- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2008

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

Commission File Number: 0-30541

PIONEER BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia

54-1278721

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

(540) 778-2294

(Registrant’s telephone number, including area code)

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common shares outstanding as of November 13, 2008 were 1,017,170.

PIONEER BANKSHARES, INC.

INDEX


		Page
PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements.

	Consolidated Balance Sheets – September 30, 2008 and December 31, 2007	3

	Consolidated Statements of Income – Three Months Ended September 30, 2008 and 2007	4

	Consolidated Statements of Income – Nine Months Ended September 30, 2008 and 2007	5

	Consolidated Statements of Changes in Stockholders’ Equity – Nine Months Ended September 30, 2008 and 2007	6

	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2008 and 2007	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures.	25

PART II	OTHER INFORMATION	25

Item 1.	Legal Proceedings.	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	25

Item 3.	Defaults Upon Senior Securities.	25

Item 4.	Submission of Matters to a Vote of Security Holders.	25

Item 5.	Other Information.	26

Item 6.	Exhibits.	26

	SIGNATURES	27

Part I - Financial Information

Item 1.

Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)


	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
ASSETS

Cash and due from banks	$	4,703		$	6,106
Interest bearing deposits in banks		10,013			1,600
Federal funds sold		2,000			300
Securities available for sale, at fair value		18,551			11,069
Restricted securities		1,089			680
Loans receivable, net of allowance for loan losses of $1,536 and $1,573 respectively		117,344			125,611
Premises and equipment, net		3,870			4,056
Accrued interest receivable		706			758
Other assets		2,002			1,645

Total Assets	$	160,278		$	151,825


LIABILITIES

Deposits
Noninterest bearing demand	$	28,946		$	33,423
Interest bearing
Demand		11,585			10,238
Savings		16,937			13,367
Time deposits over $100,000		15,148			15,822
Other time deposits		53,935			54,505

Total Deposits		126,551			127,355

Accrued expenses and other liabilities		1,080			1,295
Long term debt		16,000			6,900

Total Liabilities		143,631			135,550


STOCKHOLDERS’ EQUITY

Common stock; $.50 par value, authorized 5,000,000, outstanding 1,017,170 and 1,011,481 respectively		509			506
Retained earnings		16,599			15,805
Accumulated other comprehensive loss, net		(461	)		(36	)

Total Stockholders’ Equity		16,647			16,275

Total Liabilities and Stockholders’ Equity	$	160,278		$	151,825

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)


	Three Months Ended September 30,
	2008			2007
Interest and Dividend Income:
Loans including fees	$	2,300		$	2,512
Interest on securities - taxable		166			116
Interest on securities - nontaxable		8			2
Interest on deposits and federal funds sold		108			117
Dividends		20			39

Total Interest and Dividend Income		2,602			2,786


Interest Expense:
Deposits		797			944
Long term debt		107			106

Total Interest Expense		904			1,050


Net Interest Income		1,698			1,736
Provision for loan losses		96			70


Net interest income after provision for loan losses		1,602			1,666


Noninterest Income:
Service charges and fees		254			202
Other income		(5	)		29
Gain on securities transactions		—			147

Total Noninterest Income		249			378


Noninterest Expense:
Salaries and benefits		660			636
Occupancy expenses		87			87
Equipment expenses		160			196
Other expenses		385			435

Total Noninterest Expenses		1,292			1,354


Income before Income Taxes		559			690
Income Tax Expense		185			237


Net Income	$	374		$	453


Per Share Data
Net income, basic and diluted	$	0.37		$	0.45

Dividends	$	0.14		$	0.14


Weighted Average Shares Outstanding, Basic		1,014,594			1,011,481

Weighted Average Shares Outstanding, Diluted		1,014,594			1,014,403

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)


	Nine Months Ended September 30,
	2008		2007
Interest and Dividend Income:
Loans including fees	$	7,053	$	7,268
Interest on securities - taxable		439		332
Interest on securities - nontaxable		13		7
Interest on deposits and federal funds sold		333		316
Dividends		57		99

Total Interest and Dividend Income		7,895		8,022


Interest Expense:
Deposits		2,552		2,650
Long term debt		342		281

Total Interest Expense		2,894		2,931

Net Interest Income		5,001		5,091
Provision for loan losses		292		210


Net interest income after provision for loan losses		4,709		4,881


Noninterest Income:
Service charges and fees		668		599
Other income		111		126
Gain on security transactions		145		206

