| UNITED STATES                      |
|------------------------------------|
| SECURITIES AND EXCHANGE COMMISSION |
| Washington, DC 20549               |

| West Virginia                                                  | 55-0650793                        |
|----------------------------------------------------------------|-----------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |

| Large Accelerated Filer [   ]                                                                  |                                                | Smaller reporting company [X]                                     |
|----------------------------------------------------------------------------------------------------------|-----------------------------------------------------|-------------------------------------------------------------------|
| Accelerated Filer            [   ] |  (Do not check if a smaller reporting company) | Non-accelerated filer     [  ] |

----

| HIGHLANDS BANKSHARES, INC.                                           |
|----------------------------------------------------------------------|
| Quarterly Report on Form 10Q For The Period Ended September 30, 2009 |
|                                                                 |   |   |
| INDEX                                                                |
|                                                                 |   | Page |
| PART I                                                               | FINANCIAL INFORMATION |   |
|                                                                 |   |   |
| Item 1.                                                              | Financial Statements |   |
|                                                                 |   |   |
|                                                                 | Unaudited Consolidated Statements of Income Nine Months Ended September 30, 2009 and 2008 | 1 |
|                                                                 |   |   |
|                                                                 | Unaudited Consolidated Statements of Income Three Months Ended September 30, 2009 and 2008 | 2 |
|                                                                 |   |   |
|                                                                 | Unaudited Consolidated Balance Sheet for September 30, 2009 and Audited Consolidated Balance Sheet for December 31, 2008 | 3 |
|                                                                 |   |   |
|                                                                 | Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008 | 4 |
|                                                                 |   |   |
|                                                                 | Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 | 5 |
|                                                                 |   |   |
|                                                                 | Notes to Consolidated Financial Statements | 6 |
|                                                                 |   |   |
| Item 2.                                                              | Management’ Discussion and Analysis of Financial Condition and Results of Operations | 13 |
|                                                                 |   |   |
| Item 3.                                                              | Quantitative and Qualitative Disclosures About Market Risk | 29 |
|                                                                 |   |   |
| Item 4.                                                              | Controls and Procedures | 29 |
|                                                                 |   |   |
| PART II                                                              | OTHER INFORMATION |   |
|                                                                 |   |   |
| Item 1.                                                              | Legal Proceedings | 29 |
|                                                                 |   |   |
| Item 1A.                                                             | Risk Factors | 29 |
|                                                                 |   |   |
| Item 2.                                                              | Unregistered Sales of Equity Securities and Use of Proceeds | 29 |
|                                                                 |   |   |
| Item 3.                                                              | Defaults Upon Senior Securities | 29 |
|                                                                 |   |   |
| Item 4.                                                              | Submission of Matters to a Vote of Security Holders | 30 |
|                                                                 |   |   |
| Item 5.                                                              | Other Information | 30 |
|                                                                 |   |   |
| Item 6.                                                              | Exhibits | 30 |
|                                                                 |   |   |
| SIGNATURES                                                           |    30 |

----

Index

| Page One |
|----------|

R

| Item 1. | Financial Statements |
|---------|----------------------|

| HIGHLANDS BANKSHARES, INC.                                       |   |
|------------------------------------------------------------------|--------|
| CONSOLIDATED STATEMENTS OF INCOME                                |   |
| (In Thousands of Dollars, Except Per Share Data)                 |   |
|                                                             |   |   |   |   |   |   |
|                                                             |   | Nine Months Ended September 30 |   |
|                                                             |   | 2009 |   |   | 2008 |   |
|                                                             |   | (unaudited) |   |   | (unaudited) |   |
| Interest Income                                                  |   |   |   |   |   |   |
| Interest and fees on loans                                       |   | $ | 17,513 |   |   | $ | 18,774 |   |
| Interest on federal funds sold                                   |   |   | 15 |   |   |   | 231 |   |
| Interest on deposits in other banks                              |   |   | 11 |   |   |   | 38 |   |
| Interest and dividends on securities                             |   |   | 661 |   |   |   | 835 |   |
| Total Interest Income                                            |   |   | 18,200 |   |   |   | 19,878 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Interest Expense                                                 |   |   |   |   |   |   |   |   |
| Interest on deposits                                             |   |   | 5,566 |   |   |   | 6,467 |   |
| Interest on federal funds purchased                              |   |   | 0 |   |   |   | 10 |   |
| Interest on borrowed money                                       |   |   | 397 |   |   |   | 363 |   |
| Total Interest Expense                                           |   |   | 5,963 |   |   |   | 6,840 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Net Interest Income                                              |   |   | 12,237 |   |   |   | 13,038 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                        |   |   | 1,175 |   |   |   | 636 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Net Interest Income After Provision for Loan Losses              |   |   | 11,062 |   |   |   | 12,402 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Non-interest Income                                              |   |   |   |   |   |   |   |   |
| Service charges                                                  |   |   | 1,261 |   |   |   | 1,286 |   |
| Investment in insurance contracts                                |   |   | 167 |   |   |   | 208 |   |
| Gains (losses) on securities                                     |   |   | (13 | ) |   |   | 109 |   |
| Gains on sale of fixed assets                                    |   |   | 1 |   |   |   | 30 |   |
| Other non-interest income                                        |   |   | 411 |   |   |   | 391 |   |
| Total Non-interest Income                                        |   |   | 1,827 |   |   |   | 2,024 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Non-interest Expense                                             |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                   |   |   | 4,998 |   |   |   | 4,740 |   |
| Equipment and occupancy expense                                  |   |   | 1,023 |   |   |   | 1,020 |   |
| Data processing expense                                          |   |   | 502 |   |   |   | 616 |   |
| Directors fees                                                   |   |   | 310 |   |   |   | 274 |   |
| Legal and professional fees                                      |   |   | 432 |   |   |   | 413 |   |
| Other non-interest expense                                       |   |   | 1,954 |   |   |   | 1,508 |   |
| Total Non-interest Expense                                       |   |   | 9,219 |   |   |   | 8,571 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Income Before Provision For Income Taxes                         |   |   | 3,670 |   |   |   | 5,855 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Provision for Income Taxes                                       |   |   | 1,312 |   |   |   | 2,096 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Net Income                                                       |   | $ | 2,358 |   |   | $ | 3,759 |   |
|                                                             |   |   |   |   |   |   |   |   |
| Per Share Data                                                   |   |   |   |   |   |   |   |   |
| Net Income                                                       |   | $ | 1.76 |   |   | $ | 2.69 |   |
| Cash Dividends                                                   |   | $ | .87 |   |   | $ | .81 |   |
| Weighted Average Common Shares Outstanding                       |   |   | 1,336,873 |   |   |   | 1,398,773 |   |
| The accompanying notes are an integral part of these statements. |   |

