##### Table of Contents

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United States

Securities and Exchange Commission

Washington, D.C. 20549



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Form 10-KSB



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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission file number: 0-30541



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Pioneer Bankshares, Inc.

(Name of small business issuer 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 office)

Issuers telephone number: (540) 778-2294



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Securities registered under Section 12(b) of the Act:

None

Securities registered under Section 12(g) of the Act:

Common Stock - $.50 Par Value



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Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act.    Yes ̈No  x

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 ̈

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.    Yes  x    No ̈

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

Issuers revenues for its most recent fiscal year were $9,609,144.

The aggregate market value of the voting stock held by non-affiliates based on the last reported sales price of $18.30 per share as of March 27, 2006 was $16,379,012.

The number of shares outstanding of the registrants common stock, was 1,011,481 as of March 27, 2006.



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DOCUMENTS INCORPORATED BY
REFERENCE:

Portions of the registrants definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 18, 2006 are
incorporated by reference into Part III of this Form 10-KSB.

TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT    Yes ̈No  x



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##### Table of Contents

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-KSB

TABLE OF CONTENTS



|           |  |                                                                                                                  |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                  |  | Page
|PART I     |  |                                                                                                                  |  |     
|           |  |                                                                                                                 
|Item 1.    |  | Description of Business.                                                                                         |  | 3   
|           |  |                                                                                                                 
|Item 2.    |  | Description of Property.                                                                                         |  | 8   
|           |  |                                                                                                                 
|Item 3.    |  | Legal Proceedings.                                                                                               |  | 9   
|           |  |                                                                                                                 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders.                                                             |  | 9   
|           |  |                                                                                                                 
|PART II    |  |                                                                                                                  |  |     
|           |  |                                                                                                                 
|Item 5.    |  | Market for Common Equity and Related Stockholder Matters.                                                        |  | 9   
|           |  |                                                                                                                 
|Item 6.    |  | Managements Discussion and Analysis or Plan of Operation.                                                       |  | 10  
|           |  |                                                                                                                 
|Item 7.    |  | Financial Statements.                                                                                            |  | 26  
|           |  |                                                                                                                 
|Item 8.    |  | Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.                            |  | 53  
|           |  |                                                                                                                 
|Item 8A.   |  | Controls and Procedures.                                                                                         |  | 53  
|           |  |                                                                                                                 
|Item 8B.   |  | Other Information.                                                                                               |  | 53  
|           |  |                                                                                                                 
|PART III   |  |                                                                                                                  |  |     
|           |  |                                                                                                                 
|Item 9.    |  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. |  | 53  
|           |  |                                                                                                                 
|Item 10.   |  | Executive Compensation.                                                                                          |  | 54  
|           |  |                                                                                                                 
|Item 11.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.                  |  | 54  
|           |  |                                                                                                                 
|Item 12.   |  | Certain Relationships and Related Transactions.                                                                  |  | 54  
|           |  |                                                                                                                 
|Item 13.   |  | Exhibits.                                                                                                        |  | 55  
|           |  |                                                                                                                 
|Item 14.   |  | Principal Accountant Fees and Services.                                                                          |  | 55  
|           | 
|SIGNATURES |  | 56                                                                                                              



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##### Table of Contents

PART I

Item 1. Description of Business.

Overview

Pioneer Bankshares, Inc. (the Company), a Virginia one bank holding company headquartered in Stanley, Virginia, was incorporated under the
laws of the Commonwealth of Virginia on November 4, 1983. The Companys wholly-owned subsidiary, Pioneer Bank, Inc. (the Bank) was established as a national bank in 1909. The Bank converted from a national bank to a state
chartered bank, effective April 1994, and changed its name to Pioneer Bank, effective April 1999.

In October 2000, the Bank acquired
Valley Finance Service, Inc. (VFS), a small loan company located in Harrisonburg, Virginia. In January 2002, the assets of VFS were merged into the Bank and the subsidiary license for this company was dissolved. Valley Finance now
operates as a division and branch of the Bank offering consumer loan services.

Pioneer Bank also owns and operates two subsidiaries, one
of which is Pioneer Financial Services, LLC. Income received from insurance services and non-banking investment services is handled through Pioneer Financial Services, LLC. The second subsidiary owned by Pioneer Bank is Pioneer Special Assets, LLC.
This subsidiary is generally used in conjunction with certain foreclosed properties, in which there are environmental or other significant liability circumstances, of which none existed as of December 31, 2005 and 2004. Foreclosures of this
type are handled directly through Pioneer Special Assets, LLC in an effort to minimize the risk of liability to the Bank.

The primary
assets of the Company consist of all of the stock of the Bank, real estate holdings leased to the Bank, a portfolio of equity investment securities, and minimal cash accounts.

The Bank is engaged in the general commercial banking business, primarily serving the counties of Page, Greene, Rockingham, and Albermarle, as well as,
the Cities of Harrisonburg and Charlottesville, Virginia. In addition, the close proximity and mobile nature of individuals and businesses in adjoining Virginia counties and nearby cities places these markets within the Banks targeted trade
area. The Bank also anticipates serving some individuals and businesses from other areas, including, but not limited to, the counties surrounding Page County.

The Bank offers a full range of banking and related financial services focused primarily towards serving individual consumers, small to medium size commercial businesses, and the professional community. The Bank
strives to serve the banking needs of its customers while developing personal, hometown relationships. The Banks Board of Directors and management believe that the marketing of customized banking services will enable the Bank to continue its
position in the financial services marketplace.

The Bank provides individual consumers, professionals and small and medium size commercial
businesses in its market area with responsive and technologically advanced banking services. These services include competitively priced loans that are based on deposit relationships, easy access to the Banks decision-makers, and quick and
innovative action necessary to meet a customers banking needs. The Banks capitalization and lending limit enables it to satisfy the credit needs of a large portion of the targeted market segment. In the event there are customers whose
loan requirements exceed the Banks lending limit, the Bank will seek to arrange such loans on a participation basis with other financial institutions. The Board of Directors and management believe the Banks present capitalization will
support substantial growth in deposits and loans.

Location and Market Area

The Bank currently operates full service branches in Stanley, Luray, Shenandoah, Harrisonburg, Stanardsville, and Charlottesville, Virginia. Management
will continue to investigate and consider other possible sites that would enable the Bank to profitably serve its chosen market area.



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The opening of additional banking offices by the Bank requires prior regulatory approval, which takes
into account a number of factors, including, among others, a determination that the Bank has capital in an amount deemed necessary to warrant additional expansion and a finding that the public interest will be served. While the Bank plans to seek
regulatory approval at the appropriate time to establish additional banking offices in various parts of the Banks market area, there can be no assurance when or if the Bank will be able to undertake such expansion plans.

Banking Services

The Bank accepts deposits, makes
consumer and commercial loans, issues drafts, and provides other services customarily offered by a commercial banking institution, such as business and personal checking and savings accounts, walk-up tellers, drive-in windows, and 24-hour automated
teller machines. The Bank is a member of the Federal Reserve System and deposits are insured under the Federal Deposit Insurance Act to the limits provided thereunder.

The Bank offers a full range of short-to-medium term commercial and consumer loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business
expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans generally include secured and unsecured loans for financing automobiles, residential financing, home improvements, education,
and personal investments.

The Banks lending activities are subject to a variety of lending limits imposed by state law. While
differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrowers relationship to the Bank), in general the Bank is subject to a loan-to-one borrower limit of an amount equal to
15% of the Banks capital and surplus in the case of loans which are not fully secured by readily marketable or other permissible types of collateral. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that
is less than the legal lending limit. The Bank may establish relationships with correspondent banks to sell interests or participations in loans when loan amounts exceed the Banks legal limitations or internal lending policies.

Other bank services include internet banking, ATM/Debit Cards, safe deposit boxes, issuance of cashiers checks, certain cash management services,
travelers checks, direct deposit of payroll and social security checks and automatic drafts for various accounts. The Banks Visa check cards and ATM debit cards can be used by bank customers throughout the United States. The Bank also
offers MasterCard and VISA credit card services. Additionally, the Bank offers a Bounce Protection program which provides overdraft privileges on checking accounts up to predetermined amounts, subject to overdraft fees. The Bank is also
licensed to sell property/casualty and life/health insurance, and investment securities, and does so through its investment subsidiary, Pioneer Financial Services, LLC.

The Bank does not have trust powers and does not anticipate obtaining trust powers. If the Bank decided to establish a trust department in the future, the Bank could not do so without the prior approval of the
Virginia State Corporation Commission. In the interim, the Bank may contract for the provision of trust services to its customers through outside vendors.

Competition

The banking business is highly competitive. The Bank competes as a financial intermediary with other commercial
banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the western Virginia
market area and elsewhere.

The Banks service area is a highly competitive, highly branched banking market. Competition in the market
area for loans to small to medium size businesses and individuals, the Banks target market, is intense, and pricing is important. Most of the Banks competitors have substantially greater resources and lending limits than the Bank and
offer certain services, such as extensive and established branch networks, that the Bank does not expect to provide or will not provide in the near future. Moreover, larger institutions operating in the western Virginia market area have access to
borrowed funds at a lower cost than are available to the Bank. Also, deposit competition among institutions in the market area is strong.



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Employees

As of December 31, 2005, the Company had 57 employees, with 55 full-time equivalent employees. None of the employees are represented by any collective bargaining agreements and relations with employees are considered excellent.

Supervision and Regulation

Set forth
below is a summary of statutes and regulations affecting the Company and the Bank. Federal and state laws and regulations provide regulatory oversight for virtually all aspects of both of their operations. This summary is qualified in its entirety
by reference to these statutes and regulations.

General

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and is supervised and subject to examination by the Board of Governors of the Federal Reserve System (the Federal
Reserve). The Company and the Bank are also subject to Virginia laws that regulate banks and bank holding companies. Virginias banking laws are administered by the Bureau of Financial Institutions of the Virginia State Corporation
Commission (the Commission). The Company and the Bank are also affected by rules and regulations of the Federal Deposit Insurance Corporation (the FDIC). The various laws and regulations administered by all of these
regulatory agencies affect corporate practices, expansion of business, and provisions of services. Also, monetary and fiscal policies of the United States directly affect bank loans and deposits and may affect our earnings. The future impact of
these policies and of continuing regulatory changes in the financial services industry cannot be predicted. The supervision, regulation and examination of the Bank are intended primarily for the protection of depositors rather than our stockholders.

Supervision and Regulation of the Company

As a bank holding company, the institution is required to file with the Federal Reserve periodic reports and any additional information the Federal Reserve may require. The Company also must provide the Commission with information regarding
itself and the Bank. The Federal Reserve examines the Company periodically and may examine its subsidiaries. The Commission also may examine the Company.

A bank holding company is required to obtain prior approval from the Federal Reserve before acquiring control of substantially all the assets of any non-affiliated bank or more than 5% of the voting shares of any bank
it does not already own, or before it merges or consolidates with another institution or engages in any business other than banking or managing, controlling or furnishing services to banks and other subsidiaries, and a limited list of activities
closely related to or incidental to banking. Similarly, approval of the Virginia Bureau of Financial Institutions is required for certain acquisitions of other banks and bank holding companies.

The Federal Reserve will approve the ownership by a bank holding company of shares in a company engaged in activities determined by order or regulation
to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In other words, regulatory involvement, and frequently approval, is required for the Company to engage in non-banking activities.

The Company would be compelled by the Federal Reserve to invest additional capital in the event the Bank experiences either significant loan losses or
rapid growth of loans or deposits. The Federal Reserve requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries.

Company Capital Guidelines.The Company operates under the capital adequacy guidelines established by the Federal Reserve. Under the Federal
Reserves current risk-based capital guidelines for bank holding companies, the minimum required ratio for total capital to risk weighted assets the Company is required to maintain is 8%, with at least 4% consisting of Tier 1 capital. Tier 1
capital consists of common and qualifying preferred stock, certain other qualifying instruments, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets. These risk-based capital guidelines
establish minimum standards, and bank holding companies generally are expected to operate well above the minimum standards.

Financial
Modernization Legislation. A bank holding company generally is restricted to activities related or incidental to banking. In the past, bank holding companies were specifically prohibited from engaging in the



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issue, flotation, underwriting, public sale, or distribution of third party securities. Limits also were placed on underwriting and selling insurance. The
permitted activities with respect to bank holding companies and their affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which became effective in March 2000. This act repealed the banking/securities industry anti-affiliation
rules and permits the common ownership of commercial banks, investment banks, and insurance companies under the structure of a financial holding company. Under this law, a bank holding company can elect to be treated as a financial holding company,
which may engage in any activity that the Federal Reserve determines is financial in nature. A financial holding company also may engage in any activity that is complementary to a financial activity and does not pose a substantial risk to the safety
and soundness of the related depository institutions or the financial system generally.

In order for a bank holding company to qualify as
a financial holding company, all of its depository subsidiaries (i.e., banks and thrifts) must be well capitalized and well managed, and must meet their Community Reinvestment Act, or CRA, obligations, as explained below. The bank holding
company also must declare its intention to become a financial holding company to the Federal Reserve and certify that it meets the requirements. Banks and thrifts acquired by a financial holding company within 12 months prior to the date on which
the election is filed may be excluded from this test if they have less than a satisfactory CRA rating, but they must submit a plan to the applicable federal banking agency describing how the CRA rating will be brought into conformance.

The act also establishes a system of functional regulation for financial holding companies and banks providing regulation of securities by the
Securities and Exchange Commission and state securities regulators, regulation of futures by the Commodity Futures Trading Commission, and regulation of insurance activities by the state insurance regulators. Banks may sell title insurance only when
specifically permitted under applicable state law.

The Company does not currently intend to become a financial holding company
under the terms of this law, but may consider doing so at some point in the future. It is impossible to predict the impact of this new law on our competition or our operations at this time.

Securities. The Company must also comply with the requirements of the Securities Exchange Act of 1934, which include the filing of annual,
quarterly and other reports with the Securities and Exchange Commission.

Supervision and Regulation of the Bank

General.The Bank is a state chartered bank and member of the Federal Reserve System. The Federal Reserve and the Commission regulate and monitor
all significant aspects of the Banks operations. The Federal Reserve requires quarterly reports on the Banks financial condition, and both federal and state regulators conduct periodic examinations of the Bank. The cost of complying with
these regulations and reporting requirements can be significant. In addition, some of these regulations impact investors directly. For example, the Bank may pay dividends only out of its net undivided profits after deducting expenses, bad debts,
losses, interest and taxes accrued, and contribution to capital necessary for the Banks original capital to be restored. The Federal Reserve recommends that banks pay dividends only if the net income available to shareholders in the past year
fully funds those dividends, and the expected rate of earnings retention is consistent with capital needs, asset quality, and overall financial condition. Regulatory restrictions on the Banks ability to pay dividends may adversely impact the
Companys ability to pay dividends to its shareholders.

The Bank is subject to various state and federal banking laws and regulations
that impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. The Bank operates under the supervision of, and subject to regulation and examination by, the
Commission and the Federal Reserve. The Bank is also subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets,
interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and the establishment of branch offices. Federal and state bank regulatory agencies also have the general authority
to eliminate dividends paid by insured banks if such payment is deemed to constitute an unsafe and unsound practice. As the Banks primary federal regulator, the Federal Reserve has the authority to impose penalties, initiate civil and
administrative actions and take other steps to prevent the Bank from engaging in unsafe and unsound practices.

The amount of dividends
payable by the Bank will depend upon its earnings and capital position, and is limited by federal and state law, regulations and policy. In addition, Virginia law imposes restrictions on the ability of all banks chartered under Virginia law to pay
dividends. No dividend may be declared or paid that would impair a banks paid-in capital. Both the Commission and the Federal Reserve have the general authority to limit dividends paid by the Bank if such payments are deemed to constitute an
unsafe and unsound practice.



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Under current supervisory practice, prior approval of the Federal Reserve is required if the total of all
cash dividends declared in any given year will exceed the total of its net profits for such year, plus its retained net profits for the preceding two years. Also, the Bank may not pay a dividend in an amount greater than its undivided profits then
on hand after deducting current losses and bad debts. For this purpose, bad debts are generally defined to include the principal amount of all loans which are in arrears with respect to interest by six months or more, unless such loans are fully
secured and in the process of collection. Federal law further provides that no issued depository institution may make any capital distribution (which would include a cash dividend) if, after making the distribution, the institution would not satisfy
one or more of its minimum capital requirements.

Capital Resources

The various federal bank regulatory agencies, including the Federal Reserve, have adopted risk-based capital requirements for assessing bank capital adequacy. Virginia chartered banks must also satisfy the capital
requirements adopted by the Commission. The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, as adjusted for credit risk. The risk-based capital standards
currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The minimum standard for the ratio of capital to risk-weighted assets (including certain off-balance sheet obligations, such as standby
letters of credit) is 8.0%. At least half of the risk-based capital must consist of common equity, retained earnings and qualifying perpetual preferred stock, less deductions for goodwill and various other tangibles (Tier 1 capital). The
remainder (Tier 2 capital) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general valuation allowance for loan losses. The
sum of Tier 1 capital and Tier 2 capital is total risk-based capital.