Total Noninterest Income		924		931


Noninterest Expense:
Salaries and benefits		1,965		1,900
Occupancy expenses		266		283
Equipment expenses		501		556
Other expenses		1,239		1,179

Total Noninterest Expenses		3,971		3,918


Income before Income Taxes		1,662		1,894
Income Tax Expense		552		642


Net Income	$	1,110	$	1,252


Per Share Data
Net income, basic and diluted	$	1.09	$	1.24

Dividends	$	0.43	$	0.42


Weighted Average Shares Outstanding, Basic		1,014,594		1,011,481

Weighted Average Shares Outstanding, Diluted		1,014,976		1,013,990

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands)

(UNAUDITED)


	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
BALANCE DECEMBER 31, 2006	$	506	$	14,615		$	97		$	15,218
Comprehensive Income
Net Income				1,252						1,252
Changes in unrealized gains (losses) on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $31)							55
Reclassification adjustment for gains included in net income (net of tax effect of $78)							(128	)		(73	)

Total Comprehensive Income										1,179

Cash Dividends		—		(424	)		—			(424	)


BALANCE SEPTEMBER 30, 2007	$	506	$	15,443		$	24		$	15,973


BALANCE DECEMBER 31, 2007	$	506	$	15,805		$	(36	)	$	16,275
Comprehensive Income
Net Income				1,110						1,110
Changes in unrealized gains (losses) on securities, net of taxes
Unrealized holding losses arising during the period (net of tax effect of $214)							(329	)
Reclassification adjustment for gains included in net income (net of tax effect of $49)							(96	)		(425	)

Total Comprehensive Income										685
Stock issued for compensation		3		120			—			123

Cash Dividends		—		(436	)		—			(436	)

BALANCE SEPTEMBER 30, 2008	$	509	$	16,599		$	(461	)	$	16,647

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)


	Nine Months Ended September 30,
	2008			2007
Cash Flows from Operating Activities:
Net income	$	1,110		$	1,252
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		292			210
Depreciation and amortization		370			410
Gain on sale of securities		(145	)		(206	)
Net amortization on securities		—			(7	)
Stock issued for compensation		123			—
Net change in:
Accrued interest receivable		52			(102	)
Other assets		(93	)		(27	)
Accrued expense and other liabilities		(215	)		346

Net Cash Provided by Operating Activities		1,494			1,930


Cash Flows from Investing Activities:
Net change in federal funds sold		(1,700	)		700
Net change in interest bearing deposits		(8,413	)		64
Net change in restricted securities		(409	)		8
Proceeds from maturities and sales of securities available for sale		13,325			13,370
Proceeds from maturities and calls of securities held to maturity		—			1
Purchase of securities available for sale		(21,351	)		(9,097	)
Net decrease (increase) in loans		7,975			(7,433	)
Purchase of bank premises and equipment		(184	)		(105	)


Net Cash Used in Investing Activities		(10,757	)		(2,492	)


Cash Flows from Financing Activities:
Net change in:
Demand and savings deposits		440			2,550
Time deposits		(1,244	)		3,986
Proceeds from borrowings		21,501			2,000
Curtailments of borrowings		(12,401	)		(3,200	)
Dividends paid		(436	)		(424	)


Net Cash Provided by Financing Activities		7,860			4,912


Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents		(1,403	)		4,350
Cash and Cash Equivalents, beginning of year		6,106			5,197

Cash and Cash Equivalents, End of Period	$	4,703		$	9,547


Supplemental Disclosure of Cash Paid
During the Period for:
Interest	$	3,055		$	2,766
Income taxes	$	654		$	396

Supplemental Disclosure of non-cash activity:
Unrealized (loss) on securities available for sale		(688	)		(120	)
Loan balances transferred to OREO		24			—

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 ACCOUNTING PRINCIPLES:

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

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

•

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Securities

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

Impaired loans

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

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157. As of September 30, 2008, the outstanding balance in OREO was approximately $24,000. It is not management’s intent to hold foreclosure properties or maintain them as a part of the Company’s permanent fixed assets and premises. Management is actively marketing these properties and anticipates being able to sell them within a reasonable time period.

