298 | ) |                  |   | (1,322 | )
|                                 |  |                |        |   |                  |   |        |  
|Loans, less unearned discount    |  |                | 95,188 |   |                  |   | 93,629 |  
|Less allowance for loan losses   |  |                | (1,381 | ) |                  |   | (1,346 | )
|                                 |  |                |        |   |                  |   |        |  
|Net Loans Receivable             |  | $              | 93,807 |   |                  | $ | 92,283 |  
|                                 |  |                |        |   |                  |   |        |  



NOTE 4 ALLOWANCE FOR LOAN LOSSES:



A summary of transactions in the allowance for loan losses for the three
months ended March 31, 2005 and 2004 follows:



|                                        |  |                |       |   |      |   |       |  
|--------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                        |  | 2005           |       |   | 2004 |  
|                                        |  | (In Thousands) |      
|Balance, beginning of period            |  | $              | 1,346 |   |      | $ | 1,433 |  
|Provision charged to operating expenses |  |                | 90    |   |      |   | (9    | )
|Recoveries of loans charged off         |  |                | 82    |   |      |   | 121   |  
|Loans charged off                       |  |                | (137  | ) |      |   | (189  | )
|                                        |  |                |       |   |      |   |       |  
|Balance, End of Period                  |  | $              | 1,381 |   |      | $ | 1,356 |  
|                                        |  |                |       |   |      |   |       |  



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##### Table of Contents

NOTE 5 EARNINGS PER SHARE



The following shows the weighted average number of shares as of March 31, 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.



|                               |  |                |  |                 |      |        |           |                 |   |     
|------------------------------ |  | -------------- |  | --------------- | ---- | ------ | --------- | --------------- | - | ----
|                               |  | March 31, 2005 |  | March 31, 2004 
|                               |  | Shares         |  | Per ShareAmount |      | Shares |           | Per ShareAmount
|Basic earnings per share       |  | 1,034,045      |  | $               | 0.29 |        | 1,073,650 |                 | $ | 0.49
|                               |  |                |  |                 |      |        |           |                 |   |     
|Effect of dilutive securities: |  |                |  |                 |      |        |           |                 |   |     
|Stock Options                  |  | 1,156          |  |                 |      |        | 987       |                 |   |     
|                               |  |                |  |                 |      |        |           |                 |   |     
|Diluted earnings per share     |  | 1,035,201      |  | $               | 0.29 |        | 1,074,637 |                 | $ | 0.49
|                               |  |                |  |                 |      |        |           |                 |   |     



As of March 31, 2005, stock options
representing 1,500 shares were not included in computing diluted EPS because their effects were anti-dilutive.



NOTE 6 OTHER EXPENSES:



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



|                      |  |                |     |      |   |    
|--------------------- |  | -------------- | --- | ---- | - | ---
|                      |  | March 31,     
|                      |  | 2005           |     | 2004
|                      |  | (In Thousands)
|Director Fees         |  | $              | 55  |      | $ | 51 
|Professional Fees     |  |                | 68  |      |   | 17 
|Postage               |  |                | 27  |      |   | 27 
|Supplies and Printing |  |                | 30  |      |   | 35 
|Telephone Expense     |  |                | 31  |      |   | 31 
|Other                 |  |                | 176 |      |   | 165
|                      |  |                |     |      |   |    
|Total                 |  | $              | 387 |      | $ | 326
|                      |  |                |     |      |   |    



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##### Table of Contents

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



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



Forward-Looking Statements



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



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



Overview



In the first three months of 2005, net income including securities transactions was $304,000
($0.29 per share) compared with $530,000 ($0.49) for the first three months of 2004. This represents a decrease of $226,000 or approximately 43%. The decrease in net income can be accounted for mainly in the category of gains on securities
transactions. Total gains on securities as of March 31, 2005 were $44,000 compared to gains in the same period last year of $249,000. This decrease of $205,000 had a net tax effect on income of approximately $135,000, which accounts for
approximately 60% of the overall decrease in net income when compared to the prior year.