The Federal Reserve also has adopted regulations which
supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to average total consolidated assets (Leverage ratio) of 4%. The Federal Reserve has emphasized that the foregoing standards are supervisory
minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating
significant growth. All other banking organizations are required to maintain a Leverage ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a tangible Tier 1
leverage ratio in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total assets. The Banks
capital ratios significantly exceed all requirements at December 31, 2005.

Deposit Insurance

The Banks deposits are insured by the FDIC for a maximum of $100,000 per depositor. For this protection, the Bank pays a quarterly statutory
assessment and must comply with the rules and regulations of the FDIC. The actual assessment paid is based on the institutions assessment risk classification, which is determined based on whether the institution is considered well
capitalized, adequately capitalized or undercapitalized, as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or
to have supervisory concerns. FDIC assessments can change, affecting the Banks costs, depending on the solvency of the banking industry as a whole.

In February 2006, Congress enacted the Federal Deposit Insurance Reform Act of 2005 (the FDIR Act). As a result of the passage of the FDIR Act, over the course of the next year, among other things:
(i) the BIF will be merged with the SAIF creating the Deposit Insurance Fund (the DIF); (ii) the $100,000 per account insurance level will be indexed to reflect inflation; (iii) deposit insurance coverage for certain
retirement accounts will be increased to $250,000; and (iv) a cap will be placed on the level of the DIF and dividends will be paid to banks once the level of the DIF exceeds the specified threshold.



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In addition, the cost of complying with FDIC rules and regulations may negatively impact the Banks
profitability. For member banks like the Bank, the Federal Reserve has the authority to prevent the continuance or development of unsound and unsafe banking practices and to approve conversions, mergers and consolidations. Obtaining regulatory
approval of these transactions can be expensive, time consuming, and ultimately may not be successful.

Effect of Governmental Monetary Policies

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a banks earnings. The operations of the Bank will be affected not only by general economic
conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve Board regulates money, credit conditions and interest rates in order to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve Board monetary policies have had a significant effect
on the operating results of commercial banks in the past and are expected to do so in the future.

Item 2. Description of Property.

The Companys corporate office is located in Stanley, Virginia and
is directly across the street from the Banks main branch office. The building was originally built as a residence. It was purchased in 1989 and fully renovated for commercial use. The building contains approximately 3,252 square feet.

The Banks main branch office in Stanley, Virginia was constructed in 1984, contains 12,876 square feet on three floors and is
situated on approximately two acres. The building contains a full service branch, administration and operations, bookkeeping and credit departments, three drive-through lanes and a drive-up ATM.

The branch at Luray, Virginia is a brick building containing approximately 3,797 square feet and situated on a 200 x 150 lot. This office is a full
service branch with two drive-through lanes and a walk-up ATM. This branch was built in 1989 and is located next to a shopping center. This branch is owned by the Bank.

The branch at Shenandoah is a brick building containing approximately 3,400 square feet and situated on a 300 x 150 lot. This office is a full service branch with two drive-through lanes and a walk-up ATM. This branch
was built in 1995 and is owned by the Company.

The branch in Harrisonburg, Virginia is a new brick facility, which was constructed in
2003. The building is situated on a 130 x 190 lot, which was originally purchased in 2002. The branch contains approximately 1,620 square feet. This full-service office is located next to a shopping center and has three drive-through lanes and a
drive-up ATM.

The branch in Stanardsville, Virginia is a double-wide modular building containing approximately 1,680 square feet and
situated on .644 acre. It is equipped with two drive-through lanes and a drive-up ATM. The branch was established in 2001 and is owned by the Bank.

Valley Finance Service operates as a division/branch of Pioneer Bank and was relocated in September 2003 from its former location of 120 S. Main Street, Harrisonburg, Virginia. This finance company and loan production office now operates
out of the former branch location at 932 West Market Street, Harrisonburg, Virginia. This facility is leased on a short-term basis. The facility is equipped with two drive-through lanes for customer convenience.

The Bank has recently renovated the Jenkins Building located next to the Banks main office in Stanley, Virginia for the purpose of housing its data
processing, technology operations, and bookkeeping departments. The renovations to this facility were completed in October 2005. The data processing center building has approximately 25,760 square feet and was originally purchased on
September 8, 1970.

The Banks newest branch office is located in downtown Charlottesville, Virginia. This branch is a leased
facility. This office was opened in March 2005 and primarily offers commercial loans and small business accounts. The branch is located at 257 Ridge McIntire Road, Charlottesville, Virginia.



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Item 3. Legal Proceedings.

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

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

Not Applicable

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

The Common Stock of the Company is not currently traded
on any established market. The Common Stock trades on the OTC Bulletin Board under the symbol PNBI.OB and transactions generally involve a small number of shares. The Banks transfer agent is Registrar and Transfer Company, 10
Commerce Drive, Cranford Drive, Cranford, New Jersey, 07016-3572. The following table shows actual trade prices (without commissions) reported to Scott & Stringfellow, Inc. Other transactions may have occurred which were not included in the
table.

COMMON STOCK TRADE PRICES



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|2004           |  | High |       | Low
|First Quarter  |  | $    | 17.75 |     | $ | 16.07
|Second Quarter |  |      | 18.00 |     |   | 16.10
|Third Quarter  |  |      | 18.00 |     |   | 17.20
|Fourth Quarter |  |      | 18.50 |     |   | 17.15
|               |  |     
|2005           |  | High |       | Low
|First Quarter  |  | $    | 18.25 |     | $ | 17.30
|Second Quarter |  |      | 18.30 |     |   | 16.50
|Third Quarter  |  |      | 19.00 |     |   | 17.50
|Fourth Quarter |  |      | 19.05 |     |   | 17.25

There were 1,011,481 shares of the Companys Common Stock outstanding at the close of business on
December 31, 2005, which were held by 519 shareholders of record.

The Company has declared dividends on its Common Stock as follows:



|               |  |            |  |             |  |                 |    
|-------------- |  | ---------- |  | ----------- |  | --------------- | ---
|Declared Date  |  | RecordDate |  | PaymentDate |  | Per ShareAmount
|3/05/04        |  | 3/18/04    |  | 3/31/04     |  | $               | .12
|6/10/04        |  | 6/21/04    |  | 6/30/04     |  |                 | .12
|9/09/04        |  | 9/20/04    |  | 9/30/04     |  |                 | .12
|11/18/04       |  | 12/13/04   |  | 12/20/04    |  |                 | .12
|               |  |            |  |             |  |                 |    
|Total for 2004 |  |            |  |             |  | $               | .48
|               |  |            |  |             |  |                 |    
|3/10/05        |  | 3/20/05    |  | 3/31/05     |  | $               | .12
|6/09/05        |  | 6/20/05    |  | 6/30/05     |  |                 | .12
|9/08/05        |  | 9/27/05    |  | 9/29/05     |  |                 | .12
|12/08/05       |  | 12/19/05   |  | 12/29/05    |  |                 | .12
|               |  |            |  |             |  |                 |    
|Total for 2005 |  |            |  |             |  | $               | .48
|               |  |            |  |             |  |                 |    



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The Companys ability to pay dividends is subject to certain restrictions imposed by the Federal
Reserve and capital requirements of Federal and Virginia banking statutes and regulations. Additionally, the Company intends to follow a policy of retained earnings sufficient for the purpose of maintaining net worth and reserves of the Bank at
adequate levels and to provide for the Companys growth and ability to compete in its market area.

Item 6. Managements Discussion and Analysis or Plan of Operation.

The following is managements
discussion of the financial condition and results of operations on a consolidated basis for the two years ended December 31, 2005 and 2004, respectively, for the Company. The consolidated financial statements of the Company include the accounts
of the Company, the Bank, and Pioneer Financial Services, LLC, and Pioneer Special Assets, LLC, each of which is a wholly-owned subsidiary of the Bank. This discussion should be read in conjunction with the audited consolidated financial statements
and related notes of the Company presented elsewhere herein.

Forward Looking Statements

The report on Form 10-KSB 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 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 office, the words or phrases will likely result, are expect 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.

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.



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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) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable and can be estimated and 2) SFAS114, 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 the financial condition of individual borrowers.

This review also considers concentrations of loans in terms of geography, business type and 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 was 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 are 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 for the reporting periods ending December 31, 2005 and 2004. Goodwill is no longer
amortized, but instead is evaluated for impairment at least annually. There were no impairment expenses recognized for the 2005 and 2004 reporting periods.



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OPERATIONS ANALYSIS - 2005 - Compared to 2004

Table I

PIONEER BANKSHARES, INC.

FINANCIAL HIGHLIGHTS

(In thousands,
except for per share information)



|                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                    |  | 2005 |         |   | 2004 |  
|Condensed Statement of Income                       |  |      |         |   |      |   |         |  
|Interest and dividend income                        |  | $    | 8,575   |   |      | $ | 7,798   |  
|Interest expense                                    |  |      | 2,264   |   |      |   | 1,779   |  
|                                                    |  |      |         |   |      |   |         |  
|Net interest income                                 |  |      | 6,311   |   |      |   | 6,019   |  
|Provision for loan losses                           |  |      | 401     |   |      |   | 72      |  
|                                                    |  |      |         |   |      |   |         |  
|Net interest income after provision for loan losses |  |      | 5,910   |   |      |   | 5,947   |  
|Noninterest income                                  |  |      | 998     |   |      |   | 1,188   |  
|Noninterest expense                                 |  |      | 4,694   |   |      |   | 4,781   |  
|                                                    |  |      |         |   |      |   |         |  
|Income before income taxes                          |  |      | 2,214   |   |      |   | 2,354   |  
|Income tax expense                                  |  |      | 749     |   |      |   | 792     |  
|                                                    |  |      |         |   |      |   |         |  
|Net Income                                          |  | $    | 1,465   |   |      | $ | 1,562   |  
|                                                    |  |      |         |   |      |   |         |  
|                                                    |  |     
|At Year End                                         |  |      |         |   |      |   |         |  
|Assets                                              |  | $    | 142,978 |   |      | $ | 133,265 |  
|Deposits                                            |  |      | 113,713 |   |      |   | 100,797 |  
|Loans, Net                                          |  |      | 108,692 |   |      |   | 92,283  |  
|Stockholders Equity                                |  |      | 13,945  |   |      |   | 13,537  |  
|                                                    |  |     
|Per Share Information                               |  |      |         |   |      |   |         |  
|Net income per share, basic                         |  | $    | 1.42    |   |      | $ | 1.46    |  
|Net income per share, diluted                       |  |      | 1.42    |   |      |   | 1.45    |  
|Dividends per share                                 |  |      | .48     |   |      |   | .48     |  
|Book value per share                                |  |      | 13.79   |   |      |   | 13.09   |  
|Financial Statement Ratios                          |  |      |         |   |      |   |         |  
|Return on average assets1                           |  |      | 1.07    | % |      |   | 1.26    | %
|Return on average equity1                           |  |      | 10.46   | % |      |   | 11.30   | %
|Dividend payout ratio                               |  |      | 33.86   | % |      |   | 32.97   | %
|Average equity to average asset1                    |  |      | 10.18   | % |      |   | 11.15   | %

---

|1 | Ratios are based primarily on daily average balances
|- | ----------------------------------------------------

Overview

The Companys net income for
2005 was $1.465 million as compared to $1.562 million in 2004. Net income decreased approximately $97,000 or 6.217%. Diluted earnings per share decreased from $1.45 in 2004 to $1.42 in 2005. The decrease in earnings can be accounted for primarily in
the category of gains on securities transactions and provision for loan losses. Total gains on securities for 2005 were $122,000 compared to $305,000 for 2004. This decrease of $183,000 has a net tax effect of approximately $113,000. The provision
for loan loss expense has increased by approximately $329,000 when compared to the loan loss expense for the prior year. This increase had a net tax effect on income of approximately $217,000.



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Total assets for the Company as of December 31, 2005 were $143.0 million compared to $133.3 million
as of December 31, 2004. This represents total growth in assets of $9.7 million or 7.29%. The increase in assets is directly related to significant growth in the Companys loan portfolio during the year. Total net loans as of
December 31, 2005 were $108.7 million compared to total net loans of $92.3 million at December 31, 2004. This represents an overall increase in the loan portfolio of $16.4 million or 17.78%. A significant portion of the increase in loans
is in the category of commercial real estate and residential mortgages.

Total liabilities for the Company as of December 31, 2005
were $129.0 million, which is an increase of approximately $9.3 million or 7.77%. The primary increase in liability accounts is in the time deposit category. Total deposits as of December 31, 2005 were $113.7 million compared to total deposits
of $100.8 million at December 31, 2004.

The Companys total capital as of December 31, 2005 was $13.9 million, which is an
increase of approximately 408,000 or 3.01% from December 31, 2004. The Companys capital position remains strong and exceeds regulatory guidelines.

Management is unaware of any trends, events or uncertainties that would have a material effect on liquidity, capital resources, or other operational activities. There are no current recommendations by regulatory
authorities, which, if they were to be implemented, would have material effect on the Company.



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Table II

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(ON A FULLY TAXABLE EQUIVALENT BASIS)

(In thousands )



|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|------------------------------------------ |  | ------- | ------- | - | -------------- | - | ----------------------- |  | ----- | ------- |  | - | --------------- | - | ----------------------- | - | ----- |  | ----- | -
|                                           |  | 2005    |         |   | 2004           |  
|                                           |  | Average |         |   | Income/Expense |   | AverageRatesEarned/Paid |  |       | Average |  |   | Income/ Expense |   | AverageRatesEarned/Paid |  
|ASSETS                                     |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Loans:1                                    |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Commercial                                 |  | $       | 3,957   |   |                | $ | 313                     |  | 7.91  | %       |  | $ | 2,960           |   |                         | $ | 224   |  | 7.57  | %
|Real estate                                |  |         | 82,636  |   |                |   | 5,617                   |  | 6.80  | %       |  |   | 72,303          |   |                         |   | 5,058 |  | 7.00  | %
|Installment                                |  |         | 13,867  |   |                |   | 1,731                   |  | 12.48 | %       |  |   | 12,877          |   |                         |   | 1,790 |  | 13.90 | %
|Credit card                                |  |         | 635     |   |                |   | 135                     |  | 21.26 | %       |  |   | 713             |   |                         |   | 152   |  | 21.32 | %
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Total Loans                                |  |         | 101,095 |   |                |   | 7,796                   |  | 7.71  | %       |  |   | 88,853          |   |                         |   | 7,224 |  | 8.13  | %
|                                           |  |         |         |   |                |  
|Federal funds sold                         |  |         | 2,821   |   |                |   | 92                      |  | 3.26  | %       |  |   | 2,771           |   |                         |   | 31    |  | 1.12  | %
|Interest bearing deposits                  |  |         | 6,356   |   |                |   | 208                     |  | 3.27  | %       |  |   | 7,053           |   |                         |   | 163   |  | 2.31  | %
|Securities                                 |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Taxable                                    |  |         | 14,623  |   |                |   | 438                     |  | 3.00  | %       |  |   | 12,350          |   |                         |   | 324   |  | 2.62  | %
|Nontaxable                                 |  |         | 1,852   |   |                |   | 58                      |  | 3.13  | %       |  |   | 2,478           |   |                         |   | 81    |  | 3.27  | %
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Total Earning Assets                       |  |         | 126,747 |   |                |   | 8,592                   |  | 6.78  | %       |  |   | 113,505         |   |                         |   | 7,823 |  | 6.89  | %
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Allowance for loan losses                  |  |         | (1,335  | ) |                |   |                         |  |       |         |  |   | (1,436          | ) |                         |   |       |  |       |  
|Nonearning assets                          |  |         | 12,238  |   |                |   |                         |  |       |         |  |   | 11,966          |   |                         |   |       |  |       |  
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Total Assets                               |  | $       | 137,650 |   |                |   |                         |  |       |         |  | $ | 124,035         |   |                         |   |       |  |       |  
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|                                           |  |         |         |   |                |  
|Deposits:                                  |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Interest bearing demand deposits           |  | $       | 14,841  |   |                | $ | 62                      |  | 0.41  | %       |  | $ | 14,343          |   |                         | $ | 55    |  | 0.38  | %
|Savings                                    |  |         | 14,138  |   |                |   | 79                      |  | 0.56  | %       |  |   | 13,679          |   |                         |   | 66    |  | 0.48  | %
|Time deposits                              |  |         | 49,637  |   |                |   | 1,506                   |  | 3.03  | %       |  |   | 47,562          |   |                         |   | 1,214 |  | 2.55  | %
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Total Deposits                             |  |         | 78,616  |   |                |   | 1,647                   |  | 2.09  | %       |  |   | 75,584          |   |                         |   | 1,335 |  | 1.77  | %
|Borrowings                                 |  |         | 17,448  |   |                |   | 617                     |  | 3.54  | %       |  |   | 10,952          |   |                         |   | 444   |  | 4.05  | %
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Total Interest Bearing Liabilities         |  |         | 96,064  |   |                |   | 2,264                   |  | 2.36  | %       |  |   | 86,536          |   |                         |   | 1,779 |  | 2.06  | %
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Noninterest bearing deposits               |  |         | 26,864  |   |                |   |                         |  |       |         |  |   | 23,050          |   |                         |   |       |  |       |  
|Other liabilities                          |  |         | 715     |   |                |   |                         |  |       |         |  |   | 628             |   |                         |   |       |  |       |  
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Total Liabilities                          |  |         | 123,643 |   |                |   |                         |  |       |         |  |   | 110,214         |   |                         |   |       |  |       |  
|Stockholders equity                       |  |         | 14,007  |   |                |   |                         |  |       |         |  |   | 13,821          |   |                         |   |       |  |       |  
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Total Liabilities and Stockholders Equity |  | $       | 137,650 |   |                |   |                         |  |       |         |  | $ | 124,035         |   |                         |   |       |  |       |  
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Net Interest Earnings                      |  |         |         |   |                | $ | 6,328                   |  |       |         |  |   |                 |   |                         | $ | 6,044 |  |       |  
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  
|Net Yield on Interest Earning Assets       |  |         |         |   |                |   |                         |  | 4.99  | %       |  |   |                 |   |                         |   |       |  | 5.32  | %
|                                           |  |         |         |   |                |   |                         |  |       |         |  |   |                 |   |                         |   |       |  |       |  

---

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

|2 | An incremental tax rate of 34% and a 70% dividend exclusion was used to calculate the tax
equivalent income. The total tax equivalent adjustment was $17,000 and $25,000 in 2005 and 2004, respectively.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Table III

PIONEER BANKSHARES, INC.