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

Stock Compensation Plans - The Company previously accounted for its stock option plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2006, the Financial Accounting Standards Board (“FASB”) Statement No. 123R (Revised 2004), Share-Based Payment (“SFAS No. 123R”), replaces and supersedes APB Opinion No. 25. This revised accounting principle now requires that costs resulting from all share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted.

The expense relating to previously issued stock options, as of September 30, 2008, is approximately $2,057 compared to $3,287 for September 30, 2007. The expense related to stock option compensation is generally recognized over a vesting period of one year for each option granted. There were no additional stock options granted during the nine month period ending September 30, 2008. There have been 700 stock option shares exercised by non-employee directors during the nine month period ending September 30, 2008, which were exercised at a price of $18.00 per share.

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


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Intrinsic Value of Unexercised In-the-Money Options (In Thousands)
Options outstanding, 12/31/07	7,900	$	16.32	5.1
New Options Granted	—		—
Options Exercised	700		18.00
Options Forfeited	—		—
Options outstanding, 9/30/08	7,200	$	16.16	4.8
Options exercisable, 9/30/08	7,200	$	16.16	4.8	$	56

(1)

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

NOTE 2 INVESTMENT SECURITIES:

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


	(In Thousands)
	September 30, 2008				December 31, 2007
	Carrying Value		Market Value		Carrying Value		Market Value
Securities available for sale:
U.S. Treasury and agency obligations	$	5,994	$	6,030	$	5,962	$	6,088
Mortgage-backed		9,525		9,709		1,999		2,007
Municipal securities		1,117		1,097		215		218
Equity securities		2,671		1,715		2,961		2,756


Total	$	19,307	$	18,551	$	11,137	$	11,069

NOTE 2 INVESTMENT SECURITIES: (continued)

As of September 30, 2008, there were 4 investment securities that had been in a loss position for more than 12 consecutive months and 12 additional securities that had been in a loss position for less than one year.

In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports and overall credit quality.

As of September 30, 2008, management has determined that the unrealized losses in the investment portfolio are temporary. Management recognizes that current economic conditions and market trends may result in other than temporary impairment classifications for certain securities or equity investments. Management will continue to monitor the securities in a loss position for future impairment. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value.

The schedule of losses on the securities as of September 30, 2008, is as follows:


LOSSES		US Government Agency Securities		Tax-Exempt Municipal Securities			Mortgage- Backed Securities		Equity Securities			Total
		(In Thousands)
Less than 12 Months	Fair Value	$	—	$	1,097		$	—	$	1,528		$	2,625
	Unrealized Losses		—		(19	)		—		(728	)		(747	)

More than 12 Months	Fair Value		—		—			—		187			187
	Unrealized Losses		—		—			—		(228	)		(228	)


Total	Fair Value	$	—	$	1,097			—	$	1,715		$	2,812
	Unrealized Losses		—		(19	)		—		(956	)		(975	)

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


LOSSES		US Government Agency Securities		Mortgage-Backed Securities			Equity Securities			Total
				(In Thousands)
Less than 12 Months	Fair Value	$	—	$	—		$	2,756		$	2,756
	Unrealized Losses		—		—			(205	)		(205	)

More than 12 Months	Fair Value		—		273			—			273
	Unrealized Losses		—		(5	)		—			(5	)


Total	Fair Value	$	—		273			2,756			3,029
	Unrealized Losses		—		(5	)		(205	)		(210	)

NOTE 3 LOANS:

Loans outstanding are summarized as follows:


	(In Thousands)
	September 30, 2008			December 31, 2007
Mortgage loans on real estate
Construction loans	$	9,335		$	12,979
Agricultural		4,303			4,573
Equity lines of credit		1,957			2,431
Residential 1-4 family		40,926			41,579
Second Mortgages		4,041			5,055
Multifamily		3,846			3,946
Commercial		33,109			32,332

Total real estate loans		97,517			102,895

Commercial and industrial loans		5,930			7,204

Consumer installment loans
Personal		15,433			17,165
Credit cards		577			587

Total consumer installment loans		16,010			17,752

All other loans		197			323

Gross Loans		119,654			128,174

Less unearned income on loans		(774	)		(990	)

Loans, less unearned discount		118,880			127,184

Less allowance for loan losses		(1,536	)		(1,573	)

Net Loans Receivable	$	117,344		$	125,611

Pioneer Bank’s loan portfolio is concentrated in real estate loans, including those secured by residential consumer properties and small business commercial properties. Management has limited its exposure to risk in the real estate lending market by establishing specific criteria relating to real estate lending practices and continuing to engage primarily in only traditional mortgage products. Management has also limited its risk exposure by establishing caps for long-term fixed rate mortgage programs. As September 30, 2008, management considers the risk of loss in the real estate loan categories to be low to moderate.