----

Index

| Page Two |
|----------|

| HIGHLANDS BANKSHARES, INC.                       |
|--------------------------------------------------|
| CONSOLIDATED STATEMENTS OF INCOME                |
| (In Thousands of Dollars, Except Per Share Data) |

|                                                |   |                            |      |   |        |   |
|-----------------------------------------------------|--------|---------------------------------|-----------|--------|-------------|--------|
|                                                |   | Three Months Ended September 30 |      |
|                                                |   | 2009                            |      |   | 2008        |   |
|                                                |   | (unaudited)                     |      |   | (unaudited) |   |
| Interest Income                                     |   |                            |      |   |        |   |
| Interest and fees on loans                          |   | $                               | 5,812     |   |        | $      | 6,162 |   |
| Interest on federal funds sold                      |   |                            | 6         |   |        |   | 8 |   |
| Interest on deposits in other banks                 |   |                            | 5         |   |        |   | 7 |   |
| Interest and dividends on securities                |   |                            | 217       |   |        |   | 294 |   |
| Total Interest Income                               |   |                            | 6,040     |   |        |   | 6,471 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Interest Expense                                    |   |                            |      |   |        |   |   |   |
| Interest on deposits                                |   |                            | 1,856     |   |        |   | 1,916 |   |
| Interest on federal funds purchased                 |   |                            | 0         |   |        |   | 10 |   |
| Interest on borrowed money                          |   |                            | 128       |   |        |   | 128 |   |
| Total Interest Expense                              |   |                            | 1,984     |   |        |   | 2,054 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Net Interest Income                                 |   |                            | 4,056     |   |        |   | 4,417 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Provision for Loan Losses                           |   |                            | 354       |   |        |   | 238 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Net Interest Income After Provision for Loan Losses |   |                            | 3,702     |   |        |   | 4,179 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Non-interest Income                                 |   |                            |      |   |        |   |   |   |
| Service charges                                     |   |                            | 455       |   |        |   | 467 |   |
| Income on insurance contracts                  |   |                            |  56  |   |        |   | 89 |   |
| Gains (losses) on securities                        |   |                            | 0         |   |        |   | 0 |   |
| Gains on sale of fixed assets                       |   |                            | 0         |   |        |   | 7 |   |
| Other non-interest income                           |   |                            | 169       |   |        |   | 124 |   |
| Total Non-interest Income                           |   |                            | 680       |   |        |   | 687 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Non-interest Expense                                |   |                            |      |   |        |   |   |   |
| Salaries and employee benefits                      |   |                            | 1,741     |   |        |   | 1,599 |   |
| Equipment and occupancy expense                     |   |                            | 351       |   |        |   | 341 |   |
| Data processing expense                             |   |                            | 163       |   |        |   | 200 |   |
| Directors fees                                      |   |                            | 125       |   |        |   | 76 |   |
| Legal and professional fees                         |   |                            | 204       |   |        |   | 148 |   |
| Other non-interest expense                          |   |                            | 659       |   |        |   | 546 |   |
| Total Non-interest Expense                          |   |                            | 3,243     |   |        |   | 2,910 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Income Before Provision For Income Taxes            |   |                            | 1,139     |   |        |   | 1,956 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Provision for Income Taxes                          |   |                            | 404       |   |        |   | 656 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Net Income                                          |   | $                               | 735       |   |        | $      | 1,300 |   |
|                                                |   |                            |      |   |        |   |   |   |
| Per Share Data                                      |   |                            |      |   |        |   |   |   |
| Net Income                                          |   | $                               | .55       |   |        | $      | .97 |   |
| Cash Dividends                                      |   | $                               | .29       |   |        | $      | .27 |   |
| Weighted Average Common Shares Outstanding          |   |                            | 1,336,873 |   |        |   | 1,337,311 |   |

|   The accompanying notes are an integral part of these statements. |
|-------------------------------------------------------------------------|

----

Index

| Page Three HIGHLANDS BANKSHARES, INC. |
|--------------------------------------------|
| CONSOLIDATED BALANCE SHEETS                |
| (In thousands of dollars)             |

|                                                                                             |   | September 30, 2009 |    |   | December 31, 2008 |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
|                                                                                             |   | (unaudited)        |    |   | (audited)         |   |
| ASSETS                                                                                           |   |               |    |   |              |   |
| Cash and due from banks                                                                          |   | $                  | 6,549   |   |              | $      | 7,589 |   |
| Interest bearing deposits in banks                                                               |   |               | 1,091   |   |              |   | 502 |   |
| Federal funds sold                                                                               |   |               | 12,115  |   |              |   | 160 |   |
| Investment securities available for sale                                                         |   |               | 26,807  |   |              |   | 21,692 |   |
| Restricted investments                                                                           |   |               | 2,185   |   |              |   | 2,177 |   |
| Loans                                                                                            |   |               | 334,491 |   |              |   | 325,754 |   |
| Allowance for loan losses                                                                        |   |               | (3,902  | )      |              |   | (3,667 | ) |
| Bank premises and equipment, net of depreciation                                                 |   |               | 9,169   |   |              |   | 8,031 |   |
| Interest receivable                                                                              |   |               | 1,829   |   |              |   | 2,164 |   |
| Investment in life insurance contracts                                                           |   |               | 6,683   |   |              |   | 6,499 |   |
| Goodwill                                                                                         |   |               | 1,534   |   |              |   | 1,534 |   |
| Other intangible assets                                                                          |   |               | 1,069   |   |              |   | 1,215 |   |
| Other assets                                                                                     |   |               | 5,324   |   |              |   | 4,645 |   |
| Total Assets                                                                                     |   | $                  | 404,944 |   |              | $      | 378,295 |   |
|                                                                                             |   |               |    |   |              |   |   |   |
| LIABILITIES                                                                                      |   |               |    |   |              |   |   |   |
| Deposits                                                                                         |   |               |    |   |              |   |   |   |
| Non-interest bearing deposits                                                                    |   | $                  | 50,825  |   |              | $      | 49,604 |   |
| Interest bearing transaction and savings accounts                                                |   |               | 72,765  |   |              |   | 68,610 |   |
| Time deposits over $100,000                                                                      |   |               | 73,229  |   |              |   | 64,779 |   |
| All other time deposits                                                                          |   |               | 149,799 |   |              |   | 133,294 |   |
| Total Deposits                                                                                   |   |               | 346,618 |   |              |   | 316,287 |   |
|                                                                                             |   |               |    |   |              |   |   |   |
| Overnight and other short term debt instruments                                                  |   |               | 0       |   |              |   | 4,800 |   |
| Long term debt instruments                                                                       |   |               | 10,981  |   |              |   | 11,317 |   |
| Accrued expenses and other liabilities                                                           |   |               | 6,654   |   |              |   | 6,492 |   |
| Total Liabilities                                                                                |   |               | 364,253 |   |              |   | 338,896 |   |
|                                                                                             |   |               |    |   |              |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                       |   |               |    |   |              |   |   |   |
| Common Stock, $5 par value, 3,000,000 shares authorized, 1,436,874 shares  issued |   |               | 7,184   |   |              |   | 7,184 |   |
| Surplus                                                                                          |   |               | 1,662   |   |              |   | 1,662 |   |
| Treasury stock (100,001 shares, at cost)                                                         |   |               | (3,372  | )      |              |   | (3,372 | ) |
| Retained earnings                                                                                |   |               | 36,353  |   |              |   | 35,157 |   |
| Other accumulated comprehensive loss                                                             |   |               | (1,136  | )      |              |   | (1,232 | ) |
| Total Stockholders’ Equity                                                                 |   |               | 40,691  |   |              |   | 39,399 |   |
|                                                                                             |   |               |    |   |              |   |   |   |
| Total Liabilities and Stockholders’ Equity                                                 |   | $                  | 404,944 |   |              | $      | 378,295 |   |
|                                                                                             |   |               |    |   |              |   |   |   |
| The accompanying notes are an integral part of these statements                                  |   |