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

(On a fully tax equivalent basis)

(In thousands of dollars)



|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|---------------------------------- |  | ----------------------------------------- | --- | - | ----------------------------------------- | - | ---- | ----- |  | - | ------ | - |  | ---- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                   |  | 2005 Compared to 2004 Increase (Decrease) |     |   | 2004 Compared to 2003 Increase (Decrease) |  
|                                   |  | Volume                                    |     |   | Rate                                      |   |      | Total |  |   | Volume |   |  | Rate |      |   | Total |  
|Interest Income                    |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Loans                              |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Commercial                         |  | $                                         | 75  |   |                                           | $ | 14   |       |  | $ | 89     |   |  | $    | 4    |   |       | $ | (21  | ) |  | $ | (17  | )
|Real estate                        |  |                                           | 723 |   |                                           |   | (164 | )     |  |   | 559    |   |  |      | 621  |   |       |   | (324 | ) |  |   | 297  |  
|Installment                        |  |                                           | 138 |   |                                           |   | (197 | )     |  |   | (59    | ) |  |      | (454 | ) |       |   | (110 | ) |  |   | (564 | )
|Credit Card                        |  |                                           | (17 | ) |                                           |   |     |       |  |   | (17    | ) |  |      | (19  | ) |       |   | 4    |   |  |   | (15  | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Total Loans                        |  |                                           | 919 |   |                                           |   | (347 | )     |  |   | 572    |   |  |      | 152  |   |       |   | (451 | ) |  |   | (299 | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Federal funds sold                 |  |                                           | 1   |   |                                           |   | 60   |       |  |   | 61     |   |  |      | (25  | ) |       |   | 3    |   |  |   | (22  | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Interest bearing deposits in banks |  |                                           | (16 | ) |                                           |   | 61   |       |  |   | 45     |   |  |      | 29   |   |       |   | 21   |   |  |   | 50   |  
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Investments                        |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Taxable                            |  |                                           | 60  |   |                                           |   | 54   |       |  |   | 114    |   |  |      | 26   |   |       |   | (62  | ) |  |   | (36  | )
|Nontaxable                         |  |                                           | (20 | ) |                                           |   | (3   | )     |  |   | (23    | ) |  |      | (46  | ) |       |   | (54  | ) |  |   | (100 | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Total Securities                   |  |                                           | 40  |   |                                           |   | 51   |       |  |   | 91     |   |  |      | (20  | ) |       |   | (116 | ) |  |   | (136 | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Total Earning Assets               |  | $                                         | 944 |   |                                           | $ | (175 | )     |  | $ | 769    |   |  | $    | 136  |   |       | $ | (543 | ) |  | $ | (407 | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|                                   |  |                                           |     |   |                                           |  
|Interest Expense                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Demand deposits                    |  | $                                         | 2   |   |                                           | $ | 5    |       |  | $ | 7      |   |  | $    | 5    |   |       | $ | (20  | ) |  | $ | (15  | )
|Savings                            |  |                                           | 2   |   |                                           |   | 11   |       |  |   | 13     |   |  |      | 7    |   |       |   | (31  | ) |  |   | (24  | )
|Time deposits                      |  |                                           | 53  |   |                                           |   | 239  |       |  |   | 292    |   |  |      | (193 | ) |       |   | (178 | ) |  |   | (371 | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Total Deposits                     |  |                                           | 57  |   |                                           |   | 255  |       |  |   | 312    |   |  |      | (181 | ) |       |   | (229 | ) |  |   | (410 | )
|Borrowings                         |  |                                           | 263 |   |                                           |   | (90  | )     |  |   | 173    |   |  |      | 350  |   |       |   | (191 | ) |  |   | 159  |  
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Total Liabilities                  |  |                                           | 320 |   |                                           |   | 165  |       |  |   | 485    |   |  |      | 169  |   |       |   | (420 | ) |  |   | (251 | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  
|Net Interest Earnings              |  | $                                         | 624 |   |                                           | $ | (340 | )     |  | $ | 284    |   |  | $    | (33  | ) |       | $ | (123 | ) |  | $ | (156 | )
|                                   |  |                                           |     |   |                                           |   |      |       |  |   |        |   |  |      |      |   |       |   |      |   |  |   |      |  

Note: Volume changes have been determined by multiplying the prior years average rate by the change in
average balances outstanding. The rate change is the difference between the total change and the volume change.



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Net Interest Income

Net interest income increased $292,000 or 4.85% in 2005 compared to a decrease of $123,000 or 2.00% for 2004. The increase in net interest income for 2005 is directly related to the large volume of loan growth during
2005 and can also be attributed to the increase in market interest rates during the past year. As interest rates rise and the volume of lending activities continues to grow, the Company expects that income from interest earning assets will increase.

Interest income on securities held to maturity and securities available for sale increased by $64,000 or 19.94% in 2005 compared to a
decrease of $92,000 in 2004. The average yields on securities increased from 2.73% in 2004 to 3.01% in 2005. The increase in average yield on securities is related to reinvestment activities during the year at higher market rates, due to the recent
rising interest rate environment. Management maintains a diversified investment strategy as a means of safeguarding the investment portfolio and maintaining adequate cash flow to support future lending activities.

Interest income on federal funds sold and other deposits was $300,000 in 2005, compared to $194,000 in 2004. This increase of $106,000 is the result of
market interest rate increases during the year.

The net interest margin on earning assets on a tax equivalent basis decreased from 5.32%
in 2004 to 4.99% in 2005. This can be attributed to lower yields on real estate and installment loans, as well as increased interest expense on the Banks deposit portfolio.

Total interest expense increased $485,000 or 27.26% in 2005. An increase in interest expense on deposits accounted for $312,000 of the total overall
decrease. The interest yield on total deposits increased from 1.77% in 2004 to 2.09% in 2005. The interest expense on borrowings increased by $173,000 or 38.96% when compared to the prior period. The increase in interest on borrowings resulted from
additional borrowings at year-end 2004 as a source of funds to support projected loan growth for 2005.

Yields on total loans decreased
from 8.13% in 2004 to 7.71% in 2005. The yield on commercial and agricultural loans increased from 7.57% in 2004 to 7.91% in 2005. Commercial real estate, residential real estate and consumer installment loan yields have decreased during 2005
primarily due to managements efforts to offer more competitive rates and attract additional loan volume.

The yield on taxable
investments increased from 2.62% in 2004 to 3.00% in 2005. The tax equivalent yield on nontaxable investments decreased from 3.27% in 2004 to 3.13% in 2005.

The average amount borrowed increased from $10.9 million in 2004 to $17.4 million in 2005. At year-end 2005, the Bank borrowed additional funds of approximately $8 million in preparation for 2005 budget needs and
anticipated loan growth. Management chose to borrow these funds at this time in order to take advantage of the low interest rate market, which will assist the Company in maximizing net interest earnings going forward.

Non-interest Income and Expense

Non-interest
income decreased from $1.2 million in 2004 to $1.0 million in 2005. This represents a 15.99% decrease. A primary factor affecting this change was gains on security transactions of $122,000 for 2005 compared to gains of $305,000 in 2004. The Company
received $15,000 in commission income from sale of insurance and investment products in 2005 compared to $10,000 in 2004. Service charge income accounted for approximately 77% of total non-interest income in 2005 compared to approximately 68% for
2004. This income was mostly generated from overdraft charges related to the Banks Bounce Protection program. Additionally, the Companys total other income, which is comprised of multiple miscellaneous operating categories, increased by
$29,000 when compared to the previous year.

Non-interest expense decreased by $87 or 1.82% from 2004 to 2005. Salaries and benefits
increased by $75,000 or 3.40% in 2005 compared to 2004. Equipment expenses decreased by $31,000 or 3.95% in 2005 compared to 2004. Other expenses decreased by $155,000 from 2005 to 2004 as a result of the Companys proactive cost saving
efforts.



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General Uncertainties and Trends

Management is of the opinion that loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not (i) represent or
result from trends or uncertainties which are reasonably expected to materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits which any available information causes serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.

Management is not aware of any known trends, events or uncertainties
that will have or that are reasonably likely to have a material effect on the issuers liquidity, capital resources or operations of the issuers. Additionally, management is not aware of any current recommendations by the regulatory authorities
which, if they were to be implemented, would have such an effect.

Securities

Securities as of December 31, 2005 totaled $12.2 million, which is a 9.63% decrease over the December 31, 2004 balance of $13.5 million. This
decline is the result of reduced volume of investment activity, as funds were utilized as a source for loan growth.

The Company maintains
an adequate level of securities to provide for liquidity and as security for public indebtedness. A schedule of securities including the carrying amount and estimated market value of securities by contractual maturity is shown in a note to the
consolidated financial statements. Managements philosophy is to keep the maturities of investments relatively short which allows the Company to better match deposit maturities with investment maturities and thus react more quickly to interest
rate changes.

At December 31, 2005, the Company had investments in common and preferred stock with a cost of $1.9 million and an
estimated market value of $2.0 million. The investments include common stocks purchased with the objective of realizing capital gains. The market value of these investments is sensitive to general trends in the stock market.

The Banks total investment portfolio at December 31, 2005 has a cost of $9.3 million and an estimated fair market value of $9.2 million. These
investments include U.S. government and agency securities, state and municipal securities, and a small amount of held-to-maturity mortgage-backed securities.

Securities (continued)

The schedule below summarizes the book value of the portfolio by maturity classification and
shows the weighted average yield in each group on a tax equivalent basis:



|                                               |  |                 |        |                      |       |   |                 |   |                      |  |       |  
|---------------------------------------------- |  | --------------- | ------ | -------------------- | ----- | - | --------------- | - | -------------------- |  | ----- | -
|                                               |  | 2005 Book Value |        | WeightedAverageYield |       |   | 2004 Book Value |   | WeightedAverageYield | 
|(In Thousands)                                 |  |                 |        |                      |       |   |                 |   |                      | 
|Securities available for sale                  |  |                 |        |                      |       |   |                 |   |                      |  |       |  
|Maturing within one year                       |  | $               | 6,434  |                      | 2.57  | % |                 | $ | 1,270                |  | 2.00  | %
|Maturing after one year But within five years  |  |                 | 2,495  |                      | 3.86  | % |                 |   | 8,808                |  | 2.82  | %
|Maturing after five years But within ten years |  |                 | 221    |                      | 6.69  | % |                 |   | 229                  |  | 6.89  | %
|Maturing after 10 years                        |  |                 |       |                      |      |   |                 |   |                     |  |      |  
|Equity Securities                              |  |                 | 1,979  |                      |      |   |                 |   | 2,024                |  |      |  
|                                               |  |                 |        |                      |       |   |                 |   |                      |  |       |  
|Total securities available for sale            |  | $               | 11,129 |                      | 3.02  | % |                 | $ | 12,331               |  | 2.80  | %
|                                               |  |                 |        |                      |       |   |                 |   |                      |  |       |  
|                                               |  |                 |        |                     
|Securities held to maturity                    |  |                 |        |                      |       |   |                 |   |                      |  |       |  
|Maturing within one year                       |  | $               |       |                      |      |   |                 | $ |                     |  |      |  
|Maturing after one year But within five years  |  |                 | 4      |                      | 6.66  | % |                 |   | 15                   |  | 6.80  | %
|Maturing after five but Within ten years       |  |                 | 1      |                      | 11.96 | % |                 |   | 1                    |  | 11.99 | %
|                                               |  |                 |        |                      |       |   |                 |   |                      |  |       |  
|Total securities held to maturity              |  | $               | 5      |                      | 7.39  | % |                 | $ | 16                   |  | 7.12  | %
|                                               |  |                 |        |                      |       |   |                 |   |                      |  |       |  
|Total Securities                               |  | $               | 11,134 |                      | 3.02  | % |                 | $ | 12,347               |  | 2.80  | %
|                                               |  |                 |        |                      |       |   |                 |   |                      |  |       |  

Equity securities have been excluded from the weighted average yield calculations in the previous
table. All tax exempt obligations included above have been stated on a tax equivalent basis using a 34% tax rate.



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The Company accounts for investments under SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. This statement requires all securities to be classified at the point of purchase as trading securities, available for sale or held to maturity. See the notes to the financial statements for a discussion of the
accounting policies for investments. The Company values its debt securities based on information supplied by its correspondent banks for actively traded obligations and by market comparison with similar obligations for non-rated investments.
Investments in common stocks are based on the last trade prices as provided by the Companys investment broker.

Loan Portfolio

Total net loans increased during 2005 from $92.3 million at December 31, 2004 to $108.7 million at December 31, 2005.
This is an increase of $16.4 million or 17.78%. The increase in the loan portfolio was mainly in the area of commercial and residential real estate loans. The Bank has historically been concentrated in consumer auto and installment loans, and
management has taken proactive steps to diversify the portfolio during the past two years by seeking small to medium sized business loans throughout its service area. The Bank continues to make consumer loans, as well as residential mortgage loans
for its customer base.

Loans are stated at their face amount, net of unearned discount, and are classified as follows at December 31:



|                                  |  |                  |         |   |                  |   |        |  
|--------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------ | -
|                                  |  | December 31,2005 |         |   | December 31,2004 |  
|                                  |  | (In Thousands)   |        
|Mortgage loans on real estate     |  |                  |         |   |                  |   |        |  
|Construction loans                |  | $                | 11,543  |   |                  | $ | 7,193  |  
|Agricultural                      |  |                  | 4,595   |   |                  |   | 4,607  |  
|Equity lines of credit            |  |                  | 1,780   |   |                  |   | 1,738  |  
|Residential 1-4 family            |  |                  | 43,308  |   |                  |   | 41,125 |  
|Second Mortgages                  |  |                  | 3,807   |   |                  |   | 3,305  |  
|Multifamily                       |  |                  | 3,275   |   |                  |   | 1,853  |  
|Commercial                        |  |                  | 21,892  |   |                  |   | 17,046 |  
|                                  |  |                  |         |   |                  |   |        |  
|Total real estate loans           |  |                  | 90,200  |   |                  |   | 76,867 |  
|                                  |  |                 
|Commercial and agricultural loans |  |                  | 5,543   |   |                  |   | 3,548  |  
|Consumer installment loans        |  |                  |         |   |                  |   |        |  
|Personal                          |  |                  | 14,699  |   |                  |   | 13,641 |  
|Credit cards                      |  |                  | 668     |   |                  |   | 729    |  
|                                  |  |                  |         |   |                  |   |        |  
|Total consumer installment loans  |  |                  | 15,367  |   |                  |   | 14,370 |  
|All other loans                   |  |                  | 225     |   |                  |   | 166    |  
|                                  |  |                  |         |   |                  |   |        |  
|Gross Loans                       |  |                  | 111,335 |   |                  |   | 94,951 |  
|                                  |  |                 
|Less unearned income on loans     |  |                  | (1,311  | ) |                  |   | (1,322 | )
|                                  |  |                  |         |   |                  |   |        |  
|Loans, less unearned discount     |  |                  |         |   |                  |   | 93,629 |  
|Less allowance for loan losses    |  |                  | (1,332  | ) |                  |   | (1,346 | )
|                                  |  |                  |         |   |                  |   |        |  
|Net Loans Receivable              |  | $                | 108,692 |   |                  | $ | 92,283 |  
|                                  |  |                  |         |   |                  |   |        |  

The Banks policy has been to make collectible loans that are held for future interest
income. Collateral required by the Bank is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower.

The Banks residential real estate loans, including equity lines of credit and second mortgages totaled $48.9 million as of December 31, 2005. This represents an increase of approximately $2.7 million in the
residential loan



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##### Table of Contents

portfolio over the previous year. Residential real estate loans are generally made for a period not to exceed 30 years and are secured by first deed of
trust, which do not exceed 80% of the appraised value. If the loan to value ratio exceeds 80%, the Company requires additional collateral or guarantees. For a majority of the real estate loans, interest is adjustable after each three or five year
period. Fixed rate loans are generally made for a fifteen-year period. In addition, the Bank makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 80% of the appraised value. Home equity loans are made on a
10-year revolving line of credit basis.

The Banks commercial real estate loans, including construction accounts, agricultural real
estate, multifamily dwellings, and other business properties totaled $41.3 million as of December 31, 2005. This represents an increase of approximately $10.6 million in the commercial real estate portfolio in comparison to the balance of $30.7
million as of December 31, 2004. The increase in commercial real estate loans is a direct result of managements focus on this lending category in an effort to diversify the overall lending portfolio. Management has established specific
lending criteria relating to commercial loans and considers the risk of loss in this loan category to be relatively low.