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

NOTE 4 ALLOWANCE FOR LOAN LOSSES:

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


	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
	(In Thousands)
Balance, beginning of period	$	1,573		$	1,476
Provision charged to operating expenses		292			309
Recoveries of loans charged off		271			262
Loans charged off		(600	)		(474	)

Balance, end of period	$	1,536		$	1,573

The total amount of impaired loans as of September 30, 2008 was $1.9 million compared to $785,000 at December 31, 2007. Specific valuation allowances at September 30, 2008 totaled $267,000 and have been made as a precautionary measure to cover potential losses. Specific valuation allowances as of September 30, 2007 totaled $67,500.

NOTE 5 EARNINGS PER SHARE:

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


	Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	1,014,594	$	1.09	1,011,481	$	1.24

Effect of dilutive securities: Stock Options	382			2,509

Diluted earnings per share	1,014,976	$	1.09	1,013,990	$	1.24

Stock options representing 7,200 shares were not included in the computation of diluted EPS because their effects were anti-dilutive as of September 30, 2008. There were no stock options excluded from the computation of diluted EPS because their effects were anti-dilutive as of September 30, 2007.

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


	Three Months Ended September 30, 2008			Three Month Ended September 30, 2007
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	1,014,594	$	0.37	1,011,481	$	0.45

Effect of dilutive securities: Stock Options	—			2,922

Diluted earnings per share	1,014,594	$	0.37	1,014,403	$	0.45

NOTE 6 LONG TERM DEBT:

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

Total outstanding borrowings increased by approximately $9.1 million during the nine month period ending September 30, 2008. This increase is the result of low-rate fixed borrowings that were obtained from the FHLB primarily for investment purposes with funds generally being placed in matching term investment instruments. The investment instruments were placed at a rate of interest higher than the borrowing rate in an effort to produce additional interest income.

As of September 30, 2008, total outstanding borrowings with FHLB were $16.0 million, which are scheduled to mature through January 18, 2011. The interest rates on these fixed-rate borrowings range from 2.47% to 3.92%. The maturities of FHLB advances as of September 30, 2008 are shown in TABLE II of this report.

NOTE 7 OTHER EXPENSES:

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


	Nine Months Ended September 30,
	2008		2007
	(In Thousands)
Director Fees	$	96	$	126
Legal Fees		90		84
Professional Fees		153		102
Supplies and Printing		101		102
Telephone Expense		106		80
Other		693		685

Total	$	1,239	$	1,179

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Forward-Looking Statements

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

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

Overview

The Company reported year-to-date net earnings of $1.1 million as of September 30, 2008 as compared to net earnings for the same period last year of $1.3 million. The decrease in earnings of approximately $142,000, or 11.34%, is primarily attributed to a reduced volume of loans and related interest income, additional loan loss reserve allocations, and increased operating and legal expenses. Earnings per share were $1.09 for the period ending September 30, 2008 compared to earnings per share of $1.24 for the same period last year.

The Company’s total assets as of September 30, 2008 were $160.3 million and total liabilities were $143.6 million. Total capital as of September 30, 2008 was $16.6 million. The Company’s loan portfolio has decreased by approximately $8.3 million or 6.58% during the nine month period ending September 30, 2008. The decrease in loan volume is primarily attributed to low consumer demand, commercial and residential real estate loan payoffs, and other consumer refinancing activities. The deposit portfolio has decreased approximately $804,000 or 0.63% during the nine month period ending September 30, 2008.

Investments in securities available for sale have increased by $7.5 million during the nine month period ending September 30, 2008, as compared to total securities at December 31, 2007. Investments in interest bearing deposits have increased by approximately $8.4 million during the same period. Total outstanding borrowings have increased by approximately $9.1 million. The increase in borrowings is primarily the result of fixed low-rate advances that were obtained from the Federal Home Loan Bank of Atlanta. These borrowings were initiated to support investment activities, with funds generally being placed in matching term investment instruments at a rate of interest higher than the borrowing rate.

