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EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - PIONEER BANKSHARES INC/VAdex32.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - PIONEER BANKSHARES INC/VAdex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - PIONEER BANKSHARES INC/VAdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2011

 

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

Commission File Number: 0-30541

 

 

PIONEER BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   54-1278721

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

(540) 778-2294

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common shares outstanding as of May 13, 2011 were 1,036,074.

 

 

 


Table of Contents

PIONEER BANKSHARES, INC.

INDEX

 

          Page  

PART I

   FINANCIAL INFORMATION      3   

Item 1.

   Financial Statements.      3   
   Consolidated Balance Sheets – March 31, 2011 and December 31, 2010      3   
   Consolidated Statements of Income – Three Months Ended March 31, 2011 and 2010      4   
   Consolidated Statements of Changes in Stockholders’ Equity – Three Months Ended March 31, 2011 and 2010      5   
   Consolidated Statements of Cash Flows – Three Months Ended March 31, 2011 and 2010      6   
   Notes to Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations.      28   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk.      39   

Item 4.

   Controls and Procedures.      39   

PART II

   OTHER INFORMATION      39   

Item 1.

   Legal Proceedings.      39   

Item 1A.

   Risk Factors.      39   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds.      39   

Item 3.

   Defaults Upon Senior Securities.      39   

Item 4.

   Reserved.      39   

Item 5.

   Other Information.      39   

Item 6.

   Exhibits.      40   
   SIGNATURES      41   

 

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Table of Contents

Part I - Financial Information.

 

Item 1. Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)

 

     March 31,
2011
     December 31,
2010
 
     (Unaudited)      (Audited)  

ASSETS

     

Cash and due from banks

   $ 3,980       $ 4,373   

Interest bearing deposits in banks

     19,144         10,634   

Federal funds sold

     6,250         2,550   

Securities available for sale, at fair value

     13,015         11,168   

Restricted securities

     947         947   

Loans receivable, net of allowance for loan losses of $2,455 and $2,342 respectively

     128,714         130,786   

Premises and equipment, net

     3,292         3,359   

Accrued interest receivable

     678         681   

Other real estate owned

     250         244   

Other assets

     3,333         3,416   
                 

Total Assets

   $ 179,603       $ 168,158   
                 

LIABILITIES

     

Deposits

     

Noninterest bearing demand

   $ 26,692       $ 25,739   

Interest bearing

     

Demand

     34,550         23,104   

Savings

     16,367         15,746   

Time deposits over $100,000

     26,060         27,545   

Other time deposits

     46,191         43,825   
                 

Total Deposits

     149,860         135,959   

Accrued expenses and other liabilities

     2,161         1,804   

Long term debt

     8,000         11,000   
                 

Total Liabilities

     160,021         148,763   
                 

STOCKHOLDERS’ EQUITY

     

Common stock; $.50 par value, authorized 5,000,000, outstanding 1,035,274 shares

     518         518   

Retained earnings

     18,785         18,649   

Accumulated other comprehensive income, net

     279         228   
                 

Total Stockholders’ Equity

     19,582         19,395   
                 

Total Liabilities and Stockholders’ Equity

   $ 179,603       $ 168,158   
                 

See Notes to Consolidated Financial Statements

 

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Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

(UNAUDITED)

 

     Three Months Ended
March 31,
 
     2011     2010  

Interest and Dividend Income:

    

Loans including fees

   $ 2,190      $ 2,181   

Interest on securities - taxable

     24        52   

Interest on securities - nontaxable

     30        35   

Interest on deposits and federal funds sold

     30        32   

Dividends

     15        13   
                

Total Interest and Dividend Income

     2,289        2,313   
                

Interest Expense:

    

Deposits

     350        469   

Borrowings

     25        6   
                

Total Interest Expense

     375        475   
                

Net Interest Income

     1,914        1,838   

Provision for loan losses

     356        376   
                

Net interest income after provision for loan losses

     1,558        1,462   
                

Noninterest Income:

    

Service charges and fees

     208        210   

Other income

     55        108   

Loss on security transactions

     (1     —     
                

Total Noninterest Income

     262        318   
                

Noninterest Expense:

    

Salaries and benefits

     656        572   

Occupancy expenses

     103        100   

Equipment expenses

     89        124   

Other expenses

     553        442   
                

Total Noninterest Expenses

     1,401        1,238   
                

Income before Income Taxes

     419        542   

Income Tax Expense

     128        171   
                

Net Income

   $ 291      $ 371   
                

Per Share Data

    