The Banks
consumer loan portfolio increased $997,000 or 6.94% to $15.4 million at December 31, 2005. This increase is attributed to the Banks continued efforts to serve consumer loan needs throughout its service area.

A schedule of remaining maturities of selected loan categories is as follows: (in thousands)



|                                             |  |                   |        |                                 |   |      
|-------------------------------------------- |  | ----------------- | ------ | ------------------------------- | - | -----
|                                             |  | ConstructionLoans |        | Commercial andAgriculturalLoans
|Loans maturing within one year               |  | $                 | 4,898  |                                 | $ | 1,124
|Variable rate                                |  |                   | 1,245  |                                 |   | 1,226
|Fixed rate, over one year through five years |  |                   | 5,060  |                                 |   | 2,597
|Fixed rate, over five years                  |  |                   | 340    |                                 |   | 596  
|                                             |  |                   |        |                                 |   |      
|Total Maturities of Selected Loans           |  | $                 | 11,543 |                                 | $ | 5,543
|                                             |  |                   |        |                                 |   |      

At December 31, 2005, no industry category exceeded ten percent of total loans.

Risk Elements in the Loan Portfolio

The
following schedule outlines the non-accrual, restructured, and other non-performing risk elements in the loan portfolio as of December 31, 2005 and December 31, 2004:



|                                         |  |                |      |   |      |   |       |  
|---------------------------------------- |  | -------------- | ---- | - | ---- | - | ----- | -
|                                         |  | 2005           |      |   | 2004 |  
|                                         |  | (In Thousands) |     
|Non-accrual Loans                        |  | $              | 243  |   |      | $ | 462   |  
|Loans Past Due 90 days or more           |  |                | 126  |   |      |   | 428   |  
|Other Impaired Loans                     |  |                | 286  |   |      |   | 430   |  
|                                         |  |                |      |   |      |   |       |  
|Total non-performing assets              |  | $              | 655  |   |      | $ | 1,319 |  
|                                         |  |                |      |   |      |   |       |  
|Allowance for loan losses to total loans |  |                | 1.21 | % |      |   | 1.44  | %
|                                         |  |               
|Non-performing Assets to total loans     |  |                | 0.59 | % |      |   | 1.41  | %

Non-accrual loans are loans on which the interest accruals have been suspended or discontinued as
a result of the borrowers financial difficulties and delinquency status. Interest accruals are continued on past due, secured loans until the principal and accrued interest equal the value of the collateral and on unsecured loans until the
financial condition of the creditor deteriorates to the point that any further accrued interest would be determined to be uncollectible.

Restructured loans are loans on which the original interest rate or repayment terms have been substantially changed due to the borrowers financial hardship. There were no restructured loans on which interest was accruing at a reduced
rate or on which payments had been extended.



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

Management monitors all past due accounts carefully for any anticipated losses and makes appropriate allocations of funds for potential losses as they
are identified.

Interest on non-accrual loans did not have a significant impact on income for 2005 or 2004.

Loan Losses and Allowance For Loan Losses

The
following schedule outlines the activity in the allowance for loan loss account as of December 31, 2005 and December 31, 2004:



|                                              |  |      |       |   |      |   |       |  
|--------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                              |  | 2005 |       |   | 2004 |  
|Beginning balance                             |  | $    | 1,346 |   |      | $ | 1,433 |  
|                                              |  |     
|Provision charged to expense                  |  |      | 401   |   |      |   | 72    |  
|                                              |  |     
|Loan losses:                                  |  |      |       |   |      |   |       |  
|Commercial                                    |  |      | 39    |   |      |   |      |  
|Installment                                   |  |      | 569   |   |      |   | 568   |  
|Real estate                                   |  |      | 75    |   |      |   | 25    |  
|Credit card                                   |  |      | 20    |   |      |   | 25    |  
|                                              |  |      |       |   |      |   |       |  
|Total Loan Losses                             |  |      | 703   |   |      |   | 618   |  
|                                              |  |      |       |   |      |   |       |  
|Recoveries:                                   |  |      |       |   |      |   |       |  
|Commercial                                    |  |      | 5     |   |      |   |      |  
|Installment                                   |  |      | 269   |   |      |   | 381   |  
|Real estate                                   |  |      |      |   |      |   | 67    |  
|Credit card                                   |  |      | 14    |   |      |   | 11    |  
|                                              |  |      |       |   |      |   |       |  
|Total Loan Recoveries                         |  |      | 288   |   |      |   | 459   |  
|                                              |  |      |       |   |      |   |       |  
|Net Loan Losses                               |  |      | 415   |   |      |   | 159   |  
|                                              |  |      |       |   |      |   |       |  
|Balance at End of Period                      |  | $    | 1,332 |   |      | $ | 1,346 |  
|                                              |  |      |       |   |      |   |       |  
|Net Loan Losses as a Percent of Average loans |  |      | 0.41  | % |      |   | 0.18  | %

A breakdown of the allowance allocations by loan type are presented below for December 31,
2005 and December 31, 2004:



|                                                         |  |                   |       |                     |                   |   |                        |        |   |        |   |                     |  |        |                        |  |        |  
|-------------------------------------------------------- |  | ----------------- | ----- | ------------------- | ----------------- | - | ---------------------- | ------ | - | ------ | - | ------------------- |  | ------ | ---------------------- |  | ------ | -
|                                                         |  | December 31, 2005 |       |                     | December 31, 2004 |  
|                                                         |  | Amount            |       | Percent ofAllowance |                   |   | Percent ofAverageLoans |        |   | Amount |   | Percent ofAllowance |  |        | Percent ofAverageLoans | 
|Analysis of Ending Balance                               |  |                   |       |                     |                   |   |                        |        |   |        |   |                     |  |        |                        |  |        |  
|Commercial                                               |  | $                 | 262   |                     | 19.67             | % |                        | 3.91   | % |        | $ | 428                 |  | 31.80  | %                      |  | 3.33   | %
|Real estate                                              |  |                   | 321   |                     | 24.10             | % |                        | 81.74  | % |        |   | 175                 |  | 13.00  | %                      |  | 81.38  | %
|Installment                                              |  |                   | 711   |                     | 53.38             | % |                        | 13.72  | % |        |   | 697                 |  | 51.78  | %                      |  | 14.49  | %
|Credit card                                              |  |                   | 38    |                     | 2.85              | % |                        | 0.63   | % |        |   | 46                  |  | 3.42   | %                      |  | 0.80   | %
|                                                         |  |                   |       |                     |                   |   |                        |        |   |        |   |                     |  |        |                        |  |        |  
|Total                                                    |  | $                 | 1,332 |                     | 100.00            | % |                        | 100.00 | % |        | $ | 1,346               |  | 100.00 | %                      |  | 100.00 | %
|                                                         |  |                   |       |                     |                   |   |                        |        |   |        |   |                     |  |        |                        |  |        |  
|Allowance for loan losses as a percent of year end loans |  |                   |       |                     | 1.21              | % |                        |        |   |        |   |                     |  | 1.44   | %                      |  |        |  

For periods presented, the provision for loan losses charged to operations is based on
managements judgment after taking into consideration all factors connected with the collectibility of the existing portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and value of the
portfolio, industry



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standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operations include internally generated
loan review reports, past due reports, historical loan loss experience, and individual borrowers financial conditions. 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 possible credit losses 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 allowance for loan loss reserve account remained consistent at a level of approximately $1.3 million during 2005 and
2004. Loan charge offs for 2005 increased by $85,000 or 13.75% compared to the prior year, while loan loss recoveries decreased by $171,000 or 37.25%. This resulted in an overall increase of $256,000 in net loan charge offs for the period ending
December 31, 2005 as compared to December 31, 2004. Management attributes the reduction in loan loss recoveries to increased bankruptcy filings, which prohibited legal collections against certain consumers, as well as a reduced collections
related to vehicle repossessions during 2005 as compared to 2004.

The provision expense related to the allowance for loan loss for 2005
increased by $329,000 as compared to 2004. The provision expense for 2004 was substantially reduced as a result of corrective collection efforts relating to a specific loss allocation for the automobile financing sector of its loan portfolio.
Managements evaluations during 2004 concluded that any remaining potential losses in this sector were minimal and therefore the related specific allocations were eliminated. The reductions of these specific allocations accounted for
approximately $235,000 in provision expense adjustments for 2004. These adjustments are considered to be non-recurring. The provision expense for 2005 is considered to be a relatively normal level based on the Banks historical data. There were
no significant non-recurring adjustments made to the Banks provision expense for 2005 and management does not anticipate any substantial non-recurring adjustments in the near future.

Management believes that potential loan losses in the consumer loan portfolio are offset by higher loan yields. Management has also concluded that the
risk of loan loss in the commercial and residential real estate portfolios is expected to be minimal, as these loans are well collateralized. In summary, management is of the opinion that the allowance for loan losses is adequate to absorb future
losses that may occur in the existing loan portfolio.

Premises and Equipment

The Bank completed renovations to the Jenkins Building, which is located next to the main branch office in Stanley, Virginia, in October 2005. The
renovations to this facility consisted of extensive remodeling to the upper floor in order to provide adequate space for the Companys data processing, technology operations, and bookkeeping departments. The total cost of this renovation
project was approximately $915,000.

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

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 total deposits as
of December 31, 2005 were $113.7 million compared to $100.8 million at December 31, 2004. This increase of $12.9 million or 12.81% was primarily made up of increases in time deposit accounts. Total demand deposits totaled $44.2 million as
of December 31, 2005 compared to $41.1 million at



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December 31, 2004. This represents an increase of $3.1 million or 7.66%. Demand deposits consist of checking accounts including standard consumer
accounts, NOW accounts, and money market (MMDA) accounts. The Companys demand deposits have historically remained relatively stable; however, these balances do fluctuate with normal daily activity. Management does not anticipate any major
changes in the demand deposit portfolio in the near future.

Total savings deposits as of December 31, 2005 were $14.3 million
compared to $14.0 million as of December 31, 2004. This represents an increase of approximately $310,000 or 2.22%. The Companys savings deposits have remained consistent historically, with periodic fluctuation. These accounts consist of
passbook savings accounts, statement savings accounts, and Christmas club accounts. Management does not expect any major changes in the savings deposit portfolio in the near future.

Time accounts in the form of certificates of deposit instruments represent approximately 48.56% of the Banks total deposits. Total time deposits as
of December 31, 2005 were $55.2 million compared to total time deposits of $45.5 million at December 31, 2004. This represents an increase of approximately $9.7 million or 21.39%. Time deposits are classified in two major categories for
FDIC Insurance purposes, as well as other accounting and regulatory purposes: 1) those time deposits with a balance greater than $100,000, and 2) those time deposits with a balance of $100,000 or less. The Companys total time deposits greater
than $100,000 increased during 2005 by approximately $4.2 million compared to the prior year. Total time deposits with balances of $100,000 or less were $42.8 million at December 31, 2005 compared to $37.5 million at December 31, 2004.
Time deposits with a balance greater than $100,000 represent 22.49% of the Banks total time deposit portfolio.

The maturity schedule
as of December 31, 2005 for certificates of deposit over $100,000 are shown below:



|                   |  |   |       
|------------------ |  | - | ------
|Maturity           |  |  
|Less than 3 months |  | $ | 2,383 
|3 to 12 months     |  |   | 5,397 
|1 to 3 years       |  |   | 3,388 
|Over 3 years       |  |   | 1,253 
|                   |  |   |       
|Total              |  | $ | 12,421
|                   |  |   |       

The Bank did not have any brokered deposits as of December 31, 2005.

Long-term Debt

The Bank has a line of credit
with the Federal Home Loan Bank (FHLB) of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. This represents a total credit line of approximately $57.2 million and $53.3 million as
of December 31, 2005 and 2004, respectively. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by 1-4 family
residential mortgages. On some fixed rate advances the FHLB may convert the advanced to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may pay back all or part
of the advance without a prepayment penalty.

At December 31, 2005, the total fixed-rate long-term debt with FHLB totaled $14.5
million and matures through December 30, 2009. The interest rates on the fixed-rate notes payable ranges from 2.92% to 3.92%. There were no floating-rate long-term debts outstanding for the Company as of December 31, 2005. The contractual
maturities of FHLB advances as of December 31, 2005 are as follows:



|            |  |                |       
|----------- |  | -------------- | ------
|            |  | (In Thousands)
|Due in 2006 |  | $              | 3,800 
|Due in 2007 |  |                | 3,800 
|Due in 2008 |  |                | 3,800 
|Due in 2009 |  |                | 3,100 
|            |  |                |       
|            |  | $              | 14,500
|            |  |                |       



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##### Table of Contents

Analysis of Capital

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

The Federal Reserve, Comptroller of the Currency, and the Federal Deposit Insurance Corporation have adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total
capital to risk-weighted assets is 8.00%, of which at least 4.00% must be Tier 1 capital, composed of common equity, retained earnings, and a limited amount of perpetual preferred stock, less certain goodwill items. The Company is considered to be
well capitalized under the regulatory framework. Total consolidated capital as a percentage of risk-weighted assets was 14.9% at December 31, 2005. The ratio of Consolidated Tier 1 Capital to risk-weighted assets was 13.6% as of
December 31 2005 compared to 15.4% at December 31, 2004. Both of these ratios exceed regulatory capital requirements.

The
following schedule shows a comparative breakdown of the Companys capital as of December 31, 2005 and December 31, 2004:



|                                             |  |                |         |   |      |   |        |  
|-------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | -
|                                             |  | 2005           |         |   | 2004 |  
|                                             |  | (in thousands) |        
|Tier 1 capital                               |  |                |         |   |      |   |        |  
|Consolidated Risk-weighted assets            |  | $              | 100,028 |   |      | $ | 85,086 |  
|                                             |  |                |         |   |      |   |        |  
|Consolidated Tier 1 capital                  |  |                |         |   |      |   |        |  
|Common stock                                 |  | $              | 506     |   |      | $ | 517    |  
|Surplus                                      |  |                |        |   |      |   |       |  
|Retained Earnings                            |  |                | 13,468  |   |      |   | 12,918 |  
|Goodwill excluded                            |  |                | (360    | ) |      |   | (360   | )
|                                             |  |                |         |   |      |   |        |  
|Total Tier 1 capital                         |  |                | 13,614  |   |      |   | 13,075 |  
|                                             |  |               
|Consolidated Tier 2 capital                  |  |                |         |   |      |   |        |  
|Allowance for loan losses (1)                |  |                | 1,250   |   |      |   | 1,064  |  
|                                             |  |                |         |   |      |   |        |  
|Total risk-based capital                     |  | $              | 14,864  |   |      | $ | 14,139 |  
|                                             |  |                |         |   |      |   |        |  
|Consolidated total risk-based capital ratio  |  |                | 14.9    | % |      |   | 16.6   | %
|Consolidated Tier 1 risk-based capital ratio |  |                | 13.6    | % |      |   | 15.4   | %
|Consolidated Leverage ratio                  |  |                | 9.5     | % |      |   | 10.5   | %

---

|(1) | Limited to 1.25% of gross risk-weighted assets
|--- | ----------------------------------------------



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##### Table of Contents

Interest Sensitivity and Liquidity

The following table reflects the Companys interest sensitivity and interest rate risk position as of December 31, 2005:



|                                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|----------------------------------------------- |  | ----------- | ------- | - | ------------ | - | ------- | ----------- |  | - | ----------- | - |  | ------------- | ------ | - | ----- | ------ | - |  | - | -------
|(In Thousands)                                  |  | 1 - 90 Days |         |   | 91 - 365Days |   |         | 1 to 5Years |  |   | Over 5Years |   |  | NotClassified |        |   | Total
|Uses of Funds:                                  |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Loans                                           |  | $           | 8,685   |   |              | $ | 11,061  |             |  | $ | 44,201      |   |  | $             | 46,077 |   |       |       |   |  | $ | 110,024
|Interest bearing                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Bank deposits                                   |  |             | 2,051   |   |              |   | 1,995   |             |  |   | 900         |   |  |               |       |   |       |       |   |  |   | 4,946  
|Investment Securities                           |  |             |        |   |              |   | 6,434   |             |  |   | 2,499       |   |  |               | 222    |   |       | 1,979  |   |  |   | 11,134 
|Restricted Stock                                |  |             |        |   |              |   |        |             |  |   |            |   |  |               |       |   |       | 1,016  |   |  |   | 1,016  
|Federal Funds Sold                              |  |             | 3,250   |   |              |   |        |             |  |   |            |   |  |               |       |   |       |       |   |  |   | 3,250  
|                                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Total                                           |  |             | 13,986  |   |              |   | 19,490  |             |  |   | 47,600      |   |  |               | 46,299 |   |       | 2,995  |   |  |   | 130,370
|                                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Sources of Funds:                               |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Demand Deposits                                 |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Interest bearing                                |  |             | 14,525  |   |              |   |        |             |  |   |            |   |  |               |       |   |       |       |   |  |   | 14,525 
|Savings accounts                                |  |             | 14,264  |   |              |   |        |             |  |   |            |   |  |               |       |   |       |       |   |  |   | 14,264 
|Time Deposits:                                  |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Over $100,000                                   |  |             | 2,383   |   |              |   | 5,397   |             |  |   | 4,641       |   |  |               |       |   |       |       |   |  |   | 12,421 
|Other certificates                              |  |             | 4,363   |   |              |   | 19,664  |             |  |   | 18,772      |   |  |               |       |   |       |       |   |  |   | 42,799 
|                                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Total deposits                                  |  |             | 35,535  |   |              |   | 25,061  |             |  |   | 23,413      |   |  |               |       |   |       |       |   |  |   | 84,009 
|                                                |  |             |         |   |              |  
|Borrowings                                      |  |             | 1,300   |   |              |   | 2,500   |             |  |   | 10,700      |   |  |               |       |   |       |       |   |  |   | 14,500 
|                                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|Total                                           |  |             | 36,835  |   |              |   | 27,561  |             |  |   | 34,113      |   |  |               |       |   |       |       |   |  |   | 98,509 
|                                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        
|                                                |  |             |         |   |              |  
|Discrete Gap                                    |  |             | (22,849 | ) |              |   | (8,071  | )           |  |   | 13,487      |   |  |               | 46,299 |   |       | 2,995  |   |  |   | 31,861 
|                                                |  |             |         |   |              |  
|Cumulative Gap                                  |  |             | (22,849 | ) |              |   | (30,920 | )           |  |   | (17,433     | ) |  |               | 28,866 |   |       | 31,861 |   |  |   |        
|                                                |  |             |         |   |              |  
|Ratio of Cumulative Gap to Total Earning Assets |  |             | -17.53  | % |              |   | -23.72  | %           |  |   | -13.37      | % |  |               | 22.14  | % |       | 24.44  | % |  |   |        
|                                                |  |             |         |   |              |   |         |             |  |   |             |   |  |               |        |   |       |        |   |  |   |        

At December 31, 2005, the Company had a negative cumulative Gap Rate Sensitivity Ratio of
23.72% for the one-year re-pricing period compared with -26.86% at December 31, 2004. This 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. Management constantly monitors the Companys interest rate risk and believes that the current position is an acceptable risk for a growing community bank
operating in a rural environment.