The Company’s book value as of September 30, 2008 was $16.37 per share, as compared to a book value of $16.09 per share as of December 31, 2007. This represents an increase of 1.74%. Additionally, shareholder dividend payments for the nine month period ending September 30, 2008 increased by 2.38%, as compared to the same period last year.

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

Critical Accounting Policies

General

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

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

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: 1) Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable, and 2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the market and the loan balance.

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

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

Goodwill

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

Goodwill is included in other assets and totaled $360,000 at September 30, 2008 and December 31, 2007. The goodwill is no longer amortized, but instead is tested for impairment at least annually.

Results of Operations

Net Interest Income

Total interest income decreased $127,000 or 1.58% during the nine month period ending September 30, 2008, as compared to the same period for 2007. Total interest expense decreased $37,000 or 1.26% during the same period. The decreased in interest income and interest expense resulted in a net interest income decrease of $90,000 or 1.77% for the period ending September 30, 2008 compared to the period ending September 30, 2007. The net interest margin decreased from 4.70% for the period ending September 30, 2007 to 4.40% for the period ending September 30, 2008. The decreases in net interest income and net interest margin are primarily attributed to recent declines in market interest rates and a declining loan volume.

The average yield on loans decreased from 7.80% for the nine month period ending September 30, 2007 to 7.62% for the nine month period ending September 30, 2008. This is primarily the result of declining loan volume resulting from refinancing and re-pricing activities in a lower interest rate environment. The overall average yield on earning assets decreased from 7.40% as of September 30, 2007 to 6.93% as of September 30, 2008, as a result of the previously mentioned factors.

Noninterest Income

During the nine month period ending September 30, 2008, non-interest income decreased $7,000 when compared to the same period last year. Service charge income increased $69,000 as a result of various fee increases relating to checking accounts, statement processing, minimum balance requirements, and overdrafts. Securities gains during the nine month period ending September 30, 2008 decreased by $61,000 as compared to the prior year. The decrease in securities gains is primarily attributed to the recent downturn in economic and market conditions. Other income decreased by $15,000 for the nine month period ending September 30, 2008, as compared to the same period last year. The decrease in other income is mainly attributed to losses recorded on the sale of foreclosure properties and other assets of approximately $35,000 during the nine month period ending September 30, 2008. Losses on foreclosures sales and other assets recorded during the nine month period ending September 30, 2007 were only $2,000.

Noninterest Expense

During the nine month period ending September 30, 2008, non-interest expense increased by $53,000 or 1.35%, as compared to the same period last year. The primary factors contributing to this overall increase were legal and professional fees incurred for shareholder and proxy litigation, as well as increased telephone and communication expenses relating to system upgrades.

Financial Condition

Securities

The Company’s securities portfolio is held to assist in asset-liability management, as well as, capital appreciation. The securities portfolio, as of September 30, 2008 consists of securities classified as available for sale. Securities available for sale include securities that may be sold in response to general market fluctuations, general liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses of available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of shareholders’ equity.

As of September 30, 2008, the net amortized cost of securities available for sale was approximately $756,000 less than the stated market value as shown in Note 2 of the financial statements included in this report. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value, which should minimize the impact or possibility of other than temporary classifications.

Investments in securities, including those which were restricted, increased by approximately $7.9 million during the nine month period ending September 30, 2008. The Company generally invests in securities with a relatively short-term maturity due to uncertainty in the direction of interest rates.

Of the investments in securities available for sale, 9.24% (based on market value) are invested in equities, some of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. These investments have produced a high rate of return for the Company. Management recognizes that these investments are subject to market conditions and can be also impacted by economic downturns. Management generally has the intent and demonstrated ability to hold these securities for an extended period of time, which allows for potential recovery and increases in value. Management’s intent and ability to hold these securities during periods of economic uncertainty should minimize the impact or possibility of other than temporary classifications.

Loan Portfolio

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

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

While lending is geographically diversified within the service area, the Company does have loan concentrations in commercial and residential real estate loans, as well as, consumer auto loans. A large percentage of these loans are made to borrowers who are employed by businesses outside the service area. Management monitors the levels of loan concentrations within the portfolio on a regular basis and establishes appropriate risk tolerances as a means of minimizing potential losses in the future.