Net income, basic and diluted

   $ 0.28      $ 0.36   
                

Dividends

   $ 0.15      $ 0.15   
                

Weighted Average Shares Outstanding, Basic and Diluted

     1,035,274        1,029,466   
                

See Notes to Consolidated Financial Statements

 

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Table of Contents

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands of Dollars)

(UNAUDITED)

 

     Common
Stock
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Total  

BALANCE DECEMBER 31, 2009

   $ 515       $ 17,300      $ 101       $ 17,916   

Comprehensive Income

          

Net Income

        371           371   

Changes in unrealized gains on securities, net of taxes

          

Unrealized holding gains arising during the period (net of tax effect of $19)

          35         35   
                

Total Comprehensive Income

             406   

Cash Dividends

     —           (155     —           (155
                                  

BALANCE MARCH 31, 2010

   $ 515       $ 17,516      $ 136       $ 18,167   
                                  

BALANCE DECEMBER 31, 2010

   $ 518       $ 18,649      $ 228       $ 19,395   

Comprehensive Income

          

Net Income

        291           291   

Changes in unrealized gains on securities, net of taxes

          

Unrealized holding gains arising during the period (net of tax effect $30)

          50      

Reclassification adjustment for losses included in net income (net of tax $ —)

          1         51   
                

Total Comprehensive Income

             342   

Cash Dividends

     —           (155     —           (155
                                  

BALANCE MARCH 31, 2011

   $ 518       $ 18,785      $ 279       $ 19,582   
                                  

See Notes to Consolidated Financial Statements

 

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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)

 

     Three Months Ended
March 31,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net income

   $ 291      $ 371   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     356        376   

Depreciation and amortization

     84        92   

Loss on sale of securities

     1        —     

Net amortization on securities

     5        8   

Loss (gain) on sale of other real estate

     10        (7

Net change in:

    

Accrued interest receivable

     3        23   

Other assets

     53        349   

Accrued expense and other liabilities

     357        (71
                

Net Cash Provided by Operating Activities

     1,160        1,141   
                

Cash Flows from Investing Activities:

    

Net change in federal funds sold

     (3,700     600   

Net change in interest bearing deposits

     (8,510     (9,851

Net change in restricted securities

     —          (103

Proceeds from maturities and sales of securities available for sale

     4,250        2,488   

Purchase of securities available for sale

     (6,022     (3,500

Net decrease (increase) in loans

     1,630        (2,075

Proceeds from sale of other real estate

     70        148   

Purchase of bank premises and equipment

     (17     (18
                

Net Cash (Used in) Investing Activities

     (12,299     (12,311
                

Cash Flows from Financing Activities:

    

Net change in:

    

Demand and savings deposits

     13,020        4,283   

Time deposits

     881        377   

Proceeds from borrowings

     —          13,500   

Curtailments of borrowings

     (3,000     (10,000

Dividends paid

     (155     (155
                

Net Cash Provided by Financing Activities

     10,746        8,005   
                

Cash and Cash Equivalents:

    

Net (decrease) in cash and cash equivalents

     (393     (3,165

Cash and Cash Equivalents, beginning of year

     4,373        5,252   
                

Cash and Cash Equivalents, End of Period

   $ 3,980      $ 2,087   
                

Supplemental Disclosure of Cash Paid During the Period for Interest

   $ 309      $ 500   

Supplemental Disclosure of non-cash activity:

    

Unrealized gain on securities available for sale

   $ 81      $ 54   

Loans transferred to other real estate owned

     86        89   

See Notes to Consolidated Financial Statements

 

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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

A summary of significant accounting policies is as follows:

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

 

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The accounting standard relating to Stock Compensation requires that costs resulting from all share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted. All outstanding shares are fully vested and all compensation expense relating to outstanding stock options under this plan have been previously recorded. There is no additional compensation expense expected to be booked relating to this plan.

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

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

 

     Shares      Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual Term

(In Years)
     Intrinsic Value
of Unexercised
In-the-Money
Options
(In Thousands)
 

Options outstanding, 12/31/10

     5,600       $ 17.13         3.50       $ 5   

Options Granted

     —              

Options Exercised

     —              

Options Forfeited

     —              

Options outstanding, 3/31/11

     5,600       $ 17.13         3.25      
                 

Options exercisable, 3/31/11

     5,600       $ 17.13         3.25       $ 5   
                 

 

NOTE 2 INVESTMENT SECURITIES:

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (In Thousands)  

March 31, 2011

          

Available for Sale

          

U.S. government and agency securities

   $ 6,000       $ —         $ —        $ 6,000   

Mortgage-backed securities

     927         66         —          993   

State and municipals

     3,756         206         —          3,962   

Corporate Securities

     477         35         —          512   

Equity securities

     1,421         129         (2     1,548   
                                  
   $ 12,581       $ 436       $ (2   $ 13,015   
                                  

 