Total assets for the Company as of March 31, 2005 were $131 million compared to $133 million at year-end 2004. This is a decrease of approximately $2 million or 1.61%. Total net loans have increased from $92.3 million
as of December 31, 2004 to $93.8 million as of March 31, 2005. This represents an increase of $1.5 million or 1.65%. The majority of this increase in loans is in the area of commercial and residential real estate properties.



Total liabilities for the Company as of March 31, 2005 were $117.5 million compared to $119.7
million at year-end 2004. This represents a decrease of $2.3 million or 1.90%. The primary decreases in liability accounts have been in the non-interest bearing deposit accounts and outstanding long-term borrowings. Non-interest bearing deposit
accounts have decreased by $1.8 million during the first three months of 2005, and borrowings have been curtailed by $1.3 million during this period.



The Companys total capital position remains strong and exceeds regulatory guidelines. As of March 31, 2005, total capital was $13.7 million.



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



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##### Table of Contents

Critical Accounting Policies



General



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



Allowance for Loan Losses



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



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



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



Goodwill



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



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



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##### Table of Contents

Results of Operations



Net Interest Income



Total interest income increased $78,000 or 4.04% in the first three months of 2005 compared to the first three months of 2004. Total interest expense increased $33,000 or
7.08% in the first three 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 $45,000 or 3.07% for the period ending March 31, 2005
compared to the period ending March 31, 2004. The net interest margin decreased from 5.30% for the first three months of 2004 to 5.01% for the first three 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
6.97% as of March 31, 2004 to 6.66% as of March 31, 2005.



The average interest
rate being paid on time deposits increased from 2.58% as of March 31, 2004 to 2.65% as of March 31, 2005. This is directly related to the recent increases in market interest rates during the reporting period.



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



Noninterest Income



In the first three months of 2005 non-interest income decreased by $212,000 when compared to the same period last year. Gains on securities transactions in the prior year were $249,000 as compared to only $44,000 as
of March 31, 2005. This accounts for $205,000 or approximately 97% of the overall decrease in non-interest income. Security gains are generally infrequent in nature and are considered non-recurring income. Service charge income decreased by $32,000,
while other income increased by $25,000. The decrease in service charge income is attributed to managements proactive approach to reducing overdrafts, which has affected the fee income generated from bounce protection on checking accounts. The
increase in other income consists primarily of a one-time gain from the sale of other real estate property, which was obtained through foreclosure proceedings.



Noninterest Expense



For the first three months of 2005, non-interest expense increased $75,000 (6.48%) in comparison to the first three months of 2004. Salaries and benefits increased by $12,000 due to regular payroll adjustments and
cost of living increases. Occupancy expenses increased $3,000 and equipment expense remained relatively unchanged, with a decrease of $1,000. Additionally, other expenses increased by $61,000. The main factor included in other expenses is an
increase in professional fee expense of $51,000. The increase in professional fees is primarily related to new regulatory requirements under the Sarbanes Oxley Act of 2002, section 404 (SOX 404), which mandates extensive reviews of internal controls
and also requires additional testing of controls on an on-going basis.



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##### Table of Contents

Financial Condition



Securities



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



As of March 31, 2005, the amortized cost of securities available for sale exceeded the market value by $75,000 ($43,000 after the
consideration of income taxes). 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
$6 million during the first three 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, 12.11%
(based on market value) are invested in equities, some of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The Company believes these investments offer adequate returns and/or have the potential for
increases in value.



Loan Portfolio



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



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



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



In the first three months of 2005, net loans increased by $1.5 million or 1.65%, as a result of a 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



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##### Table of Contents

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 $519,000 at March 31, 2005 compared to $231,000 at March 31, 2004. This represents an increase of $288,000 and is mainly due to the refinance of certain previously past due loans, which
have been placed in nonaccrual status as a precautionary measure for monitoring purposes. As of March 31, 2005, the cumulative amount of these certain refinanced accounts is approximately $270,000, which accounts for nearly 94% of the increase in
non-performing assets over the same period last year. There is no expected loss on this portion of the non-accrual accounts at this time. 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.