During the nine month period ending September 30, 2008, net loans decreased by approximately $8.3 million or 6.58%. The decline in loan volume is primarily attributed to residential and commercial real estate loan payoffs and other refinance activities. A schedule of loans by type is shown in a note to the consolidated financial statements included in this report.

The risk elements in lending activities include non-accrual loans, loans 90 days or more past due and restructured loans. Non-accrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans on which the original interest rate or repayment terms have changed due to financial hardship. Non-accrual loans and loans 90 days or more past due totaled $889,000 at September 30, 2008 compared to $386,000 at December 31, 2007. This represents an increase of $503,000 and is mainly attributed to one specific real estate loan where the borrower’s source of repayment has diminished with limited expectation for continued business operations. Management has evaluated the value of collateral related to this account as of September 30, 2008 and has made a specific allocation to the allowance for loan loss account for a potential loss amount of approximately $50,000.

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

Impaired loans are those loans which have been identified by management as problem credits due to various circumstances concerning the borrower’s financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a non-accrual classification, however, management has classified these accounts as impaired and is monitoring the circumstances and payment status closely. In most cases, a specific allocation to the Bank’s allowance for loan loss is made for an impaired loan. The total amount of impaired loans as of September 30, 2008 was $2.0 million compared to $785,000 at December 31, 2007. This represents an increase of approximately $1.2 million and is primarily the result of management’s proactive efforts to promptly identify additional potential problem credits. Based on current collateral values, management has identified potential losses relating to these credits of approximately $267,000 as of September 30, 2008. Specific valuation allowances have been made as a preventative measure to cover potential losses should they occur in the future.

Problem loans (serious doubt loans) are loans whereby information known by management indicates that the borrower may not be able to comply with present payment terms. Management was not aware of any problem loans as of September 30, 2008 that are not included in the past dues, non-accrual or impaired loans referred above.

Allowance for Loan Losses

Management’s analysis process for evaluating the adequacy of the allowance for loan loss is a continual process, which is monitored at least quarterly, or more frequently, as needed. The evaluation process consists of regular periodic reviews of the loans outstanding by loan type. Specific reviews and allocations are made for loans that have been identified as potential loss, in which the borrower’s financial condition has substantially weakened or habitual past due payment activity has occurred. Specific reviews and allocations are also made for various sectors of the loan portfolio that have been identified as higher risk categories. Historical loss ratios are applied to the remaining loan portfolio by loan type, based on the most recent loss trends. Management takes into consideration expected recoveries from prior charge offs as part of its allowance and funding calculation.

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

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

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

The allowance for loan loss balance of $1.536 million at September 30, 2008, decreased by approximately $37,000 from its level at December 31, 2007. The decrease in the allowance balance is primarily attributed to the declining loan volume, as well as, the reduction of a specific allocation relating to one borrower, where the sale of collateral resulted in the curtailment of loan principal. Management has made allocations based on the declining economic trends and the potential for increased past dues in the loan portfolio as a means of providing sufficient funding for possible future losses. Additionally, management has performed an evaluation of various concentrations within the loan portfolio and has established appropriate allocations in accordance with the levels of risk identified with each concentration category.

The allowance allocations noted above and the declining loan volume trends are considered to be the primary factors impacting the cumulative funding as a percentage of total loans. The cumulative balance in the allowance for loan loss account was equal to 1.29% and 1.24% of total loans as of September 30, 2008 and December 31, 2007, respectively. Management believes the increase in the allowance for loan loss as a percentage of total loans, as of September 30, 2008, is directionally consistent with the changes within the loan portfolio and current economic trends that may impact customer’s ability to pay and overall loan performance.

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

The provision expense related to the allowance for loan loss as of September 30, 2008 was $292,000 as compared to $210,000 for the nine month period ending September 30, 2008. This increase is directly related to the loan portfolio allocations previously discussed.

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

Premises, Equipment and Software

During the third quarter of 2008, the Company moved its Valley Finance Services office location into the Harrisonburg branch facility in an effort to improve operating efficiency and reduce overhead expenses.

The Company periodically evaluates opportunities for possible new branch locations. However, there are no immediate plans for additional office locations at this time.