----

Index

| Page Four |
|-----------|

| HIGHLANDS BANKSHARES, INC.                                                           |   |
|--------------------------------------------------------------------------------------|--------|
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY                     |   |
| (In Thousands of Dollars)                                                            |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                 |   | CommonStock |   |   |  Surplus |   |   | Treasury Stock |   |   | RetainedEarnings |   |   | OtherComprehensiveIncome (Loss) |   |   |  Total |   |
| Balances at December 31, 2007                                                        |   | $ | 7,184 |   |   | $ | 1,662 |   |   | $ | 0 |   |   | $ | 32,032 |   |   | $ | (285 | ) |   | $ | 40,593 |   |
| Cumulative effect adjustment to retained earnings for change in accounting principle |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (348 | ) |   |   |   |   |   |   | (348 | ) |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive Income:                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,759 |   |   |   |   |   |   |   | 3,759 |   |
| Change in other comprehensive income                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (54 | ) |   |   | (54 | ) |
| Total Comprehensive Income                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,357 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Treasury Stock repurchased                                                           |   |   |   |   |   |   |   |   |   |   | (3,372 | ) |   |   |   |   |   |   |   |   |   |   | (3,372 | ) |
| Dividends Paid                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,135 | ) |   |   |   |   |   |   | (1,135 | ) |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances September 30, 2008                                                          |   | $ | 7,184 |   |   | $ | 1,662 |   |   | $ | (3,372 | ) |   | $ | 34,308 |   |   | $ | (339 | ) |   | $ | 39,443 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                 |   | CommonStock |   |   |  Surplus |   |   | TreasuryStock |   |   | RetainedEarnings |   |   | OtherComprehensiveIncome (Loss) |   |   |  Total |   |
| Balances at December 31, 2008                                                        |   | $ | 7,184 |   |   | $ | 1,662 |   |   | $ | (3,372 | ) |   | $ | 35,157 |   |   | $ | (1,232 | ) |   | $ | 39,399 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive Income:                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,358 |   |   |   |   |   |   |   | 2,358 |   |
| Change in other comprehensive income                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 96 |   |   |   | 96 |   |
| Total Comprehensive Income                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,454 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends Paid                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,162 | ) |   |   |   |   |   |   | (1,162 | ) |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances September 30, 2009                                                          |   | $ | 7,184 |   |   | $ | 1,662 |   |   | $ | (3,372 | ) |   | $ | 36,353 |   |   | $ | (1,136 | ) |   | $ | 40,691 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The accompanying notes are an integral part of these statements                      |   |

----

Index

| Page Five |
|-----------|

| HIGHLANDS BANKSHARES, INC.            |
|---------------------------------------|
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In Thousands of Dollars)             |

|                                                                 |   | Nine Months Ended September 30, |    |
|----------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                 |   | 2009                            |    |   | 2008 |   |
|                                                                 |   | (unaudited)                     |    |   | (unaudited) |   |
| Cash Flows From Operating Activities                                 |   |                            |    |   |   |   |
| Net Income                                                           |   | $                               | 2,358   |   |   | $ | 3,759 |   |
| Adjustments to reconcile net income to net                           |   |                            |    |   |   |   |   |   |
| cash provided by operating activities                                |   |                            |    |   |   |   |   |   |
| Loss (gain) on investment securities                                 |   |                            | 13      |   |   |   | (109 | ) |
| (Gain) on sale of fixed asset                                        |   |                            | (1      | ) |   |   | (32 | ) |
| Other Loss                                                           |   |                            | 0       |   |   |   | 22 |   |
| Gain on sale of OREO                                                 |   |                            | (36     | )  |   |   | (0 | )  |
| Depreciation                                                         |   |                            | 488     |   |   |   | 512 |   |
| Change in insurance contracts                                        |   |                            | (184    | ) |   |   | (209 | ) |
| Net amortization of securities                                       |   |                            | 61      |   |   |   | 3 |   |
| Provision for loan losses                                            |   |                            | 1,175   |   |   |   | 636 |   |
| Deferred income tax benefit                                          |   |                            | 0       |   |   |   | (14 | ) |
| Writedown on OREO property                                      |   |                            | 40      |   |   |   | 0 |   |
| Amortization of intangibles                                          |   |                            | 146     |   |   |   | 133 |   |
| Net purchase of intangibles                                          |   |                            | 0       |   |   |   | 175 |   |
| Decrease in interest receivable                                      |   |                            | 335     |   |   |   | 124 |   |
| (Increase) decrease in other assets                                  |   |                            | 31      |   |   |   | (685 | ) |
| Increase in accrued expenses and other liabilities                   |   |                            | 163     |   |   |   | 189 |   |
| Net Cash Provided by Operating Activities                            |   |                            | 4,589   |   |   |   | 4,504 |   |
|                                                                 |   |                            |    |   |   |   |   |   |
| Cash Flows From Investing Activities                                 |   |                            |    |   |   |   |   |   |
| (Increase) decrease in federal funds sold                            |   |                            | (11,955 | ) |   |   | 13,418 |   |
| Settlement on insurance contract                                     |   |                            | 0       |   |   |   | 82 |   |
| Proceeds from maturities of securities available for sale            |   |                            | 5,777   |   |   |   | 15,282 |   |
| Purchase of securities available for sale                            |   |                            | (10,813 | ) |   |   | (12,537 | ) |
| (Increase) in restricted investments                                 |   |                            | (8      | ) |   |   | (375 | ) |
| Proceeds from sale of fixed assets and OREO                     |   |                            | 669     |   |   |   | 0 |   |
| (Increase) decrease  in interest bearing deposits in banks |   |                            | (589    | ) |   |   | 1,361 |   |
| Purchase of property and equipment                                   |   |                            | (1,626  | ) |   |   | (461 | ) |
| Net increase in Loans                                                |   |                            | (11,117 | ) |   |   | (5,678 | ) |
| Net Cash (Used in) Provided by Investing Activities                  |   |                            | (29,662 | ) |   |   | 11,092 |   |
|                                                                 |   |                            |    |   |   |   |   |   |
| Cash Flows From Financing Activities                                 |   |                            |    |   |   |   |   |   |
| Net change in deposits                                               |   |                            | 30,331  |   |   |   | (12,656 | ) |
| Federal funds purchased                                              |   |                            | 0       |   |   |   | 775 |   |
| Net change in short term borrowings                                  |   |                            | (4,800  | ) |   |   | 0 |   |
| Additional long term debt                                            |   |                            | 0       |   |   |   | 1,500 |   |
| Repayment of long term borrowings                                    |   |                            | (336    | ) |   |   | (1,869 | ) |
| Purchase of treasury stock                                           |   |                            | 0       |   |   |   | (3,372 | ) |
| Dividends paid in cash                                               |   |                            | (1,162  | ) |   |   | (1,135 | ) |
| Net Cash Provided by (Used in) Financing Activities                  |   |                            | 24,033  |   |   |   | (16,757 | ) |
|                                                                 |   |                            |    |   |   |   |   |   |
| Net (decrease)  in Cash and Cash Equivalents               |   |                            | (1,040  | ) |   |   | (1,161 | ) |
|                                                                 |   |                            |    |   |   |   |   |   |
| Cash and Cash Equivalents, Beginning of Period                       |   |                            | 7,589   |   |   |   | 7,935 |   |
|                                                                 |   |                            |    |   |   |   |   |   |
| Cash and Cash Equivalents, End of Period                             |   | $                               | 6,549   |   |   | $ | 6,774 |   |