Liquidity represents an institutions 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 and due from banks, interest-bearing deposits in financial institutions, securities purchased
under agreements to resell, federal funds sold, securities available for sale, and loans and investments maturing within one year.



24



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##### Table of Contents

Liquidity as of December 31, 2005 remains adequate. The Bank 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 Bank was a seller of federal funds for most of
2005 and 2004. The Banks membership in the Federal Home Loan Bank System also provides liquidity, as the Bank can borrow money that is repaid over a ten-year period and can use the money to make fixed rate loans. The matching of the long-term
loans and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Bank reviews its interest rate gap periodically and makes adjustments as needed.

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

Off-Balance Sheet Commitments

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its
customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Companys liquidity and capital resources to the extent customers accept and or use
these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The notes to the Consolidated Financial Statements contain further discussion of the
nature, business purpose and elements of risk involved with these off-balance sheet arrangements. The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Companys financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

Recent Accounting Pronouncements

Accounting pronouncements are established by various
accountancy governing bodies to provide guidance in the principles and practices used for maintaining accurate and consistent accounting records. The Company has established monitoring procedures for the review of new accounting pronouncements
relating to the banking industry, in order to ensure that all transactions are in compliance with GAAP. Recent accounting pronouncements considered to be applicable to the Company are included in Note 1 of the Consolidated Financial Statements
within this report.



25



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##### Table of Contents

Item 7. Consolidated Financial Statements.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                          |  |     
|--------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                          |  | Page
|                                                                                                          | 
|Report of Independent Registered Public Accounting Firm                                                   |  | 27  
|                                                                                                          | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                              |  | 28  
|                                                                                                          | 
|Consolidated Statements of Income for the years ended December 31, 2005 and 2004                          |  | 29  
|                                                                                                          | 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2005 and 2004 |  | 30  
|                                                                                                          | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004                      |  | 31  
|                                                                                                          | 
|Notes to Consolidated Financial Statements                                                                |  | 32  



26



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##### Table of Contents

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Pioneer Bankshares, Inc.

Stanley, Virginia

We have audited the accompanying consolidated balance sheets of Pioneer Bankshares, Inc. and subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of income, changes in stockholders equity and cash flows for the two years ended December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pioneer Bankshares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the two years ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of America.

LOGO

Winchester, Virginia

February 2, 2006



27



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##### Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

(In Thousands, except share data)



|                                                                                                                     |  |      |         |   |      |   |        
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|                                                                                                                     |  | 2005 |         |   | 2004
|ASSETS                                                                                                               |  |      |         |   |      |   |        
|Cash and due from banks                                                                                              |  | $    | 7,373   |   |      | $ | 9,896  
|Interest-bearing deposits in banks                                                                                   |  |      | 4,946   |   |      |   | 10,480 
|Federal funds sold                                                                                                   |  |      | 3,250   |   |      |   | 950    
|Securities available for sale, at fair value                                                                         |  |      | 11,129  |   |      |   | 12,331 
|Securities held to maturity (fair value was $5 and $16 in 2005 and 2004, respectively)                               |  |      | 5       |   |      |   | 16     
|Restricted securities                                                                                                |  |      | 1,016   |   |      |   | 1,181  
|Loans receivable, net of allowance for loan losses of $1,332 in 2005 and $1,346 in 2004                              |  |      | 108,692 |   |      |   | 92,283 
|Bank premises and equipment, net                                                                                     |  |      | 4,581   |   |      |   | 4,150  
|Accrued interest receivable                                                                                          |  |      | 567     |   |      |   | 491    
|Other assets                                                                                                         |  |      | 1,419   |   |      |   | 1,487  
|                                                                                                                     |  |      |         |   |      |   |        
|Total Assets                                                                                                         |  | $    | 142,978 |   |      | $ | 133,265
|                                                                                                                     |  |      |         |   |      |   |        
|                                                                                                                     |  |     
|LIABILITIES                                                                                                          |  |      |         |   |      |   |        
|Deposits                                                                                                             |  |      |         |   |      |   |        
|Noninterest bearing                                                                                                  |  | $    | 29,704  |   |      | $ | 26,194 
|Interest bearing                                                                                                     |  |      |         |   |      |   |        
|Demand                                                                                                               |  |      | 14,525  |   |      |   | 14,890 
|Savings                                                                                                              |  |      | 14,264  |   |      |   | 13,954 
|Time deposits over $100,000                                                                                          |  |      | 12,421  |   |      |   | 8,236  
|Other time deposits                                                                                                  |  |      | 42,799  |   |      |   | 37,523 
|                                                                                                                     |  |      |         |   |      |   |        
|Total Deposits                                                                                                       |  |      | 113,713 |   |      |   | 100,797
|Accrued expenses and other liabilities                                                                               |  |      | 820     |   |      |   | 631    
|Long term debt                                                                                                       |  |      | 14,500  |   |      |   | 18,300 
|                                                                                                                     |  |      |         |   |      |   |        
|Total Liabilities                                                                                                    |  |      | 129,033 |   |      |   | 119,728
|                                                                                                                     |  |      |         |   |      |   |        
|                                                                                                                     |  |     
|STOCKHOLDERS EQUITY                                                                                                 |  |      |         |   |      |   |        
|Common stock; $.50 par value, authorized 5,000,000 shares; outstanding  1,011,481 in 2005; 1,034,045 shares in 2004 |  |      | 506     |   |      |   | 517    
|Retained earnings                                                                                                    |  |      | 13,468  |   |      |   | 12,918 
|Accumulated other comprehensive income (loss), net                                                                   |  |      | (29     | ) |      |   | 102    
|                                                                                                                     |  |      |         |   |      |   |        
|Total Stockholders Equity                                                                                           |  |      | 13,945  |   |      |   | 13,537 
|                                                                                                                     |  |      |         |   |      |   |        
|Total Liabilities and Stockholders Equity                                                                           |  | $    | 142,978 |   |      | $ | 133,265
|                                                                                                                     |  |      |         |   |      |   |        

See Notes to Consolidated Financial Statements.



28



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2005 AND 2004

(In Thousands, except per
share data)



|                                                    |  |      |       |      |   |      
|--------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                    |  | 2005 |       | 2004
|INTEREST AND DIVIDEND INCOME:                       |  |      |       |      |   |      
|Loans including fees                                |  | $    | 7,796 |      | $ | 7,224
|Interest on securities  taxable                    |  |      | 375   |      |   | 300  
|Interest on securities  nontaxable                 |  |      | 10    |      |   | 21   
|Deposits and federal funds sold                     |  |      | 300   |      |   | 194  
|Dividends                                           |  |      | 94    |      |   | 59   
|                                                    |  |      |       |      |   |      
|Total Interest and Dividend Income                  |  |      | 8,575 |      |   | 7,798
|                                                    |  |      |       |      |   |      
|                                                    |  |     
|INTEREST EXPENSE:                                   |  |      |       |      |   |      
|Deposits                                            |  |      | 1,647 |      |   | 1,335
|Long term debt                                      |  |      | 617   |      |   | 444  
|                                                    |  |      |       |      |   |      
|Total Interest Expense                              |  |      | 2,264 |      |   | 1,779
|                                                    |  |      |       |      |   |      
|NET INTEREST INCOME                                 |  |      | 6,311 |      |   | 6,019
|PROVISION FOR LOAN LOSSES                           |  |      | 401   |      |   | 72   
|                                                    |  |      |       |      |   |      
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |      | 5,910 |      |   | 5,947
|                                                    |  |      |       |      |   |      
|                                                    |  |     
|NONINTEREST INCOME:                                 |  |      |       |      |   |      
|Service charges on deposit accounts                 |  |      | 764   |      |   | 805  
|Commission income                                   |  |      | 15    |      |   | 10   
|Other income                                        |  |      | 97    |      |   | 68   
|Gain on security transactions                       |  |      | 122   |      |   | 305  
|                                                    |  |      |       |      |   |      
|Total Noninterest Income                            |  |      | 998   |      |   | 1,188
|                                                    |  |      |       |      |   |      
|NONINTEREST EXPENSES:                               |  |      |       |      |   |      
|Salaries and employee benefits                      |  |      | 2,278 |      |   | 2,203
|Occupancy expenses                                  |  |      | 319   |      |   | 295  
|Equipment expenses                                  |  |      | 754   |      |   | 785  
|Other expenses                                      |  |      | 1,343 |      |   | 1,498
|                                                    |  |      |       |      |   |      
|Total Noninterest Expenses                          |  |      | 4,694 |      |   | 4,781
|                                                    |  |      |       |      |   |      
|INCOME BEFORE INCOME TAXES                          |  |      | 2,214 |      |   | 2,354
|INCOME TAX EXPENSE                                  |  |      | 749   |      |   | 792  
|                                                    |  |      |       |      |   |      
|NET INCOME                                          |  | $    | 1,465 |      | $ | 1,562
|                                                    |  |      |       |      |   |      
|PER SHARE DATA                                      |  |      |       |      |   |      
|Net income, basic                                   |  | $    | 1.42  |      | $ | 1.46 
|                                                    |  |      |       |      |   |      
|Net income, diluted                                 |  | $    | 1.42  |      | $ | 1.45 
|                                                    |  |      |       |      |   |      
|Dividends                                           |  | $    | 0.48  |      | $ | 0.48 
|                                                    |  |      |       |      |   |      

See Notes to Consolidated Financial Statements.



29



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

YEARS ENDED DECEMBER 31, 2005 AND 2004

(In Thousands, except share
data)



|                                                                                         |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ----------- | --- | - | ---------------- | - | ------ | ------------------------------------------ |  | - | ----- | - |  | - | ------ | -
|                                                                                         |  | CommonStock |     |   | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total |  
|BALANCE DECEMBER 31, 2003                                                                |  | $           | 537 |   |                  | $ | 12,464 |                                            |  | $ | 164   |   |  | $ | 13,165 |  
|Comprehensive Income                                                                     |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net Income                                                                               |  |             |     |   |                  |   | 1,562  |                                            |  |   |       |   |  |   | 1,562  |  
|Changes in unrealized gains on securities, net of taxes                                  |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding gains arising during the period (net of tax effect of $77)            |  |             |     |   |                  |   |        |                                            |  |   | 139   |   |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $104) |  |             |     |   |                  |   |        |                                            |  |   | (201  | ) |  |   | (62    | )
|                                                                                         |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                               |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   | 1,500  |  
|Cash Dividends                                                                           |  |             |     |   |                  |   | (515   | )                                          |  |   |       |   |  |   | (515   | )
|Retirement of common stock (18,699 shares)                                               |  |             | (20 | ) |                  |   | (593   | )                                          |  |   |       |   |  |   | (613   | )
|                                                                                         |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|                                                                                         |  |             |     |  
|BALANCE DECEMBER 31, 2004                                                                |  |             | 517 |   |                  |   | 12,918 |                                            |  |   | 102   |   |  |   | 13,537 |  
|Comprehensive Income                                                                     |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net Income                                                                               |  |             |     |   |                  |   | 1,465  |                                            |  |   |       |   |  |   | 1,465  |  
|Changes in unrealized gains on securities, net of taxes                                  |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Unrealized holding losses arising during the period (net of tax effect of $33)           |  |             |     |   |                  |   |        |                                            |  |   | (55   | ) |  |   |        |  
|Reclassification adjustment for gains included in net income (net of tax effect of $46)  |  |             |     |   |                  |   |        |                                            |  |   | (76   | ) |  |   | (131   | )
|                                                                                         |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total Comprehensive Income                                                               |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   | 1,334  |  
|Cash Dividends                                                                           |  |             |     |   |                  |   | (496   | )                                          |  |   |       |   |  |   | (496   | )
|Retirement of common stock (22,564 shares)                                               |  |             | (11 | ) |                  |   | (419   | )                                          |  |   |       |   |  |   | (430   | )
|                                                                                         |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE DECEMBER 31, 2005                                                                |  | $           | 506 |   |                  | $ | 13,468 |                                            |  | $ | (29   | ) |  | $ | 13,945 |  
|                                                                                         |  |             |     |   |                  |   |        |                                            |  |   |       |   |  |   |        |  

See Notes to Consolidated Financial Statements.



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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005 AND 2004

(In Thousands)



|                                                                                                           |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                           |  | 2005 |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                      |  |      |         |   |      |   |         |  
|Net income                                                                                                 |  | $    | 1,465   |   |      | $ | 1,562   |  
|Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses |  |      | 401     |   |      |   | 72      |  
|(Gain) on security sales                                                                                   |  |      | (122    | ) |      |   | (305    | )
|Net amortization on securities                                                                             |  |      | 95      |   |      |   | 97      |  
|Deferred income tax expense (benefit)                                                                      |  |      | 13      |   |      |   | 43      |  
|Depreciation                                                                                               |  |      | 512     |   |      |   | 557     |  
|Net change in:                                                                                             |  |      |         |   |      |   |         |  
|Accrued interest receivable                                                                                |  |      | (76     | ) |      |   | 6       |  
|Other assets                                                                                               |  |      | 130     |   |      |   | (229    | )
|Accrued expense and other liabilities                                                                      |  |      | 189     |   |      |   | (82     | )
|                                                                                                           |  |      |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                                                  |  |      | 2,607   |   |      |   | 1,721   |  
|                                                                                                           |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                      |  |      |         |   |      |   |         |  
|Net change in interest bearing deposits in other banks                                                     |  |      | 5,534   |   |      |   | (5,268  | )
|Net change in federal funds sold                                                                           |  |      | (2,300  | ) |      |   | 1,550   |  
|Net change in restricted securities                                                                        |  |      | 165     |   |      |   | (624    | )
|Proceeds from maturities, sales, and principal payments of securities available for sale                   |  |      | 18,323  |   |      |   | 18,961  |  
|Proceeds from principal payments of securities held to maturity                                            |  |      | 11      |   |      |   | 15      |  
|Purchase of securities available for sale                                                                  |  |      | (17,300 | ) |      |   | (12,825 | )
|Net (increase) in loans                                                                                    |  |      | (16,810 | ) |      |   | (11,574 | )
|Purchase of bank premises and equipment                                                                    |  |      | (943    | ) |      |   | (592    | )
|                                                                                                           |  |      |         |   |      |   |         |  
|Net Cash (Used in) Investing Activities                                                                    |  |      | (13,320 | ) |      |   | (10,357 | )
|                                                                                                           |  |      |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                      |  |      |         |   |      |   |         |  
|Net change in:                                                                                             |  |      |         |   |      |   |         |  
|Demand and savings deposits                                                                                |  |      | 3,455   |   |      |   | 6,814   |  
|Time deposits                                                                                              |  |      | 9,461   |   |      |   | (5,608  | )
|Proceeds from borrowings                                                                                   |  |      | 5,000   |   |      |   | 23,000  |  
|Curtailments of borrowings                                                                                 |  |      | (8,800  | ) |      |   | (12,125 | )
|Purchase and subsequent retirement of common stock                                                         |  |      | (430    | ) |      |   | (613    | )
|Dividends paid                                                                                             |  |      | (496    | ) |      |   | (515    | )
|                                                                                                           |  |      |         |   |      |   |         |  
|Net Cash Provided by Financing Activities                                                                  |  |      | 8,190   |   |      |   | 10,953  |  
|                                                                                                           |  |      |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS                                                                                  |  |      |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                       |  |      | (2,523  | ) |      |   | 2,317   |  
|Cash and cash equivalents, beginning of year                                                               |  |      | 9,896   |   |      |   | 7,579   |  
|                                                                                                           |  |      |         |   |      |   |         |  
|Cash and Cash Equivalents, End of Year                                                                     |  | $    | 7,373   |   |      | $ | 9,896   |  
|                                                                                                           |  |      |         |   |      |   |         |  
|Supplemental Disclosure of Cash Paid During the Year for:                                                  |  |      |         |   |      |   |         |  
|Interest                                                                                                   |  | $    | 2,082   |   |      |   | 1,843   |  
|Income taxes                                                                                               |  |      | 447     |   |      |   | 656     |  
|                                                                                                           |  |     
|Supplemental Disclosure of non-cash activity:                                                              |  |      |         |   |      |   |         |  
|Unrealized (loss) on securities available for sale                                                         |  |      | (210    | ) |      |   | (89     | )

See Notes to Consolidated Financial Statements.