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

Deposits

The Company’s main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Company’s service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. The Company’s deposit portfolio has decreased by approximately $804,000 or 0.63% during the nine month period ending September 30, 2008. This decrease was primarily in the categories of noninterest bearing demand deposits and time deposits. The Company monitors its deposits carefully on an on-going basis in order to provide adequate funding for investments and loan growth opportunities.

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank (the “FHLB”) of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. As of September 30, 2008, total borrowings were $16.0 million compared to $6.9 million at December 31, 2007. This represents an increase of approximately $9.1 million, which is primarily attributed to new advances obtained at fixed low interest rates. These borrowings were initiated primarily for investment purposes with funds generally being placed in matching term investment instruments, at a rate of interest higher than the borrowing rate. The Company’s borrowing activities are discussed in Note 6 of the financial statements included in this report.

Capital

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

As of September 30, 2008 and December 31, 2007, the Company’s total capital-to-asset ratio was 9.94% and 10.72%, respectively. The Company’s total risk-based capital ratio was 15.3% and 14.7% as of September 30, 2008 and December 31, 2007, respectively. The Company’s capital ratios exceed regulatory minimums and earnings have been sufficient to allow for a 2.38% increase in dividend payments during the nine month period ending September 30, 2008. Dividend payments to shareholders are generally declared on a quarterly basis and management has no reason to believe this payment schedule will not continue.

Liquidity

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

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

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

Liquidity as of September 30, 2008 remains adequate.

Interest Rate Sensitivity

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

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

As of September 30, 2008, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 37.57% for the one year re-pricing period, compared with a negative cumulative Gap Rate Sensitivity of 39.65% at December 31, 2007. This negative gap position generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. However, in actual practice, this may not be the case as deposits may not re-price concurrently with changes in rates within the general economy. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finder’s fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The Company does not expect the implementation to have a material impact on its consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements.

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

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The Company does not expect the implementation of SFAS 162 to have a material impact on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP FAS 157-2 delays the effective date of SFAS 157, “Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of Statement 157. FSP 157-2 defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for items within the scope of this FSP. Examples of items to which the deferral would and would not apply are listed in the FSP. The Company does not expect the implementation of FSP 157-2 to have a material impact on its consolidated financial statements.

In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the implementation of FSP 142-3 to have a material impact on its consolidated financial statements.

In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” The FSP requires that issuers of such instruments should separately account for the liability (debt) and equity (conversion option) components in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company does not expect the implementation of FSP APB 14-1 to have a material impact on its consolidated financial statements.

In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, including prior periods for which financial statements have not been issued. The Company does not expect the implementation of FSP APB 14-1 to have a material impact on its consolidated financial statements.

Effect of Proposed Accounting Standards

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

Securities and Exchange Commission Web Site

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

TABLE I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)


	Nine Months Ended September 30, 2008						Nine Months Ended September 30, 2007
	Average Balance		Income/ Expense		Rates		Average Balance		Income/ Expense		Rates
Interest Income
Loans ¹
Commercial	$	7,828	$	477	8.12	%	$	8,393	$	560	8.90	%
Real estate		98,584		5,183	7.01	%		99,857		5,316	7.10	%
Installment		16,519		1,316	10.62	%		15,458		1,300	11.21	%
Credit Card		545		77	18.84	%		556		92	22.06	%
Federal funds sold		3,436		59	2.29	%		3,361		128	5.08	%
Interest Bearing Deposits		9,953		274	3.67	%		4,971		188	5.04	%
Investments
Taxable		12,343		486	5.25	%		9,659		399	5.51	%
Nontaxable ²		2,903		37	1.70	%		2,611		56	2.86	%

Total earning assets		152,111		7,909	6.93	%		144,866		8,039	7.40	%

Interest Expense
Demand deposits		10,854		55	0.68	%		11,188		39	0.46	%
Savings		15,518		129	1.11	%		12,986		91	0.93	%
Time deposits		72,982		2,368	4.33	%		73,736		2,520	4.56	%
Borrowings		13,432		342	3.39	%		10,004		281	3.75	%

Total Interest Bearing Liabilities	$	112,786	$	2,894	3.42	%	$	107,914	$	2,931	3.62	%

Net Interest Income ¹				5,015						5,108

Net Interest Margin					4.40	%					4.70	%

¹	Nonaccrual loans are included in computing the average balances.