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (In Thousands)  

December 31, 2010

           

Available for Sale

           

U.S. government and agency securities

   $ 4,500       $ 4      $ —         $ 4,504   

Mortgage-backed securities

     1,040         75         —           1,115   

State and municipals

     3,760         156         —           3,916   

Corporate Securities

     478         35         —           513   

Equity securities

     1,037         83        —           1,120   
                                   
   $ 10,815       $ 353       $ —         $ 11,168   
                                   

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

 

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NOTE 2 INVESTMENT SECURITIES (continued):

 

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

 

Unrealized Losses

       
          Equity
Securities
    Total  

Less than 12 Months

   Fair Value    $ 69      $ 69   
   Unrealized Losses      (2     (2

More than 12 Months

   Fair Value      —          —     
   Unrealized Losses      —          —     

Total

   Fair Value      69        69   
   Unrealized Losses      (2     (2

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

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

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

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

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

 

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NOTE 3 LOANS:

Loans outstanding are summarized as follows:

 

     March 31,
2011
    December 31,
2010
 
     (In Thousands)        

Real Estate Loans

    

Construction & land loans

   $ 5,932      $ 6,283   

Residential Equity lines of credit

     1,595        1,534   

Residential 1-4 family

     49,630        48,573   

Residential second mortgages 1-4 family

     3,821        4,161   

Residential Multifamily

     5,472        5,439   

Commercial Agricultural loans

     4,094        4,125   

Commercial Municipal loans

     153        164   

Commercial Owner & Non-owner occupied

     38,146        40,911   
                

Total real estate loans

     108,843        111,190   

Commercial Non Real Estate loans

     5,188        4,891   

Consumer Non Real Estate loans

    

Personal Installments

     16,800        16,688   

Credit Cards

     630        659   

Overdrafts/Other

     54        73   
                

Total consumer installment loans

     17,484        17,420   
                

Gross Loans

     131,515        133,501   

Less unearned discount on loans

     (346     (373
                

Loans, less unearned discount

     131,169        133,128   

Less allowance for loan losses

     (2,455     (2,342
                

Net Loans Receivable

   $ 128,714      $ 130,786   
                

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

Pioneer Bank’s loan portfolio is concentrated in real estate loans, including those secured by residential consumer properties and small business commercial properties. Management has established specific lending criteria relating to real estate loans as a means of mitigating the risk inherent in the portfolio.

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

 

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

 

Impaired Loans with a Recorded Allowance as of March 31, 2011

   Recorded
Investment
     Unpaid
Principal
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Construction & Land Loans

              

Commercial properties

   $ 1,592       $ 2,034       $ 690       $ 1,592       $ —     

Residential Real Estate

              

1-4 Family Residences

   $ 1,098       $ 1,098       $ 165       $ 1,098       $ 3   

Commercial – Non Real Estate

              

Industrial loans

   $ 337       $ 337       $ 194       $ 337       $ 6   
                                            

Totals

   $ 3,027       $ 3,469       $ 1,049       $ 3,027       $ 9   
                                            

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

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

 

Impaired Loans with a Recorded Allowance as of December 31, 2010

   Recorded
Investment
     Unpaid
Principal
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Construction & Land Loans

              

Commercial properties

   $ 1,378       $ 1,378       $ 540       $ 1,416       $ 4   

Residential Real Estate

              

1-4 Family Residences

   $ 982       $ 982       $ 180       $ 651       $ 35   

Commercial Real Estate

              

Non-owner occupied

   $ 220       $ 662       $ 175       $ 220       $ —     

Commercial – Non Real Estate

              

Industrial loans

   $ 241       $ 241       $ 120       $ 202       $ 16   
                                            

Totals

   $ 2,821       $ 3,263       $ 1,015       $ 2,489       $ 55   
                                            

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

 

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

 

Past Due Loans by Class as of March 31, 2011

   30-59
Days
     60-89
Days
     90 Days
or More
     Total
Past Due
     Total
Current
     Total
Loans
 

Construction & Land Loans

                 

Residential

   $ —         $ —         $ —         $ —         $ 787       $ 787   

Commercial

     —           —           1,009         1,009         3,014         4,023   

Other – Land only

     61         —           —           61         1,061         1,122   

Residential Real Estate

                 

Equity Lines of Credit

     —           —           —           —           1,595         1,595   

1-4 Family Residences

     3,011         —           560         3,571         49,880         53,451   

Multifamily Dwellings

     —           —           —           —           5,472         5,472   

Commercial Real Estate

                 