----

Index

| Page Six            Supplemental Disclosures |   |            2009(unaudited) |   |   |           2008(unaudited) |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------|--------|
| Cash paid for income taxes                                                                               |   | $                                                                                 | 1,111  |   |                                                                        | $      | 1,997 |   |
| Cash paid for interest                                                                                   |   | $                                                                                 | 5,793  |   |                                                                        | $      | 6,746 |   |
|     The accompanying notes are an integral part of these statements.                 |   |
|                                                                                                     |   |
|                                                                                                     |   |
|                                                                                                     |   |
|                                                                                                     |   |
|                                                                                                     |   |
|                                                                                                     |   |
|                                                                                                     |   |

----

Index

| Page Seven |
|------------|

| NOTE ONE | ACCOUNTING PRINCIPLES |
|----------|-----------------------|

| NOTE TWO     LOANS |   |
|----------------------------------------|--------|

|                     |   | September 30, |    |   | December 31, |   |
|--------------------------|--------|---------------|---------|--------|--------------|--------|
|                     |   | 2009          |    |   | 2008         |   |
| Loan Type                |   |          |    |   |         |   |
| Commercial               |   | $             | 95,093  |   |         | $      | 97,709 |   |
| Real Estate construction |   |          | 28,982  |   |         |   | 27,210 |   |
| Real Estate mortgage     |   |          | 168,815 |   |         |   | 156,877 |   |
| Consumer installment     |   |          | 41,601  |   |         |   | 43,958 |   |
| Total Loans              |   | $             | 334,491 |   |         | $      | 325,754 |   |

| NOTE THREE | ALLOWANCE FOR LOAN LOSSES |
|------------|---------------------------|

|                             |   | 2009   |   |   | 2008   |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|
| Balance, beginning of period     |   | $      | 3,667  |   |   | $      | 3,577 |   |
| Provisions charged to operations |   |   | 1,175  |   |   |   | 636 |   |
| Loan recoveries                  |   |   | 234    |   |   |   | 102 |   |
| Loan charge-offs                 |   |   | (1,174 | )      |   |   | (664 | ) |
| Balance, end of period           |   | $      | 3,902  |   |   | $      | 3,651 |   |

|                                  |   | 2009   |   |   | 2008   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|
| Period end balance, impaired loans    |   | $      | 2,782  |   |   | $      | 3,841 |   |
| Allowance for impairments, period end |   |   | 527    |   |   |   | 272 |   |

----

Index

| Page Eight |
|------------|

| NOTE FOUR | INVESTMENT IN INSURANCE CONTRACTS |
|-----------|-----------------------------------|

| NOTE FIVE | SECURITIES AND RESTRICTED INVESTMENTS |
|-----------|---------------------------------------|

|                                                      |   | September 30, 2009 |    |   | December 31, 2008 |   |
|-----------------------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
|                                                      |   | Amortized          |    |   | Market            |   |   | Amortized |   |   | Market |   |
|                                                      |   | Cost               |    |   | Value             |   |   | Cost |   |   | Value |   |
| Available For Sale Securities                             |   |               |    |   |              |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies                              |   | $                  | 11,987  |   |              | $      | 12,149 |   |   | $ | 7,504 |   |   | $ | 7,726 |   |
| Mortgage backed securities                                |   |               | 7,010   |   |              |   | 7,225 |   |   |   | 10,211 |   |   |   | 10,342 |   |
| Obligations of states and municipalities                  |   |               | 4,584   |   |              |   | 4,698 |   |   |   | 3,596 |   |   |   | 3,609 |   |
| Certificates of deposit in other banksMarketable equities |   |               | 2,70515 |   |              |   | 2,71124 |   |   |   | 028 |   |   |   | 015 |   |
| Total Available For Sale Securities                       |   | $                  | 26,301  |   |              | $      | 26,807 |   |   | $ | 21,339 |   |   | $ | 21,692 |   |

|                         |   | Total      |   |   | Less than 12 Months     |   |   | 12 Months or Greater |   |
|------------------------------|--------|------------|--------|--------|-------------------------|--------|--------|----------------------|--------|
|                         |   | Fair Value |   |   | Gross Unrealized Losses |   |   | FairValue            |   |   | Gross Unrealized Losses |   |   | Fair Value |   |   | Gross Unrealized Losses |   |
| September 30, 2009           |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |
| Investment Category          |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Mortgage backed securities   |   |       | 138    |   |                    |   | (1     | )                    |   |   | 138 |   |   |   | (1 | ) |   |   | 0 |   |   |   | (0 | ) |
| U.S. Treasuries and Agencies |   |       | 2,295  |   |                    |   | (3     | )                    |   |   | 2,295 |   |   |   | (3 | ) |   |   | 0 |   |   |   | (0 | ) |
| Total                        |   | $          | 2,433  |   |                    | $      | (4     | )                    |   | $ | 2,433 |   |   | $ | (4 | ) |   | $ | 0 |   |   | $ | (0 | ) |
|                         |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2008            |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment Category          |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage backed securities   |   |       | 1,225  |   |                    |   | (17    | )                    |   |   | 1,156 |   |   |   | (16 | ) |   |   | 69 |   |   |   | (1 | ) |
| State and municipals         |   |       | 1,908  |   |                    |   | (16    | )                    |   |   | 1,708 |   |   |   | (15 | ) |   |   | 200 |   |   |   | (1 | ) |
| Other equity securities      |   |       | 15     |   |                    |   | (13    | )                    |   |   | 0 |   |   |   | 0 |   |   |   | 15 |   |   |   | (13 | ) |
| Total                        |   | $          | 3,148  |   |                    | $      | (46    | )                    |   | $ | 2,864 |   |   | $ | (31 | ) |   | $ | 284 |   |   | $ | (15 | ) |