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The
accounting and reporting policies of Pioneer Bankshares, Inc. (Company), and its subsidiary Pioneer Bank (Bank), conform to accounting principles generally accepted in the United States of America and to accepted practice
within the banking industry. A summary of significant accounting policies is as follows:

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

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

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

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

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the
fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than temporary impairment losses, management considers 1)
the length of time and the extent to which the fair value has been less than cost, 2) the financial condition and near term prospects of the issuer, and 3) the intent and ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans Receivable - Loans receivable are intended to be held until maturity and are shown on the consolidated balance sheets net of unearned interest and
the allowance for loan losses. Interest is computed by methods which generally result in level rates of return on principal. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the loan principal balance.

The accrual of interest on loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Personal loans are typically charged off no later than 120 days past due unless the loan is well secured and in the process of collection.
However, loans 120 days or more past due, with at least a 60-day recovery in payments are not charge offs. In most cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered
doubtful.

Loans Receivable (continued) -All interest accrued but not collected for loans that are placed on nonaccrual or charged off is
reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured.



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

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

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans
and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses. The unallocated component of the allowance
reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral
dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not generally
separately identify individual consumer loans for impairment disclosures.

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

Income Taxes - Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable
under income tax laws. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.



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##### Table of Contents

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

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

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

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

Advertising Costs - The Company follows the policy of charging the production costs of advertising to expense as incurred. Advertising expense amounted to
$54,216 and $62,401 for the years ended December 31, 2005 and 2004, respectively.

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

Stock Compensation Plans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):



|                                                                                                 |  |      |       |   |      |   |       |  
|------------------------------------------------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                                                 |  | 2005 |       |   | 2004 |  
|Net Income, as reported                                                                          |  | $    | 1,465 |   |      | $ | 1,562 |  
|Total stock-based compensation expenses determined under fair value based method for all rewards |  |      | (2    | ) |      |   | (2    | )
|                                                                                                 |  |      |       |   |      |   |       |  
|Pro forma net income                                                                             |  | $    | 1,463 |   |      | $ | 1,560 |  
|                                                                                                 |  |      |       |   |      |   |       |  
|Basic earnings per share                                                                         |  |      |       |   |      |   |       |  
|As reported                                                                                      |  | $    | 1.42  |   |      | $ | 1.46  |  
|                                                                                                 |  |      |       |   |      |   |       |  
|Pro forma                                                                                        |  | $    | 1.42  |   |      | $ | 1.45  |  
|                                                                                                 |  |      |       |   |      |   |       |  
|Diluted earnings per share                                                                       |  |      |       |   |      |   |       |  
|As reported                                                                                      |  | $    | 1.42  |   |      | $ | 1.45  |  
|                                                                                                 |  |      |       |   |      |   |       |  
|Pro forma                                                                                        |  | $    | 1.41  |   |      | $ | 1.45  |  
|                                                                                                 |  |      |       |   |      |   |       |  

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



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Recent Accounting Pronouncements In November 2005, FASB Staff Position (FSP) 115-1 The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments was issued. The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also
includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this
FSP amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. The FSP applies to
investments in debt and equity securities and cost-method investments. The application guidance within the FSP includes items to consider in determining whether an investment is impaired, in evaluating if an impairment is other than temporary and
recognizing impairment losses equal to the difference between the investments cost and its fair value when an impairment is determined. The FSP is required for all reporting periods beginning after December 15, 2005. Earlier application
is permitted. The Company does not anticipate the amendment will have a material effect on its financial statements.

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

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (Revised 2004) (SFAS No. 123R) Share-Based
Payment, which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Share-based compensation arrangements include share options, restricted share plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS No. 123R requires all share-based payments to employees to be valued using a fair value method on the date of grant and expensed based on that fair value over the applicable vesting period. SFAS No. 123R also amends
SFAS No. 95 Statement of Cash Flows requiring the benefits of tax deductions in excess of recognized compensation cost be reported as financing instead of operating cash flows. The Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 107 (SAB 107), which expresses the SECs views regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. Additionally, SAB No. 107
provides guidance related to share-based payment transactions for public companies. The Company will be required to apply SFAS No. 123R as of the annual reporting period that begins after September 15, 2005. The Company does not anticipate
the adoption of SFAS No. 123R to have a material impact on its financial statements.

In December 2003, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for differences
between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.
It includes loans purchased by the Company or acquired in business combinations. SOP 03-3 does not apply to loans originated by the Company. The Company adopted the provisions of SOP 03-3 effective January 1, 2005. The initial implementation
had no material effect on the Companys financial statements.

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.



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 NATURE OF OPERATIONS:

The Company operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to
regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services at seven separate office locations to customers in the counties of Page, Greene, Rockingham, Albermarle, and the cities of
Harrisonburg and Charlottesville, Virginia. The Bank also operates two separate subsidiaries, one being known as Pioneer Financial Services, LLC, which offers a variety of consumer investment and insurance services. The second subsidiary owned by
Pioneer Bank is Pioneer Special Assets, LLC, which is generally used in conjunction with certain foreclosed properties.

NOTE 3 CASH AND DUE FROM
BANKS:

The Bank is required to maintain average reserve balances based on a percentage of deposits. The average balance of cash, which the Federal
Reserve Bank requires to be on reserve, was $1.1 million and $1.0 million at December 31, 2005 and 2004, respectively.

NOTE 4 DEPOSITS IN AND
FEDERAL FUNDS SOLD TO BANKS:

The Bank has cash deposited in and federal funds sold to other banks, most of which exceed federally insured limits,
totaling $7.8 million and $9.9 million at December 31, 2005 and 2004, respectively.

NOTE 5 INVESTMENT SECURITIES:

The amortized cost and fair value of investment securities are as follows:



|                                      |  |               |                |                      |   |                       |  |   |           |   |  |   |       
|------------------------------------- |  | ------------- | -------------- | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                      |  | AmortizedCost |                | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|                                      |  |               | (In Thousands)
|December 31, 2005                     |  |               |                |                      |   |                       |  |   |           |   |  |   |       
|Available for Sale                    |  |               |                |                      |   |                       |  |   |           |   |  |   |       
|U.S. government and agency securities |  | $             | 8,532          |                      | $ |                      |  | $ | (115      | ) |  | $ | 8,417 
|Mortgage-backed                       |  |               | 527            |                      |   |                      |  |   | (15       | ) |  |   | 512   
|State and municipals                  |  |               | 214            |                      |   | 7                     |  |   |          |   |  |   | 221   
|Equity securities                     |  |               | 1,894          |                      |   | 116                   |  |   | (31       | ) |  |   | 1,979 
|                                      |  |               |                |                      |   |                       |  |   |           |   |  |   |       
|                                      |  |               | $11,167        |                      | $ | 123                   |  | $ | (161      | ) |  | $ | 11,129
|                                      |  |               |                |                      |   |                       |  |   |           |   |  |   |       
|Held to Maturity                      |  |               |                |                      |   |                       |  |   |           |   |  |   |       
|Mortgage-backed                       |  | $             | 5              |                      | $ |                      |  | $ |          |   |  | $ | 5     
|                                      |  |               |                |                      |   |                       |  |   |           |   |  |   |       



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##### Table of Contents

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 INVESTMENT SECURITIES (Continued):



|                                      |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|------------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                      |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|                                      |  | (In Thousands)
|                                      |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|December 31, 2004                     |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|Available for Sale                    |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|U.S. government and agency securities |  | $              | 10,154 |                      | $ | 3                     |  | $ | (79       | ) |  | $ | 10,078
|State and municipals                  |  |                | 214    |                      |   | 15                    |  |   |          |   |  |   | 229   
|Equity securities                     |  |                | 1,794  |                      |   | 230                   |  |   |          |   |  |   | 2,024 
|                                      |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|                                      |  | $              | 12,162 |                      | $ | 248                   |  | $ | (79       | ) |  | $ | 12,331
|                                      |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|Held to Maturity                      |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|Mortgage-backed                       |  | $              | 16     |                      | $ |                      |  | $ |          |   |  | $ | 16    
|                                      |  |                |        |                      |   |                       |  |   |           |   |  |   |       

The amortized cost and fair value of investment securities at December 31, 2005, by contractual maturity, are
shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                      |  |                               |        |                             |   |               |  |           |   |  |   |  
|------------------------------------- |  | ----------------------------- | ------ | --------------------------- | - | ------------- |  | --------- | - |  | - | -
|                                      |  | Securities Available for Sale |        | Securities Held to Maturity
|(In Thousands)                        |  | AmortizedCost                 |        | FairValue                   |   | AmortizedCost |  | FairValue
|Due within one year                   |  | $                             | 6,523  |                             | $ | 6,434         |  | $         | 4 |  | $ | 4
|Due after one year through five years |  |                               | 2,009  |                             |   | 1,983         |  |           |  |  |   | 
|Due five years through ten years      |  |                               | 214    |                             |   | 221           |  |           | 1 |  |   | 1
|Due after ten years                   |  |                               |       |                             |   |              |  |           |  |  |   | 
|                                      |  |                               |        |                             |   |               |  |           |   |  |   |  
|                                      |  |                               | 8,746  |                             |   | 8,638         |  |           | 5 |  |   | 5
|                                      |  |                               |        |                            
|Mortgage-backed                       |  |                               | 527    |                             |   | 512           |  |           |  |  |   | 
|Equity securities                     |  |                               | 1,894  |                             |   | 1,979         |  |           |  |  |   | 
|                                      |  |                               |        |                             |   |               |  |           |   |  |   |  
|                                      |  | $                             | 11,167 |                             | $ | 11,129        |  | $         | 5 |  | $ | 5
|                                      |  |                               |        |                             |   |               |  |           |   |  |   |  

Realized gains and losses on available for sale securities are summarized below:



|          |  |                |      |   |      |   |     |  
|--------- |  | -------------- | ---- | - | ---- | - | --- | -
|          |  | 2005           |      |   | 2004 |  
|          |  | (In Thousands) |     
|Gains     |  | $              | 234  |   |      | $ | 352 |  
|Losses    |  |                | (112 | ) |      |   | (47 | )
|          |  |                |      |   |      |   |     |  
|Net Gains |  | $              | 122  |   |      | $ | 305 |  
|          |  |                |      |   |      |   |     |  



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 INVESTMENT SECURITIES (Continued):

Investment securities with a book value of $713,000 and $1,210,000 at December 31, 2005 and 2004, respectively, were pledged to secure public deposits and for other
purposes required by law.

Securities in an unrealized loss position at December 31, 2005 and 2004, by duration of the unrealized loss are shown
below. In analyzing an issuers financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts
reports. No impairment has been recognized on any of the securities in a loss position because of managements intent and demonstrated ability to hold securities to scheduled maturity or call dates.

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



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

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



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



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 LOANS:

Loans are stated at their face amount, net of unearned discount, and are classified as follows at December 31:



|                                  |  |                   |                |   |                   |   |        |  
|--------------------------------- |  | ----------------- | -------------- | - | ----------------- | - | ------ | -
|                                  |  | December 31, 2005 |                |   | December 31, 2004 |  
|                                  |  |                   | (In Thousands) |  
|Mortgage loans on real estate     |  |                   |                |   |                   |   |        |  
|Construction loans                |  | $                 | 11,543         |   |                   | $ | 7,193  |  
|Agricultural                      |  |                   | 4,595          |   |                   |   | 4,607  |  
|Equity lines of credit            |  |                   | 1,780          |   |                   |   | 1,738  |  
|Residential 1-4 family            |  |                   | 43,308         |   |                   |   | 41,125 |  
|Second Mortgages                  |  |                   | 3,807          |   |                   |   | 3,305  |  
|Multifamily                       |  |                   | 3,275          |   |                   |   | 1,853  |  
|Commercial                        |  |                   | 21,892         |   |                   |   | 17,046 |  
|                                  |  |                   |                |   |                   |   |        |  
|Total real estate loans           |  |                   | 90,200         |   |                   |   | 76,867 |  
|                                  |  |                  
|Commercial and agricultural loans |  |                   | 5,543          |   |                   |   | 3,548  |  
|Consumer installment loans        |  |                   |                |   |                   |   |        |  
|Personal                          |  |                   | 14,699         |   |                   |   | 13,641 |  
|Credit cards                      |  |                   | 668            |   |                   |   | 729    |  
|                                  |  |                   |                |   |                   |   |        |  
|Total consumer installment loans  |  |                   | 15,367         |   |                   |   | 14,370 |  
|All other loans                   |  |                   | 225            |   |                   |   | 166    |  
|                                  |  |                   |                |   |                   |   |        |  
|Gross Loans                       |  |                   | 111,335        |   |                   |   | 94,951 |  
|Less unearned income on loans     |  |                   | (1,311         | ) |                   |   | (1,322 | )
|                                  |  |                   |                |   |                   |   |        |  
|Loans, less unearned discount     |  |                   | 110,024        |   |                   |   | 93,629 |  
|                                  |  |                  
|Less allowance for loan losses    |  |                   | (1,332         | ) |                   |   | (1,346 | )
|                                  |  |                   |                |   |                   |   |        |  
|Net Loans Receivable              |  | $                 | 108,692        |   |                   | $ | 92,283 |  
|                                  |  |                   |                |   |                   |   |        |  

Deposit accounts reclassified as loans totaled $53,000 and $41,000 as of December 31, 2005 and 2004,
respectively.

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

The Banks loan portfolio is concentrated in real estate loans, including those
secured by residential consumer properties and small business commercial properties. The residential real estate loans, including equity lines of credit and second mortgages totaled $48.9 million as of December 31, 2005 as compared to $46.2
million at December 31, 2004. The small business commercial real estate loans, including construction accounts, agricultural real estate, multifamily dwellings, and other business properties totaled $41.3 million as of December 31, 2005 as
compared to $30.7 million at December 31, 2004. Management has established specific lending criteria relating to real estate lending and considers the risk of loss in these loan categories to be relatively low.



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##### Table of Contents

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 LOANS (Continued):

The following is a summary of information pertaining to impaired loans for the years ended December 31, 2005 and 2004:



|                                                             |  |               |     |      |   |    
|------------------------------------------------------------ |  | ------------- | --- | ---- | - | ---
|                                                             |  | 2005          |     | 2004
|                                                             |  | (InThousands)
|Impaired loans with a valuation allowance                    |  | $             | 479 |      | $ | 620
|Impaired loans without a valuation allowance                 |  |               |    |      |   |   
|                                                             |  |               |     |      |   |    
|Total Impaired loans                                         |  | $             | 479 |      |   | 620
|                                                             |  |               |     |      |   |    
|Valuation allowance related to impaired loans                |  | $             | 90  |      |   | 175
|                                                             |  |               |     |      |   |    
|Average investment in impaired loans                         |  | $             | 502 |      |   | 511
|                                                             |  |               |     |      |   |    
|Interest income recognized on impaired loans                 |  | $             | 30  |      | $ | 51 
|                                                             |  |               |     |      |   |    
|Interest income recognized on a cash basis on impaired loans |  | $             |    |      | $ |   
|                                                             |  |               |     |      |   |    

No additional funds are committed to be advanced in connection with impaired loans.

Nonaccrual loans excluded from impaired loan disclosure under FASB Statement No. 114 amounted to $50,000 and $271,000 at December 31, 2005 and 2004,
respectively. The impact on interest income of these account being in nonaccrual status was minimal for both reporting periods presented. The amount of interest that would have accrued on these loans would have approximated only $9 for 2005 and
$1,000 for 2004.

Loans past due greater than 90 days and still accruing interest at December 31, 2005 and 2004 totaled $126,000 and $428,000,
respectively.

