PIONEER BANKSHARES INC/VA

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.

During the first quarter of 2012, non-interest expense increased by $34,000 or 2.43% in comparison to the same period last year. The primary factors contributing to this increase were salary and benefit expenses, as well as increased occupancy expenses resulting from the new leased facility in Charlottesville and repairs and maintenance necessary at other existing branch locations. Additionally, data processing expenses increased approximately $11,000 as a result of certain new mobile application enhancements and internal processing upgrades.

As of March 31, 2012, the fair market value of securities available for sale was approximately $404,000 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.

The allowance for loan loss balance of $2.4 million, at March 31, 2012, decreased by approximately $2,000 from its level at December 31, 2011. This consistent level in the allowance for loan loss balance is considered to be appropriate, as there have been minimal changes in risk levels identified within the bank’s portfolio during the first quarter of 2012. Additionally, while certain new impairment allocations have been made, there were others that have been reduced or removed as a result of the borrower’s improved financial condition, continued payment performance or improved collateral position.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.