----

Index

| NOTE SIX | EARNINGS PER SHARE |
|----------|--------------------|

| NOTE SEVEN | BORROWINGS |
|------------|------------|

| NOTE EIGHT | ADJUSTMENT TO RETAINED EARNINGS FOR CHANGE IN ACCOUNTING PRINCIPLE |
|------------|--------------------------------------------------------------------|

----

Index

| Page Ten |
|----------|

| NOTE NINE | INTANGIBLE ASSETS |
|-----------|-------------------|

| NOTE TEN | EMPLOYEE BENEFITS |
|----------|-------------------|

|                                             |   | 2009   |   |   | 2008   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Service cost                                     |   | $      | 126    |   |   | $      | 127 |   |
| Interest cost                                    |   |   | 207    |   |   |   | 201 |   |
| Expected return on plan assets                   |   |   | (230   | )      |   |   | (244 | ) |
| Amortization of unrecognized prior service costs |   |   | 0      |   |   |   | 3 |   |
| Recognized net actuarial loss                    |   |   | 55     |   |   |   | 40 |   |
|                                             |   |   |   |   |   |   |   |   |
| Net periodic expense                             |   | $      | 158    |   |   | $      | 127 |   |

| NOTE ELEVEN | FAIR VALUE MEASUREMENTS |
|-------------|-------------------------|

|   | · | Level One: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | Level Three: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|

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Index

| Page Eleven |
|-------------|

|                          |   |  Level 1 |   |   |  Level 2 |   |   |  Level 3 |   |   | Total Fair Value Measurements |   |
|-------------------------------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|--------|------------------------------------|--------|
| Securities available for sale |   | $             | 0      |   |          | $      | 26,807 |          |   | $      | 0                                  |   |   | $ | 26,807 |   |
| Total                         |   | $             | 0      |   |          | $      | 26,807 |          |   | $      | 0                                  |   |   | $ | 26,807 |   |

|                    |   |  Level 1 |   |   |  Level 2 |   |   |  Level 3 |   |   | Total Fair Value Measurements |   |
|-------------------------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|--------|-------------------------------|--------|
| Other real estate owned |   | $             | 0      |   |          | $      | 0      |          |   | $      | 2,167                         |   |   | $ | 2,167 |   |
| Impaired Loans          |   |          | 0      |   |          |   | 0      |          |   |   | 2,255                         |   |   |   | 2,255 |   |
| Total                   |   | $             | 0      |   |          | $      | 0      |          |   | $      | 4,422                         |   |   | $ | 4,422 |   |

----

Index

----

Index

g

|                                            |   | September 30, 2009 |                          |   | December 31, 2008   |   |
|-------------------------------------------------|--------|--------------------|-------------------------------|--------|---------------------|--------|
|                                            |   | CarryingAmount     |                          |   | EstimatedFair Value |   |   | CarryingAmount |   |   | Estimated Fair Value |   |
| Financial Assets:                               |   |               |                          |   |                |   |   |   |   |   |   |   |
| Cash and due from banks                         |   | $                  |    6,549       |   |                | $      | 6,549 |   |   | $ | 7,589 |   |   | $ | 7,589 |   |
| Interest bearing deposits                       |   |               | 1,091                         |   |                |   | 1,091 |   |   |   | 502 |   |   |   | 502 |   |
| Federal funds sold                              |   |               | 12,115                        |   |                |   | 12,115 |   |   |   | 160 |   |   |   | 160 |   |
| Securities available for sale                   |   |               | 26,807                        |   |                |   | 26,807 |   |   |   | 21,692 |   |   |   | 21,692 |   |
| Restricted investments                          |   |               | 2,185                         |   |                |   | 2,185 |   |   |   | 2,177 |   |   |   | 2,177 |   |
| Loans, net                                      |   |               | 330,589                       |   |                |   | 325,256 |   |   |   | 322,087 |   |   |   | 323,788 |   |
| Interest receivable                             |   |               | 1,829                         |   |                |   | 1,829 |   |   |   | 2,164 |   |   |   | 2,164 |   |
| Life insurance contracts                        |   |               | 6,683                         |   |                |   | 6,683 |   |   |   | 6,499 |   |   |   | 6,499 |   |
|                                            |   |               |                          |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities:                          |   |               |                          |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Demand and savings deposits                     |   |               | 123,590                       |   |                |   | 123,590 |   |   |   | 118,214 |   |   |   | 118,214 |   |
| Time deposits                                   |   |               | 223,028                       |   |                |   | 222,903 |   |   |   | 198,073 |   |   |   | 200,970 |   |
| Overnight and other short term debt instruments |   |               | 0                             |   |                |   | 0 |   |   |   | 4,800 |   |   |   | 4,800 |   |
| Long term debt instruments                      |   |               | 10,981                        |   |                |   | 11,576 |   |   |   | 11,317 |   |   |   | 11,930 |   |
| Interest payable                                |   |               |     1,039 |   |                |   |        1,039 |   |   |   |        848 |   |   |   |          848 |   |

----

Index

| Page Fourteen |
|---------------|

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

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| Page Fifteen |
|--------------|

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----

Index

----

Index

----

Index

|                                                                                                                                                                                                                                                                  |   | Nine months ended September 30, |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                                                                                                                                                                                  |   | 2009                            |   |   | 2008 |   |
| Annualized return on average assets                                                                                                                                                                                                                                   |   |                            | .80    | % |   |   | 1.33 | % |
| Annualized return on average equity                                                                                                                                                                                                                                   |   |                            | 7.84   | % |   |   | 13.38 | % |
| Net interest margin (1)                                                                                                                                                                                                                                               |   |                            | 4.51   | % |   |   | 4.97 | % |
| Efficiency Ratio (2)                                                                                                                                                                                                                                                  |   |                            | 65.55  | % |   |   | 56.91 | % |
| Earnings per share (3)                                                                                                                                                                                                                                                |   | $                               | 1.76   |   |   | $ | 2.69 |   |
|                                                                                                                                                                                                                                                                  |   |                            |   |   |   |   |   |   |
| (1) On a fully taxable equivalent basis and including loan origination fees.                                                                                                                                                                                          |   |
| (2) Non-interest expenses for the period indicated divided by the sum of net interest income and non-interest income for the period indicated.                                                                                                                        |   |
| (3) Per weighted average shares of common stock outstanding for the period indicated. Earnings per share for the nine month period ended September 30, 2009 reflect the impact of the share repurchase of 100,001 shares during the second and third quarters of2008. |

|                                                             |   | 2009   |           |   | 2008   |   |          | Change |   |
|------------------------------------------------------------------|--------|--------|----------------|--------|--------|--------|---------------|--------|--------|
| Net gains (losses) on securities                                 |   | $      | (13            | )      |   | $      | 109           |   |   | $ | (122 | ) |
| Net gains on sale of fixed assets                           |   |   | 1              |   |   |   | 30            |   |   |   | (29 | )  |
| Gain on life insurance settlement                           |   |   | 0              |   |   |   | 30            |   |   |   | (30 | )  |
| Net gains on other real estate owned and other foreclosed assets |   |   |   36 |   |   |   |   8 |   |   |   |   28 |   |
| Total                                                            |   |   | 24             |   |   |   | 177           |   |   | $ | (153 | ) |
| Income tax effect of non recurring items                         |   |   | 9              |   |   |   | 66            |   |   |   | (57 | ) |
| Impact of non recurring items on net income                      |   | $      | 15             |   |   | $      | 111           |   |   | $ | (96 | ) |