NOTE 7 ALLOWANCE FOR LOAN LOSSES:

A summary of transactions in the allowance for loan losses is as follows:



|                                        |  |                |       |   |      |   |       |  
|--------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                        |  | 2005           |       |   | 2004 |  
|                                        |  | (In Thousands) |      
|Balance, beginning of year              |  | $              | 1,346 |   |      | $ | 1,433 |  
|Provision charged to operating expenses |  |                | 401   |   |      |   | 72    |  
|Recoveries of loans charged off         |  |                | 288   |   |      |   | 459   |  
|Loans charged off                       |  |                | (703  | ) |      |   | (618  | )
|                                        |  |                |       |   |      |   |       |  
|Balance, End of Year                    |  | $              | 1,332 |   |      | $ | 1,346 |  
|                                        |  |                |       |   |      |   |       |  



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##### Table of Contents

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 BANK PREMISES, EQUIPMENT and SOFTWARE:

Bank premises, equipment and computer software included in the financial statements at December 31, 2005 and 2004 are as follows:



|                                |  |                |        |      |   |      
|------------------------------- |  | -------------- | ------ | ---- | - | -----
|                                |  | 2005           |        | 2004
|                                |  | (In Thousands)
|Land                            |  | $              | 691    |      | $ | 691  
|Land improvements and buildings |  |                | 4,301  |      |   | 3,374
|Furniture and equipment         |  |                | 4,116  |      |   | 3,826
|Construction in process         |  |                |       |      |   | 365  
|Computer software               |  |                | 1,112  |      |   | 1,021
|                                |  |                |        |      |   |      
|                                |  |                | 10,220 |      |   | 9,277
|Less accumulated depreciation   |  |                | 5,639  |      |   | 5,127
|                                |  |                |        |      |   |      
|Net                             |  | $              | 4,581  |      | $ | 4,150
|                                |  |                |        |      |   |      

Depreciation and amortization related to bank premises, equipment and software included in operating expense for
2005 and 2004 was $512,000 and $557,000, respectively.

NOTE 9 TIME DEPOSITS:

At December 31, 2005, the scheduled maturities of time deposits (in thousands) are as follows:



|      |  |   |       
|----- |  | - | ------
|2006  |  | $ | 31,807
|2007  |  |   | 13,096
|2008  |  |   | 4,427 
|2009  |  |   | 2,053 
|2010  |  |   | 3,837 
|      |  |   |       
|Total |  | $ | 55,220
|      |  |   |       

NOTE 10 LONG-TERM DEBT:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total assets, subject to
certain eligibility requirements. This represents a total credit line of approximately $57.2 million and $53.3 million as of December 31, 2005 and 2004, respectively. FHLB advances bear interest at a fixed or floating rate depending on the
terms and maturity of each advance and numerous renewal options are available. These advances are secured by 1-4 family residential mortgages. On some fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set
point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may pay back all or part of the advance without a prepayment penalty.



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##### Table of Contents

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 LONG TERM DEBT (Continued):

At December 31, 2005, the total fixed-rate long-term debt with FHLB totaled $14.5 million and matures through December 30, 2009. The interest
rates on the fixed-rate notes payable ranges from 2.92% to 3.92%. At December 31, 2004, the total fixed-rate long-term debt with FHLB was $18.3 million.

The contractual maturities of FHLB advances as of December 31, 2005 are as follows:



|            |  |                |       
|----------- |  | -------------- | ------
|            |  | Fixed Rate    
|            |  | (In Thousands)
|Due in 2006 |  | $              | 3,800 
|Due in 2007 |  |                | 3,800 
|Due in 2008 |  |                | 3,800 
|Due in 2009 |  |                | 3,100 
|            |  |                |       
|            |  | $              | 14,500
|            |  |                |       

NOTE 11 OTHER EXPENSES:

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



|                      |  |                |       |      |   |      
|--------------------- |  | -------------- | ----- | ---- | - | -----
|                      |  | 2005           |       | 2004
|                      |  | (In Thousands)
|Supplies and printing |  | $              | 127   |      | $ | 142  
|Directors fees        |  |                | 161   |      |   | 162  
|Professional fees     |  |                | 234   |      |   | 182  
|Telephone             |  |                | 145   |      |   | 117  
|Prepayment penalties  |  |                |      |      |   | 189  
|Other                 |  |                | 676   |      |   | 706  
|                      |  |                |       |      |   |      
|Total                 |  | $              | 1,343 |      | $ | 1,498
|                      |  |                |       |      |   |      

NOTE 12 DIVIDEND LIMITATION ON SUBSIDIARY BANK:

The principal source of funds of the Company is dividends paid by the Bank. The amount of dividends the Bank may pay is regulated by the Federal Reserve. As of
January 1, 2006, the maximum amount of dividends the Bank can pay to the Company is $1.1 million or 8.1% of the consolidated net assets, without requesting permission from the Federal Reserve Bank.



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 INCOME TAXES:

The components of income tax expense are as follows:



|                                                                                                                                                     |  |                |     |   |      |   |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --- | - | ---- | - | --- | -
|                                                                                                                                                     |  | 2005           |     |   | 2004 |  
|                                                                                                                                                     |  | (In Thousands) |    
|Current income tax expense                                                                                                                           |  | $              | 736 |   |      | $ | 749 |  
|Deferred income tax expense                                                                                                                          |  |                | 13  |   |      |   | 43  |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|Income Tax Expense                                                                                                                                   |  | $              | 749 |   |      | $ | 792 |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|                                                                                                                                                     |  |               
|The reasons for the differences between income tax expense and the amount computed by applying the statutory federal income tax rate are as follows: |  |                |     |   |      |   |     |  
|                                                                                                                                                     |  |               
|                                                                                                                                                     |  | 2005           |     |   | 2004 |  
|                                                                                                                                                     |  | (In Thousands) |    
|Income taxes computed at the applicable federal income tax rate                                                                                      |  | $              | 753 |   |      | $ | 800 |  
|(Decrease) resulting from:                                                                                                                           |  |                |     |   |      |   |     |  
|Tax-exempt municipal income                                                                                                                          |  |                | (4  | ) |      |   | (8  | )
|State income taxes                                                                                                                                   |  |                | 7   |   |      |   |    |  
|Other                                                                                                                                                |  |                | (7  | ) |      |   |    |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|Income Tax Expense                                                                                                                                   |  | $              | 749 |   |      | $ | 792 |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|                                                                                                                                                     |  |               
|At December 31, the net deferred tax asset was made up of the following:                                                                             |  |                |     |   |      |   |     |  
|                                                                                                                                                     |  |               
|                                                                                                                                                     |  | 2005           |     |   | 2004 |  
|                                                                                                                                                     |  | (In Thousands) |    
|Deferred Tax Assets:                                                                                                                                 |  |                |     |   |      |   |     |  
|Provision for loan losses                                                                                                                            |  | $              | 206 |   |      | $ | 246 |  
|Deferred compensation                                                                                                                                |  |                | 61  |   |      |   | 60  |  
|Prepayment Penalties (FHLB)                                                                                                                          |  |                | 51  |   |      |   | 64  |  
|Securities available for sale                                                                                                                        |  |                | 9   |   |      |   |    |  
|Other                                                                                                                                                |  |                | 10  |   |      |   | 6   |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|Total                                                                                                                                                |  | $              | 337 |   |      |   | 376 |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|Deferred Tax Liabilities                                                                                                                             |  |                |     |   |      |   |     |  
|Depreciation                                                                                                                                         |  |                | 95  |   |      |   | 144 |  
|Cash surrender value of life insurance                                                                                                               |  |                | 23  |   |      |   | 19  |  
|Securities available for sale                                                                                                                        |  |                |    |   |      |   | 67  |  
|Other                                                                                                                                                |  |                | 36  |   |      |   | 26  |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|Total                                                                                                                                                |  |                | 154 |   |      |   | 256 |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  
|Net Deferred Tax Asset                                                                                                                               |  | $              | 183 |   |      | $ | 120 |  
|                                                                                                                                                     |  |                |     |   |      |   |     |  



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 REGULATORY MATTERS:

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Companys capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not
applicable to the bank holding company.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2005 and 2004, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of
December 31, 2005, the most recent notification from the institutions primary federal regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions category.

The Companys and the Banks actual capital amounts and ratios are also presented below: (in thousands)



|                                        |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|--------------------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------ | ----------------------------- | ----- |  | - | ------ | - | ----- | - | ----- |  | - | ---- | -
|                                        |  | Actual |        |       | For CapitalAdequacy Purposes |   |        | Minimum To BeWell Capitalized |      
|                                        |  | Amount |        | Ratio |                              |   | Amount |                               | Ratio |  |   | Amount |   | Ratio |  
|As of December 31, 2005:                |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Total Capital to Risk Weighted Assets:  |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Consolidated                            |  | $      | 14,864 |       | 14.9                         | % |        | $                             | 8,002 |  | 3 | 8.0    | % |       |   | N/A   |  |   | N/A  |  
|Pioneer Bank                            |  | $      | 11,824 |       | 12.2                         | % |        | $                             | 7,786 |  | 3 | 8.0    | % |       | $ | 9,733 |  | 3 | 10.0 | %
|Tier I Capital to Risk Weighted Assets: |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Consolidated                            |  | $      | 13,614 |       | 13.6                         | % |        | $                             | 4,001 |  | 3 | 4.0    | % |       |   | N/A   |  |   | N/A  |  
|Pioneer Bank                            |  | $      | 10,606 |       | 10.9                         | % |        | $                             | 3,893 |  | 3 | 4.0    | % |       | $ | 5,840 |  | 3 | 6.0  | %
|Tier I Capital to Average Assets:       |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Consolidated                            |  | $      | 13,614 |       | 9.5                          | % |        | $                             | 5,710 |  | 3 | 4.0    | % |       |   | N/A   |  |   | N/A  |  
|Pioneer Bank                            |  | $      | 10,606 |       | 7.6                          | % |        | $                             | 5,567 |  | 3 | 4.0    | % |       | $ | 6,959 |  | 3 | 5.0  | %
|As of December 31, 2004:                |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Total Capital to Risk Weighted Assets:  |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Consolidated                            |  | $      | 14,139 |       | 16.6                         | % |        | $                             | 6,807 |  | 3 | 8.0    | % |       |   | N/A   |  |   | N/A  |  
|Pioneer Bank                            |  | $      | 11,099 |       | 13.5                         | % |        | $                             | 6,599 |  | 3 | 8.0    | % |       | $ | 8,249 |  | 3 | 10.0 | %
|Tier I Capital to Risk Weighted Assets: |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Consolidated                            |  | $      | 13,075 |       | 15.4                         | % |        | $                             | 3,403 |  | 3 | 4.0    | % |       |   | N/A   |  |   | N/A  |  
|Pioneer Bank                            |  | $      | 10,064 |       | 12.2                         | % |        | $                             | 3,300 |  | 3 | 4.0    | % |       | $ | 4,949 |  | 3 | 6.0  | %
|Tier I Capital to Average Assets:       |  |        |        |       |                              |   |        |                               |       |  |   |        |   |       |   |       |  |   |      |  
|Consolidated                            |  | $      | 13,075 |       | 10.5                         | % |        | $                             | 4,961 |  | 3 | 4.0    | % |       |   | N/A   |  |   | N/A  |  
|Pioneer Bank                            |  | $      | 10,064 |       | 8.3                          | % |        | $                             | 4,847 |  | 3 | 4.0    | % |       | $ | 6,059 |  | 3 | 5.0  | %



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 STOCK OPTION PLAN:

The Companys 1998 Stock Incentive Plan (the Plan) was adopted by the Board of Directors on June 11, 1998 and approved by the shareholders on
June 11, 1999. The Plan makes available up to 14,000 shares of common stock for awards to employees and to non-employee directors of the Company and its subsidiaries in the form of stock options.

Generally, the Plan provides for the grants of incentive stock options and non-qualified stock options. The exercise price of an Option cannot be less than 100% of the
fair market value of the common stock (or if greater, the book value) on the date of the grant. The option terms applicable to each grant are determined at the grant date, but no Option can be exercisable in any event, after ten years from its grant
date. On May 20, 2005, the Board of Directors granted Options to current non-employee directors for 2005. The effective date of the grant is May 20, 2005 and the Options may be exercised on or after May 20, 2006.

A summary of the activity in the Companys stock option plan is as follows:



|                                                               |  |                 |  |                                |       |                 |       |                                |   |      
|-------------------------------------------------------------- |  | --------------- |  | ------------------------------ | ----- | --------------- | ----- | ------------------------------ | - | -----
|                                                               |  | 2005            |  | 2004                          
|                                                               |  | Number ofShares |  | Weighted AverageExercise Price |       | Number ofShares |       | Weighted AverageExercise Price
|Outstanding at beginning of year                               |  | 5,500           |  | $                              | 14.20 |                 | 4,700 |                                | $ | 13.49
|Granted                                                        |  | 800             |  |                                | 17.50 |                 | 800   |                                |   | 18.40
|Exercised                                                      |  |                |  |                                |      |                 |      |                                |   |     
|Forfeited                                                      |  |                |  |                                |      |                 |      |                                |   |     
|                                                               |  |                 |  |                                |       |                 |       |                                |   |      
|Outstanding at end of year                                     |  | 6,300           |  | $                              | 14.62 |                 | 5,500 |                                | $ | 14.20
|                                                               |  |                 |  |                                |       |                 |       |                                |   |      
|Options exercisable at year-end                                |  | 5,500           |  | $                              | 14.20 |                 | 4,700 |                                | $ | 13.49
|                                                               |  |                 |  |                                |       |                 |       |                                |   |      
|Weighted-average fair value of options granted during the year |  |                 |  | $                              | 2.84  |                 |       |                                | $ | 3.92 

Information pertaining to options outstanding at December 31, 2005 is as
follows:



|                           |  |                     |  |                                           |  |                   |  |                                          
|-------------------------- |  | ------------------- |  | ----------------------------------------- |  | ----------------- |  | -----------------------------------------
|                           |  | Options Outstanding |  | Options Exercisable                      
|Exercise Price             |  | NumberOutstanding   |  | Weighted AverageRemainingContractual Life |  | NumberExercisable |  | Weighted AverageRemainingContractual Life
|$18.00                     |  | 700                 |  | 2.5 years                                 |  | 700               |  | 2.5 years                                
|12.75                      |  | 3,200               |  | 5.0                                       |  | 3,200             |  | 5.0                                      
|12.50                      |  | 800                 |  | 7.5                                       |  | 800               |  | 7.5                                      
|18.40                      |  | 800                 |  | 8.5                                       |  | 800               |  | 8.5                                      
|17.50                      |  | 800                 |  | 9.5                                       |  |                  |  |                                         
|                           |  |                     |  |                                           |  |                   |  |                                          
|Outstanding at end of year |  | 6,300               |  | 6.1                                       |  | 5,500             |  | 5.6                                      
|                           |  |                     |  |                                           |  |                   |  |                                          



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 EARNINGS PER SHARE

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



|                               |  |           |  |                 |      |              |           |           |   |     
|------------------------------ |  | --------- |  | --------------- | ---- | ------------ | --------- | --------- | - | ----
|                               |  | 2005      |  | 2004           
|                               |  | Shares    |  | Per ShareAmount |      | SharesAmount |           | Per Share
|Basic earnings per share       |  | 1,033,921 |  | $               | 1.42 |              | 1,073,435 |           | $ | 1.46
|                               |  |           |  |                 |      |              |           |           |   |     
|Effect of dilutive securities: |  |           |  |                 |      |              |           |           |   |     
|Stock Options                  |  | 1,154     |  |                 |      |              | 1,081     |           |   |     
|                               |  |           |  |                 |      |              |           |           |   |     
|Diluted earnings per share     |  | 1,035,075 |  | $               | 1.42 |              | 1,074,516 |           | $ | 1.45
|                               |  |           |  |                 |      |              |           |           |   |     

As of December 31, 2005 and 2004, stock options representing 925 and 1,300 average shares, respectively, were
not included in computing diluted EPS because their effects were anti-dilutive.

NOTE 17 OFF-BALANCE SHEET COMMITMENTS:

The contract or notional amount of financial instruments at December 31, with off-balance sheet risk are as follows:



|                                                                 |  |                |       |      |   |      
|---------------------------------------------------------------- |  | -------------- | ----- | ---- | - | -----
|                                                                 |  | 2005           |       | 2004
|                                                                 |  | (In Thousands)
|Unfunded lines of credit (commercial and personal)               |  | $              | 5,655 |      | $ | 2,920
|Loan commitments and letters of credit (commercial and personal) |  |                | 7,223 |      |   | 5,369
|Credit card unused credit limits                                 |  |                | 1,607 |      |   | 1,909

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on
managements credit evaluation of the counter-party.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft
protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit generally are un-collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total
extent to which the Bank is committed.



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 OFF-BALANCE SHEET COMMITMENTS (Continued):

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments for which collateral is deemed necessary.

NOTE 18 TRANSACTIONS WITH RELATED PARTIES:

During the year, officers and directors (and companies controlled by them) were customers
of and had transactions with the Company in the normal course of business. These transactions were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk. Loan transactions to such related
parties are shown in the following schedule:



|                               |  |                |     |   |      |   |      |  
|------------------------------ |  | -------------- | --- | - | ---- | - | ---- | -
|                               |  | 2005           |     |   | 2004 |  
|                               |  | (In Thousands) |    
|Total loans, beginning of year |  | $              | 710 |   |      | $ | 821  |  
|New loans                      |  |                | 159 |   |      |   |     |  
|Payments                       |  |                | (71 | ) |      |   | (111 | )
|                               |  |                |     |   |      |   |      |  
|Total Loans, End of Year       |  | $              | 798 |   |      | $ | 710  |  
|                               |  |                |     |   |      |   |      |  

NOTE 19 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statement of Financial Accounting Standards No. 107 (SFAS 107) Disclosures About the Fair Value of Financial Statements defines the fair value of a
financial instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. As the majority of the Companys financial instruments lack an
available trading market; significant estimates, assumptions and present value calculations are required to determine estimated fair value.