Owner occupied

     213         69         —           282         23,125         23,407   

Non-owner occupied

     79         —           —           79         14,660         14,739   

Agricultural / Farm loans

     —           —           —           —           4,094         4,094   

Municipals

     —           —           —           —           153         153   

Commercial – Non Real Estate

                 

Agricultural

     —           —           17         17         119         136   

Industrial

     3         3         —           6         5,017         5,023   

Municipals

     —           —           —           —           29         29   

Consumer – Non Real Estate

                 

Credit Cards

     17         5         4         26         604         630   

Automobile loans

     239         104         32         375         13,060         13,435   

Other personal loans

     47         21         —           68         3,351         3,419   
                                                     

Totals Gross Loans

   $ 3,670       $ 202       $ 1,622       $ 5,494       $ 126,021       $ 131,515   
                                                     

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

 

     90 days past due
&  still accruing interest
     Nonaccrual
Loans
 

Construction & Land Loans

     

Commercial

   $ —         $ 1,593   

Residential Real Estate

     

1-4 Family Residences

     —           560   

Commercial Real Estate

     

Non-owner occupied

     —           188   

Commercial Non-Real Estate

     

Agricultural

     17         —     

Industrial

     —           131   

Consumer – Non Real Estate

     

Credit cards

     4         —     

Automobile loans

     12         21   
                 

Totals Gross Loans

   $ 33       $ 2,493   
                 

 

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

 

Past Due Loans by Class as of December 31, 2010

   30-59
Days
     60-89
Days
     90 Days
or More
     Total
Past Due
     Total
Current
     Total
Loans
 

Construction & Land Loans

                 

Residential

   $ —         $ —         $ —         $ —         $ 708       $ 708   

Commercial

     —           —           589         589         3,878         4,467   

Other – Land only

     118         88         —           206         902         1,108   

Residential Real Estate

                 

Equity Lines of Credit

     27         —           —           27         1,507         1,534   

1-4 Family Residences

     2,894         1,011         623         4,528         48,206         52,734   

Multifamily Dwellings

     —           —           —           —           5,439         5,439   

Commercial Real Estate

                 

Owner occupied

     69         402         —           471         24,763         25,234   

Non-owner occupied

     182         —           220         402         15,275         15,677   

Agricultural / Farm loans

     —           —           5         5         4,120         4,125   

Municipals

     —           —           —           —           164         164   

Commercial – Non Real Estate

                 

Agricultural

   $ —         $ 5       $ —         $ 5       $ 159       $ 164   

Industrial

     517         47         46         610         4,082         4,692   

Municipals

     —           —           —           —           35         35   

Consumer – Non Real Estate

                 

Credit Cards

     26         5         —           31         628         659   

Automobile loans

     368         144         96         608         11,903         12,511   

Other personal loans

     108         28         7         143         4,107         4,250   
                                                     

Totals Gross Loans

   $ 4,309       $ 1,730       $ 1,586       $ 7,625       $ 125,876       $ 133,501   
                                                     

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

 

     90 days past due
&  still accruing interest
     Nonaccrual
Loans
 

Construction & Land Loans

     

Commercial

   $ —         $ 1,378   

Residential Real Estate

     

1-4 Family Residences

     —           652   

Commercial Real Estate

     

Non-owner occupied

     —           412   

Agricultural / Farm loans

     5         —     

Commercial Non-Real Estate

     

Industrial

   $ 46       $ 123   

Consumer – Non Real Estate

     

Automobile loans

     18         24   

Other personal loans

     7         —     
                 

Totals Gross Loans

   $ 76       $ 2,589   
                 

 

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Table of Contents

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

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

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

 

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Table of Contents

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

 

Loans By Class and Internal Risk Rating as of March 31, 2011

   Pass      Pass-
Watch
     Special
Mention
     Substandard      Doubtful      Loss      Total
Loans
 

Construction & Land Loans

                    

Residential

   $ 779       $ 8       $ —         $ —         $ —         $ —         $ 787   

Commercial

     178         2,253         —           1,372         220         —           4,023   

Other – Land only

     929         167         26         —           —           —           1,122   

Residential Real Estate

                    

Equity Lines of Credit

     1,576         19         —           —           —           —           1,595   

1-4 Family Residences

     44,585         5,243         3,360         263         —           —           53,451   

Multifamily Dwellings

     2,780         763         1,173         756         —           —           5,472   

Commercial Real Estate

                    

Owner occupied

     9,999         11,338         1,489         581         —           —           23,407   

Non-owner occupied

     2,190         10,765         —           1,784         —           —           14,739   