----

Index

|   |
|--------|

----

Index

|                                                       |   | September 30,2009 |   |   | December 31,2008 |   |
|------------------------------------------------------------|--------|-------------------|--------|--------|------------------|--------|
| Allowance for loan losses as a percentage of gross loans   |   |              | 1.17   | %      |             |   | 1.13 | % |
| Non performing loans as a percentage of gross loans        |   |              | 2.48   | %      |             |   | 1.70 | % |
| Ratio of allowance for loan losses to non-performing loans |   |              | .47    |   |             |   | .66 |   |

|                                               |   | September 30, |   |   | December 31, |   |
|----------------------------------------------------|--------|---------------|--------|--------|--------------|--------|
|                                               |   | 2009          |   |   | 2008         |   |
| Non-accrual loans                                  |   | $             | 3,750  |   |         | $      | 1,346 |   |
| Loans past due 90 days and still accruing interest |   |          | 2,611  |   |         |   | 3,472 |   |
| Restructured loans                                 |   |          | 1,942  |   |         |   | 705 |   |
| Total non-performing loans                         |   | $             | 8,303  |   |         | $      | 5,523 |   |

|                      |   | 2009   |   |   | 2008   |   |
|---------------------------|--------|--------|--------|--------|--------|--------|
| Charge-offs               |   |   |   |   |   |   |
| Commercial                |   | $      | (296   | )      |   | $      | (170 | ) |
| Mortgage and construction |   |   | (288   | )      |   |   | (155 | ) |
| Consumer                  |   |   | (590   | )      |   |   | (339 | ) |
| Total Charge-offs         |   |   | (1,174 | )      |   |   | (664 | ) |
|                      |   |   |   |   |   |   |   |   |
| Recoveries                |   |   |   |   |   |   |   |   |
| Commercial                |   |   | 1      |   |   |   | 19 |   |
| Mortgage                  |   |   | 51     |   |   |   | 2 |   |
| Consumer                  |   |   | 182    |   |   |   | 81 |   |
| Total Recoveries          |   |   | 234    |   |   |   | 102 |   |
|                      |   |   |   |   |   |   |   |   |
| Total Net Charge-offs     |   | $      | (940   | )      |   | $      | (562 | ) |

|                      |   | September 30, 2009 |   |   | December 31, 2008 |   |
|---------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                      |   |               |   |   | Percent of        |   |   |   |   |   | Percent of |   |
|                      |   | Amount             |   |   | Loans             |   |   | Amount |   |   | Loans |   |
| Loan Type                 |   |               |   |   |              |   |   |   |   |   |   |   |
| Commercial                |   | $                  | 1,359  |   |              |   | 28 | % |   | $ | 1,349 |   |   |   | 30 | % |
| Mortgage and construction |   |               | 1,199  |   |              |   | 60 | % |   |   | 994 |   |   |   | 57 | % |
| Consumer                  |   |               | 1,125  |   |              |   | 12 | % |   |   | 1,285 |   |   |   | 13 | % |
| Unallocated               |   |               | 219    |   |              |   |   |   |   |   | 39 |   |   |   |   |   |
| Totals                    |   | $                  | 3,902  |   |              |   |   |   |   | $ | 3,667 |   |   |   |   |   |

----

Index

----

Index

| EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME                                                      |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |   |   |   |   |   |   |   |   |   |
| Increase (Decrease) Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008 |
|                                                                                                      |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   | Due to change in: |   |
|                                                                                                      |   | Average Volume |   |   | Average Rate |   |   | Total Change |   |
| Interest Income                                                                                           |   |   |   |   |   |   |   |   |   |
| Loans                                                                                                     |   | $ | 881 |   |   | $ | (2,142 | ) |   | $ | (1,261 |   |
| Federal funds sold                                                                                        |   |   | (3 | ) |   |   | (213 | ) |   |   | (216 | ) |
| Interest bearing deposits                                                                                 |   |   | (20 | ) |   |   | (7 | ) |   |   | (27 | ) |
| Taxable investment securities                                                                             |   |   | (35 | ) |   |   | (159 | ) |   |   | (194 | ) |
| Nontaxable investment securities                                                                          |   |   | 32 |   |   |   | (1 | ) |   |   | 24 |   |
| Total Interest Income                                                                                     |   |   | 855 |   |   |   | (2,522 | ) |   |   | (1,667 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Expense                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                                                           |   |   | (2 | ) |   |   | (38 | ) |   |   | (40 | ) |
| Savings deposits                                                                                          |   |   | (2 | ) |   |   | (190 | ) |   |   | (192 | ) |
| Time deposits                                                                                             |   |   | 346 |   |   |   | (1,015 | ) |   |   | (669 | ) |
| Borrowings                                                                                                |   |   | 45 |   |   |   | (21 | ) |   |   | 24 |   |
| Total Interest Expense                                                                                    |   |   | 387 |   |   |   | (1,264 | ) |   |   | (877 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                                                                                       |   | $ | 468 |   |   | $ | (1,258 | ) |   | $ | (790 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |

----

Index

| Page Twenty-Four |
|------------------|

|                                                   |   | 2009    |    |   | 2008    |   |
|--------------------------------------------------------|--------|---------|---------|--------|---------|--------|
|                                                   |   | Average |    |   | Income/ |   |   |   |   |   | Average |   |   | Income/ |   |   |   |   |
|                                                   |   | Balance |    |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Interest Income                                        |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans1,2                                               |   | $       | 329,987 |   |    | $      | 17,513 |   |   |   | 7.08 | % |   | $ | 313,392 |   |   | $ | 18,774 |   |   |   | 7.99 | % |
| Federal funds sold                                     |   |    | 9,887   |   |    |   | 15 |   |   |   | .20 | % |   |   | 12,157 |   |   |   | 231 |   |   |   | 2.53 | % |
| Interest bearing deposits                              |   |    | 622     |   |    |   | 11 |   |   |   | 2.26 | % |   |   | 1,747 |   |   |   | 38 |   |   |   | 2.90 | % |
| Taxable investment securities                          |   |    | 19,467  |   |    |   | 548 |   |   |   | 3.76 | % |   |   | 20,717 |   |   |   | 742 |   |   |   | 4.78 | % |
| Nontaxable investment securities3                      |   |    | 3,946   |   |    |   | 179 |   |   |   | 6.05 | % |   |   | 3,239 |   |   |   | 148 |   |   |   | 6.09 | % |
| Total Earning Assets                                   |   |    | 363,909 |   |    |   | 18,266 |   |   |   | 6.69 | % |   |   | 351,252 |   |   |   | 19,933 |   |   |   | 7.57 | % |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                              |   |    | 6,934   |   |    |   |   |   |   |   |   |   |   |   | 7,339 |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                              |   |    | (3,711  | )      |    |   |   |   |   |   |   |   |   |   | (3,605 | ) |   |   |   |   |   |   |   |   |
| Insurance contracts                                    |   |    | 6,652   |   |    |   |   |   |   |   |   |   |   |   | 6,368 |   |   |   |   |   |   |   |   |   |
| Non-earning assets                                     |   |    | 20,340  |   |    |   |   |   |   |   |   |   |   |   | 16,337 |   |   |   |   |   |   |   |   |   |
| Total Assets                                           |   | $       | 394,026 |   |    |   |   |   |   |   |   |   |   | $ | 377,692 |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Expense                                       |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand deposits                       |   | $       | 22,308  |   |    | $      | 33 |   |   |   | .20 | % |   | $ | 23,700 |   |   | $ | 73 |   |   |   | .41 | % |
| Savings and money markets                              |   |    | 49,362  |   |    |   | 147 |   |   |   | .40 | % |   |   | 50,144 |   |   |   | 339 |   |   |   | .90 | % |
| Time deposits                                          |   |    | 209,817 |   |    |   | 5,386 |   |   |   | 3.42 | % |   |   | 196,328 |   |   |   | 6,055 |   |   |   | 4.11 | % |
| Borrowings                                             |   |    | 13,222  |   |    |   | 397 |   |   |   | 4.01 | % |   |   | 11,217 |   |   |   | 363 |   |   |   | 4.31 | % |
| Short-term borrowings                                  |   |    | 0       |   |    |   | 0 |   |   |   | 0.00 | % |   |   | 496 |   |   |   | 10 |   |   |   | 2.69 | % |
| Total Interest Bearing Liabilities                     |   |    | 294,709 |   |    |   | 5,963 |   |   |   | 2.70 | % |   |   | 281,885 |   |   |   | 6,840 |   |   |   | 3.24 | % |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                        |   |    | 49,925  |   |    |   |   |   |   |   |   |   |   |   | 50,020 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                      |   |    | 9,290   |   |    |   |   |   |   |   |   |   |   |   | 5,499 |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                             |   |    | 40,102  |   |    |   |   |   |   |   |   |   |   |   | 40,288 |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity       |   | $       | 394,026 |   |    |   |   |   |   |   |   |   |   | $ | 377,692 |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                                    |   |    |    |   |    | $      | 12,303 |   |   |   |   |   |   |   |   |   |   | $ | 13,093 |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Yield on Earning Assets3                           |   |    |    |   |    |   |   |   |   |   | 4.51 | % |   |   |   |   |   |   |   |   |   |   | 4.97 | % |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1Balances of loans include loans in non accrual status |   |
| 2Interest income on loans includes fees                |   |
| 3Yields are on a fully taxable equivalent basis        |   |

----

Index

| Page Twenty-Five |
|------------------|

|                                                   |   | 2009    |    |   | 2008    |   |
|--------------------------------------------------------|--------|---------|---------|--------|---------|--------|
|                                                   |   | Average |    |   | Income/ |   |   |   |   |   | Average |   |   | Income/ |   |   |   |   |
|                                                   |   | Balance |    |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Interest Income                                        |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans1,2                                               |   | $       | 330,801 |   |    | $      | 5,812 |   |   |   | 7.03 | % |   | $ | 316,627 |   |   | $ | 6,162 |   |   |   | 7.78 | % |
| Federal funds sold                                     |   |    | 12,798  |   |    |   | 6 |   |   |   | .19 | % |   |   | 1,383 |   |   |   | 8 |   |   |   | 2.31 | % |
| Interest bearing deposits                              |   |    | 845     |   |    |   | 5 |   |   |   | 2.10 | % |   |   | 773 |   |   |   | 7 |   |   |   | 3.63 | % |
| Taxable investment securities                          |   |    | 21,467  |   |    |   | 176 |   |   |   | 3.29 | % |   |   | 21,669 |   |   |   | 257 |   |   |   | 4.74 | % |
| Nontaxable investment securities3                      |   |    | 4,516   |   |    |   | 64 |   |   |   | 5.67 | % |   |   | 3,535 |   |   |   | 57 |   |   |   | 6.45 | % |
| Total Earning Assets                                   |   |    | 370,427 |   |    |   | 6,063 |   |   |   | 6.65 | % |   |   | 343,987 |   |   |   | 6,491 |   |   |   | 7.55 | % |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                              |   |    | 6,450   |   |    |   |   |   |   |   |   |   |   |   | 7,260 |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                              |   |    | (3,795  | )      |    |   |   |   |   |   |   |   |   |   | (3,698 | ) |   |   |   |   |   |   |   |   |
| Insurance contracts                                    |   |    | 6,652   |   |    |   |   |   |   |   |   |   |   |   | 6,423 |   |   |   |   |   |   |   |   |   |
| Non-earning assets                                     |   |    | 21,978  |   |    |   |   |   |   |   |   |   |   |   | 16,749 |   |   |   |   |   |   |   |   |   |
| Total Assets                                           |   | $       | 401,712 |   |    |   |   |   |   |   |   |   |   | $ | 370,721 |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Expense                                       |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand deposits                       |   | $       | 22,037  |   |    | $      | 9 |   |   |   | .16 | % |   | $ | 22,878 |   |   | $ | 20 |   |   |   | .33 | % |
| Savings and money markets                              |   |    | 51,134  |   |    |   | 47 |   |   |   | .37 | % |   |   | 49,300 |   |   |   | 88 |   |   |   | .71 | % |
| Time deposits                                          |   |    | 219,523 |   |    |   | 1,800 |   |   |   | 3.28 | % |   |   | 191,463 |   |   |   | 1,809 |   |   |   | 3.78 | % |
| Borrowings                                             |   |    | 11,040  |   |    |   | 128 |   |   |   | 4.65 | % |   |   | 11,283 |   |   |   | 128 |   |   |   | 4.54 | % |
| Short term borrowings                                  |   |    | 0       |   |    |   | 0 |   |   |   | 0.00 | % |   |   | 1,478 |   |   |   | 10 |   |   |   | 2.71 | % |
| Total Interest Bearing Liabilities                     |   |    | 303,734 |   |    |   | 1,984 |   |   |   | 2.61 | % |   |   | 276,402 |   |   |   | 2,054 |   |   |   | 2.97 | % |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                        |   |    | 50,859  |   |    |   |   |   |   |   |   |   |   |   | 49,832 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                      |   |    | 6,696   |   |    |   |   |   |   |   |   |   |   |   | 5,410 |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                             |   |    | 40,423  |   |    |   |   |   |   |   |   |   |   |   | 39,077 |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity       |   | $       | 401,712 |   |    |   |   |   |   |   |   |   |   | $ | 370,721 |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                                    |   |    |    |   |    | $      | 4,079 |   |   |   |   |   |   |   |   |   |   | $ | 4,437 |   |   |   |   |   |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Yield on Earning Assets3                           |   |    |    |   |    |   |   |   |   |   | 4.40 | % |   |   |   |   |   |   |   |   |   |   | 5.16 | % |
|                                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1Balances of loans include loans in non accrual status |   |
| 2Interest income on loans includes fees                |   |
| 3Yields are on a fully taxable equivalent basis        |   |