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

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)


	Three Months Ended September 30, 2008						Three Months Ended September 30, 2007
	Average Balance		Income/ Expense		Rates		Average Balance		Income/ Expense		Rates
Interest Income
Loans ¹
Commercial	$	7,469	$	153	8.19	%	$	8,913	$	198	8.89	%
Real estate		96,222		1,696	7.05	%		102,020		1,828	7.17	%
Installment		15,128		432	11.42	%		16,064		454	11.30	%
Credit card		558		19	13.62	%		552		32	23.19	%
Federal funds sold		3,827		18	1.88	%		3,172		40	5.04	%
Interest Bearing Deposits		10,589		90	3.40	%		5,861		77	5.26	%
Securities
Taxable		14,063		183	5.21	%		9,817		144	5.87	%
Nontaxable ²		3,036		19	2.50	%		2,267		18	3.18	%

Total earning assets		150,892		2,610	6.92	%		148,666		2,791	7.51	%

Interest Expense
Demand deposits		11,738		27	0.92	%		10,573		13	0.49	%
Savings		16,887		51	1.21	%		14,055		41	1.17	%
Time deposits		71,886		719	4.00	%		76,132		890	4.68	%
Borrowings		12,584		107	3.40	%		10,309		106	4.11	%

Total Interest Bearing Liabilities	$	113,095	$	904	3.20	%	$	111,019	$	1,050	3.78	%

Net Interest Income ¹			$	1,706					$	1,741

Net Interest Margin					4.52	%					4.68	%

¹	Nonaccrual loans are included in computing the average balances.

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

TABLE II

PIONEER BANKSHARES, INC.

INTEREST SENSITIVITY ANALYSIS

SEPTEMBER 30, 2008

(Dollar Amounts in Thousands)


	0-3 Months			4-12 Months			1-5 Years			Over 5 Years			Not Classified			Total
Uses of Funds:

Loans ¹	$	12,437		$	12,238		$	53,277		$	40,928		$	—		$	118,880
Interest bearing bank deposits		2,513			4,000			3,500			—			—			10,013
Investment securities ²		3,500			508			2,237			10,591			1,715			18,551
Restricted stock		—			—			—			—			1,089			1,089
Federal funds sold		2,000			—			—			—			—			2,000

Total		20,450			508			59,014			51,519			2,804			150,533


Sources of Funds:
Interest bearing demand deposits		11,585			—			—			—			—			11,585
Regular savings		16,937			—			—			—			—			16,937
Certificates of deposit $100,000 and over		3,270			10,009			1,869			—			—			15,148
Other certificates of deposit		10,075			34,066			9,794			—			—			53,935
Borrowings		600			7,800			7,600			—			—			16,000

Total	$	42,467		$	51,875		$	19,263		$	—		$	—		$	113,605

Discrete Gap	$	(22,017	)	$	(35,129	)	$	39,751		$	51,519		$	2,804		$	36,928

Cumulative Gap	$	(22,017	)	$	(57,146	)	$	(17,395	)	$	34,124		$	36,928

Ratio of Cumulative Gap To Total Earning Assets at September 30, 2008		-14.47	%		-37.57	%		-11.44	%		22.43	%		24.28	%

Ratio of Cumulative Gap To Total Earning Assets at December 31, 2007		-13.11	%		-39.65	%		-7.82	%		25.96	%		28.40	%

¹	Nonaccrual loans are included in the loan totals.

²	Investment securities are reflected at fair value.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable

Item 4.

Controls and Procedures

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

The Company has established disclosure controls and procedures to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive officers, and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, the Company evaluates the effectiveness of these disclosure controls and procedures on a quarterly basis, and has done so as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are adequate and effective. There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

Not Applicable

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

Item 3.

Defaults Upon Senior Securities

Not Applicable

Item 4.

Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5.

Other Information

Not Applicable

Item 6.

Exhibits


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

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

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

SIGNATURES

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


	PIONEER BANKSHARES, INC.

	By:	/s/ THOMAS R. ROSAZZA
Date: November 13, 2008		Thomas R. Rosazza
		President and Chief Executive Officer

Date: November 13, 2008	By:	/s/ LORI G. HASSETT
		Lori G. Hassett
		Vice President and Chief Financial Officer