The following
methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities  Fair values, excluding restricted stock, are based on quoted market prices or dealer quotes. The carrying value of the restricted stock approximates fair value based on each issuers redemption provision.

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



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):

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

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

Off-Balance-Sheet Financial Instruments  The fair value of commitments to extend
credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter party. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the committed rates.

The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

At December 31, 2005 and 2004, the fair value of loan commitments and stand-by letters of credit were immaterial.

Estimated fair value and the carrying value of financial instruments at December 31, 2005 and 2004 are as follows (in thousands):



|                              |  |                     |         |               |   |                      |  |               |        |  |   |       
|----------------------------- |  | ------------------- | ------- | ------------- | - | -------------------- |  | ------------- | ------ |  | - | ------
|                              |  | 2005                |         | 2004         
|                              |  | EstimatedFair Value |         | CarryingValue |   | Estimated Fair Value |  | CarryingValue
|                              |  | (In Thousands)     
|Financial Assets              |  |                     |         |               |   |                      |  |               |        |  |   |       
|Cash                          |  | $                   | 7,373   |               | $ | 7,373                |  | $             | 9,896  |  | $ | 9,896 
|Interest bearing deposits     |  |                     | 4,897   |               |   | 4,946                |  |               | 10,480 |  |   | 10,480
|Federal funds sold            |  |                     | 3,250   |               |   | 3,250                |  |               | 950    |  |   | 950   
|Securities available for sale |  |                     | 11,129  |               |   | 11,129               |  |               | 12,331 |  |   | 12,331
|Securities held to maturity   |  |                     | 5       |               |   | 5                    |  |               | 16     |  |   | 16    
|Restricted Securities         |  |                     | 1,016   |               |   | 1,016                |  |               | 1,181  |  |   | 1,181 
|Loans, net                    |  |                     | 109,772 |               |   | 108,692              |  |               | 97,793 |  |   | 92,283
|Accrued interest receivable   |  |                     | 567     |               |   | 567                  |  |               | 491    |  |   | 491   
|                              |  |                     |         |              
|Financial Liabilities         |  |                     |         |               |   |                      |  |               |        |  |   |       
|Demand Deposits:              |  |                     |         |               |   |                      |  |               |        |  |   |       
|Non-interest bearing          |  |                     | 29,704  |               |   | 29,704               |  |               | 26,194 |  |   | 26,194
|Interest bearing              |  |                     | 14,525  |               |   | 14,525               |  |               | 14,890 |  |   | 14,890
|Savings deposits              |  |                     | 14,264  |               |   | 14,264               |  |               | 13,954 |  |   | 13,954
|Time deposits                 |  |                     | 55,201  |               |   | 55,220               |  |               | 45,979 |  |   | 45,759
|Long-term debt                |  |                     | 14,238  |               |   | 14,500               |  |               | 18,314 |  |   | 18,300
|Accrued interest payable      |  |                     | 435     |               |   | 435                  |  |               | 253    |  |   | 253   



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):

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

NOTE 20 EMPLOYEE BENEFIT PLANS

The Bank has a 401(k) Profit
Sharing Plan covering full-time employees who have completed 180 days of service and are at least 21 years of age. Employees may contribute compensation subject to certain limits based on federal tax laws. The Bank makes discretionary matching
contributions equal to 100 percent of an employees compensation contributed to the Plan up to 3 percent of the employees compensation. Additional amounts may be contributed, at the option of the Banks Board of Directors. Employer
contributions vest to the employee over a six-year period, and employees become 100% vested in his/her seventh year of full-time employment. For the years ended December 31, 2005 and 2004, total expense attributable to this plan amounted to
$34,462 and $36,949, respectively.

The Companys Employee Stock Ownership Plan (ESOP), which previously held 65,018 of outstanding shares of common
stock, was terminated and dissolved effective December 30, 2004. The termination of this plan gave participants certain rights and elections for benefits to be paid either in cash or stock. The termination of the ESOP plan resulted in the
retirement of 39,605 shares of stock at a value of $15.47 per share or $613,000 as of December 31, 2004. Benefit participants who chose to retain their initial shares of stock under this termination were given certain put options, which
required the Company to repurchase and retire these shares if exercised, as described in the plan agreement at the stocks latest appraised fair market value for ESOP purposes. As of December 31, 2005, there were 22,564 additional shares
of stock retired as a result of certain exercised put options at a value of $19.06 per share or $430,000. The funding for the retirement of ESOP shares in 2004 and 2005 were taken from capital reserves in the form of a dividend from the Bank to the
Company. There are no outstanding put options remaining for the terminated ESOP plan as of December 31, 2005.



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

BALANCE SHEETS

December 31, 2005 and
2004



|                                            |  |                |        |   |      |   |       
|------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------
|                                            |  | 2005           |        |   | 2004
|                                            |  | (In Thousands)
|ASSETS                                      |  |                |        |   |      |   |       
|                                            |  |               
|Cash and cash equivalents                   |  | $              | 454    |   |      | $ | 491   
|Investment in subsidiary                    |  |                | 10,885 |   |      |   | 10,384
|Securities available for sale               |  |                | 1,979  |   |      |   | 2,024 
|Bank premises and equipment, net            |  |                | 723    |   |      |   | 737   
|                                            |  |                |        |   |      |   |       
|Total Assets                                |  | $              | 14,041 |   |      | $ | 13,636
|                                            |  |                |        |   |      |   |       
|LIABILITIES                                 |  |                |        |   |      |   |       
|                                            |  |               
|Deferred income taxes                       |  | $              | 36     |   |      | $ | 93    
|Income tax payable                          |  |                | 45     |   |      |   | 6     
|Accrued expenses                            |  |                | 15     |   |      |   |      
|                                            |  |                |        |   |      |   |       
|Total Liabilities                           |  |                | 96     |   |      |   | 99    
|                                            |  |                |        |   |      |   |       
|STOCKHOLDERS EQUITY                        |  |                |        |   |      |   |       
|                                            |  |               
|Common stock                                |  |                | 506    |   |      |   | 517   
|Retained earnings                           |  |                | 13,468 |   |      |   | 12,918
|Accumulated other comprehensive income, net |  |                | (29    | ) |      |   | 102   
|                                            |  |                |        |   |      |   |       
|Total Stockholders Equity                  |  |                | 13,945 |   |      |   | 13,537
|                                            |  |                |        |   |      |   |       
|Total Liabilities and Stockholders Equity  |  | $              | 14,041 |   |      | $ | 13,636
|                                            |  |                |        |   |      |   |       



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (Continued):

STATEMENTS OF INCOME

Years Ended
December 31, 2005 and 2004



|                                                                                                   |  |                |       |      |   |       |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- | - | ----- | -
|                                                                                                   |  | 2005           |       | 2004 |  
|                                                                                                   |  | (In Thousands) |      
|INCOME                                                                                             |  |                |       |      |   |       |  
|                                                                                                   |  |               
|Dividends from subsidiary                                                                          |  | $              | 830   |      | $ | 1,565 |  
|Interest income                                                                                    |  |                | 17    |      |   | 1     |  
|Dividend income                                                                                    |  |                | 31    |      |   | 35    |  
|Security gains                                                                                     |  |                | 122   |      |   | 174   |  
|Rent income                                                                                        |  |                | 83    |      |   | 83    |  
|Other income                                                                                       |  |                | 5     |      |   | 4     |  
|                                                                                                   |  |                |       |      |   |       |  
|Total Income                                                                                       |  |                | 1,088 |      |   | 1,862 |  
|                                                                                                   |  |                |       |      |   |       |  
|EXPENSES                                                                                           |  |                |       |      |   |       |  
|                                                                                                   |  |               
|Occupancy expenses                                                                                 |  |                | 37    |      |   | 37    |  
|Equipment expense                                                                                  |  |                | 5     |      |   | 14    |  
|Other operating expenses                                                                           |  |                | 79    |      |   | 74    |  
|                                                                                                   |  |                |       |      |   |       |  
|Total Expenses                                                                                     |  |                | 121   |      |   | 125   |  
|                                                                                                   |  |                |       |      |   |       |  
|Net income before income tax expense and increase (decrease) in undistributed equity of affiliates |  |                | 967   |      |   | 1,737 |  
|                                                                                                   |  |               
|INCOME TAX EXPENSE                                                                                 |  |                | 44    |      |   | 56    |  
|                                                                                                   |  |                |       |      |   |       |  
|Net income before increase (decrease) in undistributed income of affiliates                        |  |                | 923   |      |   | 1,681 |  
|Undistributed (distributed) income of subsidiary                                                   |  |                | 542   |      |   | (119  | )
|                                                                                                   |  |                |       |      |   |       |  
|NET INCOME                                                                                         |  | $              | 1,465 |      | $ | 1,562 |  
|                                                                                                   |  |                |       |      |   |       |  



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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (Continued):

STATEMENTS OF CASH FLOWS

Years Ended
December 31, 2005 and 2004



|                                                                                  |  |                |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | 2005           |        |   | 2004 |  
|                                                                                  |  | (In Thousands) |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                |        |   |      |   |        |  
|Net income                                                                        |  | $              | 1,465  |   |      | $ | 1,562  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                |        |   |      |   |        |  
|(Undistributed) distributed subsidiary income                                     |  |                | (542   | ) |      |   | 119    |  
|(Gain) on security sales                                                          |  |                | (122   | ) |      |   | (174   | )
|Depreciation                                                                      |  |                | 29     |   |      |   | 36     |  
|Net change in:                                                                    |  |                |        |   |      |   |        |  
|Accrued expenses                                                                  |  |                | 52     |   |      |   | (11    | )
|                                                                                  |  |                |        |   |      |   |        |  
|Net Cash Provided by Operating Activities                                         |  |                | 882    |   |      |   | 1,532  |  
|                                                                                  |  |                |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                |        |   |      |   |        |  
|Proceeds from sales of securities available for sale                              |  |                | 3,310  |   |      |   | 2,105  |  
|Purchase of securities available for sale                                         |  |                | (3,288 | ) |      |   | (2,179 | )
|Purchase of premises and equipment                                                |  |                | (15    | ) |      |   |       |  
|                                                                                  |  |                |        |   |      |   |        |  
|Net Cash Provided by (Used in) Investing Activities                               |  |                | 7      |   |      |   | (74    | )
|                                                                                  |  |                |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                |        |   |      |   |        |  
|Purchase and subsequent retirement of common stock                                |  |                | (430   | ) |      |   | (613   | )
|Dividends paid                                                                    |  |                | (496   | ) |      |   | (515   | )
|                                                                                  |  |                |        |   |      |   |        |  
|Net Cash Used in Financing Activities                                             |  |                | (926   | ) |      |   | (1,128 | )
|                                                                                  |  |                |        |   |      |   |        |  
|Net Increase (decrease) in Cash and Cash Equivalents                              |  |                | (37    | ) |      |   | 330    |  
|                                                                                  |  |               
|Cash and Cash Equivalents, Beginning of Year                                      |  |                | 491    |   |      |   | 161    |  
|                                                                                  |  |                |        |   |      |   |        |  
|Cash and Cash Equivalents, End of Year                                            |  | $              | 454    |   |      | $ | 491    |  
|                                                                                  |  |                |        |   |      |   |        |  



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Item 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.

NOT
APPLICABLE

Item 8A. 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 the Company 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. There have been no changes in the Companys internal control over financial
reporting during the three months ended December 31, 2005, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting. There were no significant changes in the
Companys internal controls pertaining to its financial reporting and control of its assets or in other factors that could significantly affect these controls since the date of their evaluation.

Item 8B. Other Information.

Not Applicable

Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.

All required information on the directors of the Company is detailed in the Companys 2006 definitive proxy statement for the annual meeting of shareholders (Definitive Proxy Statement), which is
expected to be filed with the Securities and Exchange Commission within the required time period, and is incorporated herein by reference. The following provides information on Executive Officers who are not directors of the Company and are not
included in the Proxy Statement:



|                   |  |     |  |                                                            
|------------------ |  | --- |  | -----------------------------------------------------------
|Executive Officer  |  | Age |  | Principal Occupation During Past Five Years                
|Betty J. Purdham   |  | 57  |  | Senior Vice President/Lending Officer, Pioneer Bank.       
|                   |  |    
|Judy L. Painter    |  | 56  |  | Senior Vice President/Administration Officer, Pioneer Bank.
|                   |  |    
|Eugene G. Colligan |  | 63  |  | Vice President/Chief Lending Officer. Pioneer Bank         
|                   |  |    
|Lori G. Hassett    |  | 39  |  | Vice President/Chief Financial Officer, Pioneer Bank       



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Item 10. Executive Compensation.

Information on executive compensation is provided in the Definitive Proxy Statement and
is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information on
security ownership of certain beneficial owners and management is provided in the Definitive Proxy Statement, and is incorporated herein by reference.

Equity Compensations Plan Information.

The following table sets forth information as of December 31, 2005 with respect
to certain compensation plans under which equity securities of the Company are authorized for issuance.



|                                                           |  |                                                                                            |  |                                                                             |       |                                                                                                                                         |             
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                           |  | Number ofSecurities to beissued uponexercise
ofoutstandingoptions, warrants,and rights (a) |  | Weighted-averageexercise priceof outstandingoptions,warrants, andrights (b) |       | Number ofsecuritiesremainingavailable
forfuture issuanceunder equitycompensationplans (excludingsecurities reflectedin column (a) ) (c)
|Equity Compensation plans approved by security holders     |  | 6,300 shares                                                                               |  | $                                                                           | 14.62 |                                                                                                                                         | 7,700 shares
|Equity Compensation plans not approved by security holders |  |                                                                                            |  |                                                                             |       |                                                                                                                                         |             
|Total                                                      |  | 6,300 shares                                                                               |  | $                                                                           | 14.62 |                                                                                                                                         | 7,700 shares

Item 12. Certain Relationships and Related Transactions.

Information on certain relationships and related transactions
are detailed in the Definitive Proxy Statement, and is incorporated herein by reference.



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##### Table of Contents

Item 13. Exhibits

The following exhibits are filed as part of this Form 10-KSB and this list includes the Exhibit Index.



|     |  |                                                                                                                                                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Articles of Incorporation of Pioneer Bankshares, Inc. (incorporated by reference to Exhibit 3.1 of Pioneer Bankshares, Inc.s Form 10-SB filed May 2, 2000, as
amended).                                                  
|     | 
|3.2  |  | Bylaws of Pioneer Bankshares, Inc. (incorporated by reference to Exhibit 3.2 of Pioneer Bankshares, Inc.s Form 10-SB filed May 2, 2000, as amended).                                                                     
|     | 
|10.1 |  | Pioneer Bankshares, Inc. (Formerly Page Bankshares, Inc.), 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10 of Pioneer Bankshares, Inc.s Form 10-QSB filed August 12,
2002).                           
|     | 
|21   |  | List of subsidiaries.                                                                                                                                                                                                     
|     | 
|23.1 |  | Consent of Yount, Hyde & Barbour, P.C.                                                                                                                                                                                    
|     | 
|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, Chief Operating 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).

Item 14. Principal Accountant Fees and Services.

Information on principal accountant fees and services is provided in the
Definitive Proxy Statement and is incorporated herein by reference.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|              |  |                          |  |                                           
|------------- |  | ------------------------ |  | ------------------------------------------
|              |  | Pioneer Bankshares, Inc.
|              |  |                         
|Date: 3/28/06 |  | By:                      |  | /s/ THOMAS R. ROSAZZA                     
|              |  |                          |  | Thomas R. Rosazza                         
|              |  |                          |  | President and Chief Executive Officer     
|              |  |                         
|Date: 3/28/06 |  | By:                      |  | /s/ LORI G. HASSETT                       
|              |  |                          |  | Lori G. Hassett                           
|              |  |                          |  | Vice President and Chief Financial Officer



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                            |  |                                                 |  |        
|------------------------------------------- |  | ----------------------------------------------- |  | -------
|Signature                                   |  | Title                                           |  | Date   
|                                            |  |                                                
|/s/ ROBERT E. LONG Robert E.
Long           |  | Director                                        |  | 3/22/06
|                                            |  |                                                
|/s/ KYLE MILLER Kyle
Miller                 |  | Director                                        |  | 3/23/06
|                                            |  |                                                
|/s/ PATRICIA G. BAKER Patricia G.
Baker     |  | Director                                        |  | 3/21/06
|                                            |  |                                                
|/s/ DAVID N. SLYE David N.
Slye             |  | Director                                        |  | 3/23/06
|                                            |  |                                                
|/s/ HARRY F. LOUDERBACK Harry F.
Louderback |  | Director                                        |  | 3/21/06
|                                            |  |                                                
|/s/ LOUIS L. BOSLEY Louis L.
Bosley         |  | Director                                        |  | 3/22/06
|                                            |  |                                                
|/s/ MARK N. REED Mark N.
Reed               |  | Director                                        |  | 3/23/06
|                                            |  |                                                
|/s/ E. POWELL MARKOWITZ E. Powell
Markowitz |  | Director                                        |  | 3/21/06
|                                            |  |                                                
|/s/ THOMAS R. ROSAZZA Thomas R.
Rosazza     |  | President, Chief Executive Officer and Director |  | 3/22/06
|                                            |  |                                                
|/s/ LORI G. HASSETT Lori G.
Hassett         |  | Vice President, Chief Financial Officer         |  | 3/21/06



57