----

Index

| Salary and Benefits Expense |   |
|-----------------------------|--------|
|                        |   | 2009 |   |   | 2008 |   |   | Increase(Decrease) |   |
| Employee salaries           |   | $ | 3,326 |   |   | $ | 3,159 |   |   | $ | 167 |   |
| Employee benefit insurance  |   |   | 712 |   |   |   | 683 |   |   |   | 29 |   |
| Payroll taxes               |   |   | 277 |   |   |   | 232 |   |   |   | 45 |   |
| Post retirement plans       |   |   | 683 |   |   |   | 666 |   |   |   | 17 |   |
| Total                       |   | $ | 4,998 |   |   | $ | 4,740 |   |   | $ | 258 |   |

|                                                                                  |   | Amount |   |
|---------------------------------------------------------------------------------------|--------|--------|--------|
| Changes due to increase in average salary per full time equivalent employee           |   | $      | 261    |   |
| Changes due to increase in the average full time equivalent employees for the periods |   |   | (94    | ) |
| Total increase in salary expense                                                      |   | $      | 167    |   |

|   |
|--------|

----

Index

|                                             |   | 2009   |   |   | 2008   |   |   | Increase(Decrease) |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------------------|--------|
| Depreciation of buildings and equipment          |   | $      | 488    |   |   | $      | 512    |               |   | $ | (24 | ) |
| Maintenance expense on buildings and equipment   |   |   | 307    |   |   |   | 316    |               |   |   | (9 | ) |
| Utilities expense                                |   |   | 92     |   |   |   | 67     |               |   |   | 25 |   |
| Real estate and personal property tax            |   |   | 69     |   |   |   | 62     |               |   |   | 7 |   |
| Other expense related to occupancy and equipment |   |   | 67     |   |   |   | 63     |               |   |   | 4 |   |
| Total occupancy and equipment expense            |   | $      | 1,023  |   |   | $      | 1,020  |               |   | $ | 3 |   |

|                                                   |   | 2009   |   |   | 2008   |   |   | Increase(Decrease) |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------------------|--------|
| Office supplies and postage & freight expense      |   | $      | 346    |   |   | $      | 382    |               |   | $ | (36 | ) |
| FDIC Premiums                                          |   |   | 442    |   |   |   | 42     |               |   |   | 400 |   |
| ATM expense                                            |   |   | 162    |   |   |   | 146    |               |   |   | 16 |   |
| Amortization of intangible assets                      |   |   | 146    |   |   |   | 134    |               |   |   | 12 |   |
| Advertising and marketing expense                      |   |   | 119    |   |   |   | 134    |               |   |   | (15 | ) |
| State franchise tax                                    |   |   | 85     |   |   |   | 79     |               |   |   | 6 |   |
| Miscellaneous components of other non interest expense |   |   | 654    |   |   |   | 591    |               |   |   | 63 |   |
| Total                                                  |   | $      | 1,954  |   |   | $      | 1,508  |               |   | $ | 446 |   |
|                                                   |   |   |   |   |   |   |   |               |   |   |   |   |

|   |
|--------|

----

Index

|                            |   | September 30, 2009 |   |   | December 31, 2008 |   |
|---------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                            |   | Actual             |   |   | Regulatory        |   |   | Actual |   |   | Regulatory |   |
|                            |   | Ratio              |   |   | Minimum           |   |   | Ratio |   |   | Minimum |   |
| Total Risk Based Capital Ratio  |   |               |   |   |              |   |   |   |   |   |
| Highlands Bankshares            |   |               | 14.22  | %      |              |   | 8.00 | % |   |   | 14.20 | % |   |   | 8.00 | % |
| Capon Valley Bank               |   |               | 12.89  | %      |              |   | 8.00 | % |   |   | 12.77 | % |   |   | 8.00 | % |
| The Grant County Bank           |   |               | 14.06  | %      |              |   | 8.00 | % |   |   | 13.99 | % |   |   | 8.00 | % |
|                            |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Leverage Ratio           |   |               |   |   |              |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |               | 9.83   | %      |              |   | 4.00 | % |   |   | 10.18 | % |   |   | 4.00 | % |
| Capon Valley Bank               |   |               | 8.53   | %      |              |   | 4.00 | % |   |   | 9.11 | % |   |   | 4.00 | % |
| The Grant County Bank           |   |               | 9.92   | %      |              |   | 4.00 | % |   |   | 10.00 | % |   |   | 4.00 | % |
|                            |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Risk Based Capital Ratio |   |               |   |   |              |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |               | 12.97  | %      |              |   | 4.00 | % |   |   | 12.98 | % |   |   | 4.00 | % |
| Capon Valley Bank               |   |               | 11.64  | %      |              |   | 4.00 | % |   |   | 11.52 | % |   |   | 4.00 | % |
| The Grant County Bank           |   |               | 12.83  | %      |              |   | 4.00 | % |   |   | 12.79 | % |   |   | 4.00 | % |

----

Index

m

m

A

e

m

m

m

----

Index

| Page Thirty |
|-------------|

t

e

m

| EXHIBIT INDEX  |
|----------------|
| Exhibit Number |  Description |
| 3(i)           | Articles of Incorporation of Highlands Bankshares, Inc., as restated, are hereby incorporated by reference to Exhibit 3(i) to Highlands Bankshares Inc.’s Form 10-Q filed November 13, 2007. |
| 3(ii)          | Amended Bylaws of Highlands Bankshares, Inc. are incorporated by reference to Exhibit 3(ii) to Highlands Bankshares Inc.’s Report on Form 8-K filed January 9, 2008. |
| 31.1           | Certification of Chief Executive Officer Pursuant to section 302 of the Sarbanes-Oxley  Act  of 2002 Chapter 63, Title 18 USC Section 1350 (A) and (B). |
| 31.2           | Certification of Principal Financial Officer  Pursuant to section 302 of the Sarbanes-Oxley  Act of 2002 Chapter 63, Title 18 USC Section 1350 (A) and (B). |
| 32.1           | Statement of Chief Executive Officer Pursuant to 18  U.S.C. §1350. |
| 32.2           | Statement of Principal Financial Officer Pursuant to 18 U.S.C. §1350. |

n

|              | HIGHLANDS BANKSHARES, INC.              |
|-------------------|-----------------------------------------|
|              |                                    |
|              | /s/ C.E. Porter                         |
|              | C.E. Porter                             |
|              | President & Chief Executive Officer |
|              |                                    |
|              | /s/ Alan Brill                          |
|              | Alan Brill                              |
|              | Interim Principal Financial Officer     |
| November 13, 2009 |                                    |