Agricultural / Farm loans

     1,218         2,280         596         —           —           —           4,094   

Municipals

     134         19         —           —           —           —           153   

Commercial – Non Real Estate

                    

Agricultural

     10         126         —           —           —           —           136   

Industrial

     1,950         2,350         602         —           121         —           5,023   

Municipals

     29         —           —           —           —           —           29   

Consumer – Non Real Estate

                    

Credit Cards

     604         22         4         —           —           —           630   

Automobile loans

     13,403         —           32         —           —           —           13,435   

Other personal loans

     3,323         55         40         1         —           —           3,419   
                                                              

Totals Gross Loans

   $ 83,687       $ 35,408       $ 7,322       $ 4,757       $ 341         —         $ 131,515   
                                                              

 

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Table of Contents

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

 

Loans By Class and Internal Risk Rating as of December 31, 2010

   Pass      Pass-
Watch
     Special
Mention
     Substandard      Doubtful      Loss      Total
Loans
 

Construction & Land Loans

                    

Residential

   $ 699       $ 9       $ —         $ —         $ —         $ —         $ 708   

Commercial

     778         2,117         —           1,572         —           —           4,467   

Other – Land only

     898         183         27         —           —           —           1,108   

Residential Real Estate

                    

Equity Lines of Credit

     1,514         20         —           —           —           —           1,534   

1-4 Family Residences

     44,943         5,094         2,490         207         —           —           52,734   

Multifamily Dwellings

     2,813         772         1,180         674         —           —           5,439   

Commercial Real Estate

                    

Owner occupied

     10,268         12,862         1,703         401         —           —           25,234   

Non-owner occupied

     2,339         11,336         —           1,782         220         —           15,677   

Agricultural / Farm loans

     963         2,564         598         —           —           —           4,125   

Municipals

     138         26         —           —           —           —           164   

Commercial – Non Real Estate

                    

Agricultural

     11         153         —           —           —           —           164   

Industrial

     1,688         2,753         128         —           123         —           4,692   

Municipals

     35         —           —           —           —           —           35   

Consumer – Non Real Estate

                    

Credit Cards

     628         31         —           —           —           —           659   

Automobile loans

     12,470         6         35         —           —           —           12,511   

Other personal loans

     3,842         74         332         2         —           —           4,250   
                                                              

Totals Gross Loans

   $ 84,027       $ 38,000       $ 6,493       $ 4,638       $ 343         —         $ 133,501   
                                                              

 

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Table of Contents
NOTE 4 ALLOWANCE FOR LOAN LOSSES:

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

 

     Construction
& Land
Loans
     Residential
Real Estate
    Commercial
Real Estate
    Commercial
Non-Real
Estate
    Consumer
Non-Real
Estate
    Total  

ALLL ending balance 12/31/2010

   $ 575       $ 587      $ 540      $ 222      $ 418      $ 2,342   

YTD Charge-offs

     —           (208     —          (28     (78     (314

YTD Recoveries

     —           3        —          2        66        71   

YTD Provision

     159         233        (137     68        33        356   
                                                 

ALLL ending Balance 3/31/2011

   $ 734       $ 615      $ 403      $ 264      $ 439      $ 2,455   
                                                 

Evaluated individually for impairment

     690         165        —          194        —          1,049   

Evaluated collectively for impairment

     44         450        403        70        439        1,406   

Total Gross Loans 3/31/2011

   $ 5,932       $ 60,518      $ 42,393      $ 5,188      $ 17,484      $ 131,515   
                                                 

Evaluated individually for impairment

     1,592         1,098        —          337        —          3,027   

Evaluated collectively for impairment

     4,340         59,420        42,393        4,851        17,484        128,488   

 

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

 

     Construction
& Land Loans
     Residential
Real Estate
     Commercial
Real Estate
     Commercial
Non-Real
Estate
     Consumer
Non-Real
Estate
     Total  

ALLL ending balance 12/31/2010

   $ 575       $ 587       $ 540       $ 222       $ 418       $ 2,342   
                                                     

Evaluated individually for impairment

     540         180         175         120         —           1,015   

Evaluated collectively for impairment

     35         407         365         102         418         1,327   

Total Gross Loans 12/31/2010

   $ 6,283       $ 59,707       $ 45,200       $ 4,891       $ 17,420       $ 133,501   
                                                     

Evaluated individually for impairment

     1,378         982         220         241         —           2,821   

Evaluated collectively for impairment

     4,905         58,725         44,980         4,650         17,420         130,680   

 

NOTE 5 EARNINGS PER SHARE:

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

 

     March 31, 2011      March 31, 2010  
     Shares      Per Share
Amount
     Shares      Per Share
Amount
 

Basic earnings per share

     1,035,274       $ 0.28         1,029,466       $ 0.36   
                       

Effect of dilutive securities:

           

Stock Options

     —              —        
                       

Diluted earnings per share

     1,035,274       $ 0.28         1,029,466       $ 0.36   
                                   

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

 

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NOTE 6 BORROWINGS:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total Bank assets, subject to certain eligibility requirements. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by the Bank’s real estate loan portfolio, with a current pledge against the institution’s first lien 1-4 family residential mortgages totaling $49.6 million, as of March 31, 2011. On certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may repay all or part of the advance without a prepayment penalty.