Problem loans (serious doubt loans) are loans whereby information known by management
indicates that the borrower may not be able to comply with present payment terms. Management was not aware of any problem loans at March 31, 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 losses of $1,381,000 at March 31, 2005 increased by $35,000 from its level at December 31, 2004. This increase is directly related to current year charge offs and managements efforts to ensure that loans
identified as a potential loss are written off in a timely manner. 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 practices for funding the allowance for loan loss account effectively match expenses to loan losses as they are occurring and ensures that losses are properly recorded in the period in which they occur.



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##### Table of Contents

The cumulative balance in the allowance for loan loss account was equal to 1.45% and 1.44% of total loans at March 31,
2005 and December 31, 2004, respectively. Managements evaluation of the allowance for loan losses for the periods ending March 31, 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 is presently in the process of renovations to the Jenkins building, which is located next to the main branch office in Stanley, Virginia. The renovations consist
of extensive remodeling to the upper floor of this facility. Upon completion, the facility will house the Companys data processing and technology operations department, as well as the bookkeeping department. The total cost of this project is
estimated to be approximately $1,000,000. As of March 31, 2005, the expenditures relating to this project totaled $540,000.



The Company opened a new office facility in the Charlottesville, Virginia area on March 21, 2005. This new branch facility will primarily serve 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 three months of
2005, total deposits decreased by $1.1 million or 1.06%. This decrease was mainly in the area of non-interest bearing demand deposit accounts, and is believed to be the result of consumer demand for higher income opportunities in interest bearing
accounts. The Bank has seen evidence of this trend, as the time deposit portfolio has increased by $589,000 during the first three months of 2005.



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##### Table of Contents

Long Term Debt



The Companys subsidiary has a line of credit with the Federal Home Loan Bank (FHLB) of Atlanta upon which credit advances can be made up to 40% of total assets,
subject to certain eligibility requirements. As of March 31, 2005, total borrowings were $17.0 million compared to $18.3 million at December 31, 2004. This represents a decrease of $1.3 million or 7.10%. The decrease in borrowings is the result of
normal principal curtailment in accordance with the original loan agreement. The Bank utilizes borrowings periodically as a source of funds for loan growth and other investment opportunities in order to maintain a profitable interest spread.
Borrowings are generally matched with maturities of specific groups of loans, and are normally advanced for a 5 year term.



Capital



The Company maintains a strong capital base as support for possible future expansion, to promote public confidence, to support operations and for continued growth at a manageable level. As of March 31, 2005 and
December 31, 2004, the Companys total capital-to-total asset ratios were 10.42% 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 Federal Home Loan Bank of Atlanta and
certain correspondent banks.



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



Liquidity as of March 31, 2005 remains adequate and
within policy guidelines.



Interest Rate Sensitivity



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



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



Table II contains an analysis, which shows the re-pricing opportunities of
earning assets and interest bearing liabilities as of March 31, 2005.



As of
March 31, 2005, the Company had a cumulative Gap Rate Sensitivity Ratio of (29.46%) for the one year re-pricing period, compared with (26.86%) at December 31, 2004. This negative gap position



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##### Table of Contents

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



On December 16, 2004, the Financial Accounting Standards Board 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 Corporations results of operations at the present time.



Effect of Proposed Accounting Standards



The Company does not believe that any newly issued but as yet unapplied accounting standards will have a material impact on the Companys financial position or
operations.



Securities and Exchange Commission Web Site



The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including Pioneer Bankshares, Inc.



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##### Table of Contents

TABLE I



PIONEER BANKSHARES, INC.

NET
INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)



|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|---------------------- |  | --------------------------------- | ------- | -------------- | --------------------------------- | ----- |  | ----- | -------------- |  | -------------- | ------- | ----- | - | ----- |  | ----- | -
|                       |  | Three Months Ended March 31, 2005 |         |                | Three Months Ended March 31, 2004 |      
|                       |  | AverageBalance                    |         | Income/Expense |                                   | Rates |  |       | AverageBalance |  | Income/Expense |         | Rates |  
|Interest Income        |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Loans3                 |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Commercial             |  | $                                 | 3,392   |                | $                                 | 65    |  | 7.67  | %              |  | $              | 2,846   |       | $ | 54    |  | 7.59  | %
|Real estate            |  |                                   | 77,551  |                |                                   | 1,309 |  | 6.75  | %              |  |                | 66,334  |       |   | 1,196 |  | 7.21  | %
|Installment            |  |                                   | 13,008  |                |                                   | 425   |  | 13.07 | %              |  |                | 12,956  |       |   | 468   |  | 14.45 | %
|Credit card            |  |                                   | 676     |                |                                   | 34    |  | 20.12 | %              |  |                | 764     |       |   | 40    |  | 20.94 | %
|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Loans            |  |                                   | 94,627  |                |                                   | 1,833 |  | 7.75  | %              |  |                | 82,900  |       |   | 1,758 |  | 8.48  | %
|                       |  |                                   |         |                |                                   |      
|Federal funds sold     |  |                                   | 2,295   |                |                                   | 13    |  | 2.27  | %              |  |                | 2,808   |       |   | 6     |  | 0.85  | %
|Interest Bearing       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Deposits               |  |                                   | 5,208   |                |                                   | 38    |  | 2.92  | %              |  |                | 7,735   |       |   | 50    |  | 2.59  | %
|Securities             |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Taxable2               |  |                                   | 16,782  |                |                                   | 118   |  | 2.81  | %              |  |                | 14,658  |       |   | 96    |  | 2.62  | %
|Nontaxable1            |  |                                   | 2,229   |                |                                   | 14    |  | 2.51  | %              |  |                | 3,490   |       |   | 34    |  | 3.90  | %
|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total earning assets   |  |                                   | 121,141 |                |                                   | 2,016 |  | 6.66  | %              |  |                | 111,591 |       |   | 1,944 |  | 6.97  | %
|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Interest Expense       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Demand deposits        |  |                                   | 14,627  |                |                                   | 15    |  | 0.41  | %              |  |                | 13,931  |       |   | 13    |  | 0.37  | %
|Savings                |  |                                   | 13,980  |                |                                   | 19    |  | 0.54  | %              |  |                | 13,093  |       |   | 16    |  | 0.49  | %
|Time deposits          |  |                                   | 46,216  |                |                                   | 306   |  | 2.65  | %              |  |                | 50,514  |       |   | 326   |  | 2.58  | %
|Borrowings             |  |                                   | 17,772  |                |                                   | 159   |  | 3.58  | %              |  |                | 10,145  |       |   | 111   |  | 4.38  | %
|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Total Interest Bearing |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Liabilities            |  | $                                 | 92,595  |                | $                                 | 499   |  | 2.16  | %              |  | $              | 87,683  |       | $ | 466   |  | 2.13  | %
|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Income1   |  |                                   |         |                | $                                 | 1,517 |  |       |                |  |                |         |       | $ | 1,478 |  |       |  
|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  
|Net Interest Margin    |  |                                   |         |                |                                   |       |  | 5.01  | %              |  |                |         |       |   |       |  | 5.30  | %
|                       |  |                                   |         |                |                                   |       |  |       |                |  |                |         |       |   |       |  |       |  

---

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

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

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



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##### Table of Contents

TABLE II



PIONEER BANKSHARES, INC.