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

 

NOTE 7 OTHER EXPENSES:

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

 

     Three Months Ended
March 31,
 
     2011      2010  
     (In Thousands)  

ATM Service Fees

   $ 28       $ 25   

Director Fees

     31         30   

FDIC Assessment Fees

     68         55   

Professional Fees

     105         90   

Supplies and Printing

     33         23   

Telephone Expense

     31         30   

Sales & Franchise Taxes

     33         48   

Other

     224         141   
                 

Total

   $ 553       $ 442   
                 

 

NOTE 8 FAIR VALUE MEASUREMENT:

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

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

 

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Fair Value Hierarchy

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

 

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

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

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

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

 

Description

   Balances
Outstanding
(In Thousands)
     Fair Value Measurements Using:  
      Quoted Prices
in Active

Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

As of March 31, 2011

           

U.S. Government & Agency Securities

   $ 6,000       $ —         $ 6,000       $ —     

Mortgage-backed Securities

     993         —           993         —     

State & Municipals

     3,962         —           3,962         —     

Corporate Securities

     512         —           512         —     

Equity Securities

     1,548         —           1,548         —     
                                   

Total Available –for-sale securities

   $ 13,015       $ —         $ 13,015       $ —     
                                   

As of December 31, 2010

           

U.S. Government & Agency Securities

   $ 4,504       $ —         $ 4,504       $ —     

Mortgage-backed Securities

     1,115         —           1,115         —     

State & Municipals

     3,916         —           3,916         —     

Corporate Securities

     513         —           513         —     

Equity Securities

     1,120         —           1,120         —     
                                   

Total Available-for-sale securities

   $ 11,168       $ —         $ 11,168       $ —     
                                   

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

 

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

Impaired Loans: The Fair Value Measurement accounting standard also applies to loans measured for impairment including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

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

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

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

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

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

 

Description

   Balances
Outstanding
(In Thousands)
     Quoted Prices
in Active
Markets for

Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets as of March 31, 2011

           

Impaired Loans, Net of allowance

   $ 1,978       $ —         $ 1,355         623   
                                   

Other Real Estate Owned

   $ 250       $ —         $ 250         —     
                                   

Assets as of December 31, 2010

           

Impaired Loans, Net of allowance

   $ 1,806       $ —         $ 1,111       $ 695   
                                   

Other Real Estate Owned

   $ 244       $ —         $ 244       $ —     
                                   

 

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

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

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

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

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

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

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

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

 

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

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

 

     March 31, 2011      December 31, 2010  
     Carrying
Value
     Estimated
Fair  Value
     Carrying
Value
     Estimated
Fair Value
 
     (In Thousands)  

Financial Assets

           

Cash and due from banks

   $ 3,980         3,980       $ 4,373       $ 4,373   

Interest bearing deposits in other banks

     19,144         19,146         10,634         10,632   

Federal funds sold

     6,250         6,250         2,550         2,550   

Securities available for sale

     13,015         13,015         11,168         11,168   

Loans, net

     128,714         131,429         130,786         133,269   

Accrued interest receivable

     678         678         681         681   

Financial Liabilities

           

Demand Deposits:

           

Non-interest bearing

     26,692         26,692         25,739         25,739   

Interest bearing

     34,550         34,550         23,104         23,104   

Savings deposits

     16,367         16,367         15,746         15,746   

Time deposits

     72,251         73,010         71,370         72,313   

Borrowings

     8,000         8,057         11,000         11,073   

Accrued interest payable

     312         312         246         246   

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

 

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

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

Forward-Looking Statements

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

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

Overview

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

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

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

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

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

 

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Critical Accounting Policies

General

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

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

Allowance for Loan Losses

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

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

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

Goodwill

Goodwill is evaluated on an annual basis for impairments in value and adjusted accordingly. The accounting standards for Business Combinations, Goodwill and Other Intangible Assets require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. The provisions of these accounting standards discontinued the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review, which must be performed at least annually or more frequently if certain impairment indicators are in evidence. The accounting standards relating to Goodwill also require that reporting units be identified for the purpose of assessing potential future impairments.