INTEREST
SENSITIVITY ANALYSIS

MARCH 31, 2005

(Dollar Amounts in Thousands)



|                                          |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|----------------------------------------- |  | ---------- | ------- | - | ---------- | - | ------- | --------- |  | - | ----------- | - |  | ------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                          |  | 0-3 Months |         |   | 4-12Months |   |         | 1-5 Years |  |   | Over 5Years |   |  | NotClassified |        |   | Total
|Uses of Funds:                            |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                          |  |            |         |   |            |  
|Loans                                     |  | $          | 6,252   |   |            | $ | 5,070   |           |  | $ | 37,633      |   |  | $             | 46,233 |   |       | $ |       |   |  | $ | 95,188 
|Interest bearing bank deposits            |  |            | 1,521   |   |            |   | 900     |           |  |   | 2,795       |   |  |               |       |   |       |   |       |   |  |   | 5,216  
|Investment securities                     |  |            |        |   |            |   | 7,263   |           |  |   | 8,717       |   |  |               | 226    |   |       |   | 2,230  |   |  |   | 18,436 
|Restricted stock                          |  |            |        |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   | 1,101  |   |  |   | 1,101  
|Federal funds sold                        |  |            | 100     |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 100    
|                                          |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                     |  |            | 7,873   |   |            |   | 13,233  |           |  |   | 49,145      |   |  |               | 46,459 |   |       |   | 3,331  |   |  |   | 120,041
|                                          |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Sources of Funds:                         |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|                                          |  |            |         |   |            |  
|Interest bearing demand deposits          |  |            | 15,067  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 15,067 
|Regular savings                           |  |            | 13,931  |   |            |   |        |           |  |   |            |   |  |               |       |   |       |   |       |   |  |   | 13,931 
|Certificates of deposit $100,000 and over |  |            | 1,126   |   |            |   | 4,076   |           |  |   | 3,843       |   |  |               |       |   |       |   |       |   |  |   | 9,045  
|Other certificates of deposit             |  |            | 5,229   |   |            |   | 13,246  |           |  |   | 18,828      |   |  |               |       |   |       |   |       |   |  |   | 37,303 
|Borrowings                                |  |            | 600     |   |            |   | 3,200   |           |  |   | 13,200      |   |  |               |       |   |       |   |       |   |  |   | 17,000 
|                                          |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Total                                     |  |            | 35,953  |   |            |   | 20,522  |           |  |   | 35,871      |   |  |               |       |   |       |   |       |   |  |   | 92,346 
|                                          |  |            |         |   |            |  
|Discrete Gap                              |  |            | (28,080 | ) |            |   | (7,289  | )         |  |   | 13,274      |   |  |               | 46,459 |   |       |   | 3,331  |   |  |   | 27,695 
|                                          |  |            |         |   |            |  
|Cumulative Gap                            |  |            | (28,080 | ) |            |   | (35,369 | )         |  |   | (22,095     | ) |  |               | 24,364 |   |       |   | 27,695 |   |  |   |        
|                                          |  |            |         |   |            |  
|Ratio of Cumulative                       |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Gap To Total                              |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Earning Assets at March 31, 2005          |  |            | -23.39  | % |            |   | -29.46  | %         |  |   | -18.41      | % |  |               | 20.30  | % |       |   | 23.07  | % |  |   |        
|                                          |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Ratio of Cumulative                       |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Gap To Total                              |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        
|Earning Assets at December 31, 2004       |  |            | -17.64  | % |            |   | -26.86  | %         |  |   | -17.84      | % |  |               | 18.96  | % |       |   | 21.66  | % |  |   |        
|                                          |  |            |         |   |            |   |         |           |  |   |             |   |  |               |        |   |       |   |        |   |  |   |        



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Item 3. Controls and Procedures



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



We have established disclosure controls and procedures to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive
officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, we evaluate the effectiveness of these disclosure controls and procedures on a
quarterly basis, and have done so as of the end of the period covered by this report. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures are adequate and effective. There were no changes in the Companys internal control over financial reporting during the three months ended March 31, 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 -



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



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



The Company has a stock repurchase program, which was authorized in September 2002. There are 5,000 authorized shares remaining available for repurchase under this plan. There have been no repurchase transactions
during 2005.



Item 3. Defaults Upon Senior Securities - Not Applicable



Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable



Item 5. Other Information - Not Applicable



Item 5a. Required 8-K Disclosures                        None



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



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



Item 6. Exhibits



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



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##### Table of Contents

SIGNATURES



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



PIONEER BANKSHARES, INC.By:

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

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




Date: May 11, 2005



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