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

 

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Table of Contents

Results of Operations

Net Interest Income

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

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

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

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

Noninterest Income

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

Noninterest Expense

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

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

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

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

 

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Financial Condition

Securities

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

As of March 31, 2011, the fair market value of securities available for sale was approximately $434,000 more than the net amortized cost value as shown in Note 2 of the financial statements included in this report. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value and does not expect to be required to sell these securities for operational cash flow purposes. Management continually monitors any securities in a loss position for possible impairment. At this time, management does not expect the fluctuation in the value of these securities to have a material impact on earnings.

Investments in securities, including those which were restricted, increased approximately $1.8 million during the first quarter of 2011. The Company generally invests in securities with a relatively short-term maturity due to uncertainty in the direction of interest rates. Of the investments in securities available for sale, 11.89% (based on market value) are invested in equities, most of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The equity securities generally include common stocks, which are purchased with the objective of generating additional income. The value of these investments is sensitive to general trends in the stock market and other economic conditions.

Loan Portfolio

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

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

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

During the first quarter of 2011, net loans decreased by approximately $2.1 million or 1.58%. The decrease in loan volume was primarily in the category of commercial real estate loans. A schedule of loans by type is shown in Note 3 of the consolidated financial statements included in this report.

The risk elements in lending activities include non-accrual loans, loans 90 days or more past due, restructured and impaired loans. Non-accrual loans are loans on which interest accruals have been suspended or discontinued permanently as previously defined in the Company’s significant accounting policies. Restructured loans are loans on which the original interest rate or repayment terms have changed due to the borrower’s financial hardship and were previously discussed in Note 1.

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

 

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

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

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

Allowance for Loan Losses

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

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

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

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

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

 

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Management has made allocations based on the declining economic trends, concentrations of credit and increases in non-performing assets, as a means of providing sufficient funding for possible losses. The increased allowance allocations noted above have contributed to an overall increase in the cumulative funding as a percentage of total loans. The cumulative balance in the allowance for loan loss account was equal to 1.87% and 1.76% of total loans at March 31, 2011 and December 31, 2010, respectively. The increase in the allowance for loan loss as a percentage of total loans is directionally consistent with the changes and trends that have been identified within the loan portfolio as of March 31, 2011.

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

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

Management’s evaluation of the allowance for loan losses as of March 31, 2011 and December 31, 2010 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan loss account is monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.

Premises, Equipment and Software

During the first quarter of 2011, the Company had purchases relating to premises, equipment or other fixed assets of approximately $17,000. These purchases were primarily related to in-house software and equipment upgrades. The Bank continually monitors technological upgrades in the banking industry, and periodically, in order to achieve higher levels of internal operational efficiency, purchases new or additional equipment relating to such technologies. Management sets specific budget allowances on an annual basis, which are deemed to be adequate to cover expenditures that may arise throughout the year relating to technological upgrades or enhancements.

The Bank executed new contracts with its core data processing vendor during 2010 for various system enhancements relating to certain daily processing functions and operational software upgrades. One major element of these new contracts was the change from an in-house daily processing system to an outsourced environment, in which the core vendor now performs selected back-office operational support functions for the bank. The implementation of these new system functions are expected to provide cost savings and increased internal efficiencies to the Bank in future reporting periods.

 

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Deposits

The Company’s main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Company’s service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. The Company’s total deposit portfolio has historically remained relatively stable; however, these balances fluctuate with normal daily activity.

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

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

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total Bank assets, subject to certain eligibility requirements. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by the Bank’s real estate loan portfolio, with a current pledge against the institution’s first lien 1-4 family residential mortgages totaling $49.6 million, as of March 31, 2011. On certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may repay all or part of the advance without a prepayment penalty.

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

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

Capital

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

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

 

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Liquidity

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

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

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

Liquidity as of March 31, 2011 is considered to be adequate.

Interest Rate Sensitivity

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

As of March 31, 2011, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 25.69% for the one year re-pricing period, compared with a negative cumulative Gap Rate Sensitivity of 34.19% at December 31, 2010. This negative gap position generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. However, in actual practice, this may not be the case as deposits may not re-price concurrently with changes in rates within the general economy. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.

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

Recent Accounting Pronouncements

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

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

 

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

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

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

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

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

Securities and Exchange Commission Web Site

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

 

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TABLE I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)

 

     Three Months Ended
March 31, 2011
    Three Months Ended
March 31, 2010
 
     Average
Balance
     Income/
Expense
     Rates     Average
Balance
     Income/
Expense
     Rates  

Interest Income Loans 1

                

Commercial

   $ 5,476       $ 91         6.65   $ 7,023       $ 127         7.23

Real estate

     107,558         1,667         6.20     104,729         1,650         6.30

Installment

     16,974         407         9.59     15,634         377         9.65

Credit card

     620         25         16.13     619         27         17.45
                                                    

Total Loans

     130,628         2,190         6.71     128,005         2,181         6.82

Federal funds sold

     5,455         3         0.22     2,808         2         0.28

Interest Bearing Deposits

     13,074         27         0.83     7,753         30         1.55

Securities

                

Taxable

     3,756         27         2.88     5,198         54         4.16

Nontaxable 2

     5,591         63         4.51     6,498         70         4.31
                                                    

Total earning assets

     158,504         2,310         5.83     150,262         2,337         6.22
                                                    

Interest Expense

                

Demand deposits

     25,666         44         0.69     18,881         35         0.74

Savings

     16,029         13         0.32     15,919         10         0.25

Time deposits

     69,584         293         1.68     70,925         424         2.39

Borrowings

     9,256         25         1.08     8,112         6         0.30
                                                    

Total Interest Bearing Liabilities

   $ 120,535       $ 375         1.24   $ 113,837       $ 475         1.67
                                                    

Net Interest Income

      $ 1,935            $ 1,862      
                            

Net Interest Margin

           4.88           4.96
                            

 

1 

Nonaccrual loans are included in computing the average balances.

2 

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

 

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TABLE II

PIONEER BANKSHARES, INC.

INTEREST SENSITIVITY ANALYSIS

MARCH 31, 2011

(Dollar Amounts in Thousands)

 

    0-3
Months
    4-12
Months
    1-5
Years
    Over 5
Years
    Not
Classified
    Total  

Uses of Funds:

           

Loans1

  $ 11,988      $ 7,801      $ 66,046      $ 45,334      $ —        $ 131,169   

Interest bearing bank deposits

    11,394        4,750        3,000        —          —          19,144   

Investment securities2

    5,000        —          3,133        2,822        2,060        13,015   

Restricted stock

    —          —          —          —          947        947   

Federal funds sold

    6,250        —          —          —          —          6,250   
                                               

Total

    34,632        12,551        72,179        48,156        3,007        170,525   
                                               

Sources of Funds:

           

Interest bearing demand deposits

    34,550        —          —          —          —          34,550   

Regular savings

    16,367        —          —          —          —          16,367   

Certificates of deposit $100,000 and over

    6,745        9,099        10,216        —          —          26,060   

Other certificates of deposit

    8,637        15,593        21,961        —          —          46,191   

Borrowings

    —          —          8,000        —          —          8,000   
                                               

Total

  $ 66,299      $ 24,692      $ 40,177      $ —        $ —        $ 131,168   
                                               

Discrete Gap

  $ (31,667   $ (12,141   $ 32,002      $ 48,156      $ 3,007      $ 39,357   

Cumulative Gap

  $ (31,667   $ (43,808   $ (11,806   $ 36,350      $ 39,357     

Ratio of Cumulative Gap To Total Earning Assets at March 31, 2011

    -18.57     -25.69     -6.92     21.32     23.08  
                                         

Ratio of Cumulative Gap To Total Earning Assets at December 31, 2010

    -25.62     -34.19     -9.92     21.86     23.49  
                                         

 

1 

Nonaccrual loans are included in the loan totals.

2

Investment securities are reflected at fair value.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable

 

Item 4. Controls and Procedures

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

The Company has established disclosure controls and procedures to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive officers, and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, the Company evaluates the effectiveness of these disclosure controls and procedures on a quarterly basis, and has done so as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are adequate and effective. There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

 

Item 1. Legal Proceedings.

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

 

Item 1A. Risk Factors.

Not Applicable

 

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

The Company has a stock repurchase program authorized with 5,000 shares remaining available for repurchase. There have been no repurchase transactions during 2011.

 

Item 3. Defaults Upon Senior Securities.

Not Applicable

 

Item 4. Reserved.

Not Applicable

 

Item 5. Other Information.

Not Applicable

 

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Item 6. Exhibits.

 

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

 

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SIGNATURES

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

 

    PIONEER BANKSHARES, INC.
    By:  

/s/ THOMAS R. ROSAZZA

Date: May 13, 2011     Thomas R. Rosazza
    President and Chief Executive Officer
Date: May 13, 2011     By:  

/s/ LORI G. HASSETT

    Lori G. Hassett
    Vice President and Chief Financial Officer

 

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