----

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

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----

HIGHLANDS 

|       |                                                                | Page   |
|------------|---------------------------------------------------------------------|--------|
| PART I     | FINANCIAL INFORMATION                                               |   |
|       |                                                                |   |
| Item 1.    | Financial Statements                                                |   |
|       |                                                                |   |
|       | Unaudited Consolidated Statements of Income                         |   |
|       | Nine Months Ended September 30, 2010 and 2009                       | 1      |
|       |                                                                |   |
|       | Unaudited Consolidated Statements of Income                         |   |
|       | Three Months Ended September 30, 2010 and 2009                      | 2      |
|       |                                                                |   |
|       | Unaudited Consolidated Balance Sheet for September 30,              |   |
|       | 2010 and Audited Consolidated Balance Sheet for December 31, 2009   | 3      |
|       |                                                                |   |
|       | Unaudited Consolidated Statements of Changes in Stockholders’ |   |
|       | Equity for the Nine Months Ended September 30, 2010 and 2009        | 4      |
|       |                                                                |   |
|       | Unaudited Consolidated Statements of Cash Flows for the Nine        |   |
|       | Months Ended September 30, 2010 and 2009                            | 5      |
|       |                                                                |   |
|       | Notes to Consolidated Financial Statements                          | 6      |
|       |                                                                |   |
| Item 2.    | Management’s Discussion and Analysis of Financial Condition   |   |
|       | and Results of Operations                                           | 12     |
|       |                                                                |   |
| Item 3.    | Quantitative and Qualitative Disclosures About Market Risk          | 24     |
|       |                                                                |   |
| Item 4.    | Controls and Procedures                                             | 24     |
|       |                                                                |   |
| PART II    | OTHER INFORMATION                                                   |   |
|       |                                                                |   |
| Item 1.    | Legal Proceedings                                                   | 24     |
|       |                                                                |   |
| Item 1A.   | Risk Factors                                                        | 24     |
|       |                                                                |   |
| Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds         | 24     |
|       |                                                                |   |
| Item 3.    | Defaults Upon Senior Securities                                     | 24     |
|       |                                                                |   |
| Item 4.    | (Removed and Reserved)                                              | 24     |
|       |                                                                |   |
| Item 5.    | Other Information                                                   | 24     |
|       |                                                                |   |
| Item 6.    | Exhibits                                                            | 25     |
|       |                                                                |   |
| SIGNATURES |    26                                                |

----

Index

PART 

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

|                                                |   | Nine Months Ended September 30 |      |
|-----------------------------------------------------|--------|-------------------------------------|-----------|
|                                                |   | 2010                                |      |   | 2009 |   |
|                                                |   | (unaudited)                         |      |   | (unaudited) |   |
| Interest Income                                     |   |                                |      |   |   |   |
| Interest and fees on loans                          |   | $                                   | 16,611    |   |   | $ | 17,513 |   |
| Interest on federal funds sold                      |   |                                | 12        |   |   |   | 15 |   |
| Interest on deposits in other banks                 |   |                                | 4         |   |   |   | 11 |   |
| Interest and dividends on securities                |   |                                | 560       |   |   |   | 661 |   |
| Total Interest Income                               |   |                                | 17,187    |   |   |   | 18,200 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Interest Expense                                    |   |                                |      |   |   |   |   |   |
| Interest on deposits                                |   |                                | 4,467     |   |   |   | 5,566 |   |
| Interest on borrowed money                          |   |                                | 363       |   |   |   | 397 |   |
| Total Interest Expense                              |   |                                | 4,830     |   |   |   | 5,963 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Net Interest Income                                 |   |                                | 12,357    |   |   |   | 12,237 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Provision for Loan Losses                           |   |                                | 2,896     |   |   |   | 1,175 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Net Interest Income After Provision for Loan Losses |   |                                | 9,461     |   |   |   | 11,062 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Non-interest Income                                 |   |                                |      |   |   |   |   |   |
| Service charges                                     |   |                                | 1,157     |   |   |   | 1,261 |   |
| Life insurance investment income                    |   |                                | 198       |   |   |   | 167 |   |
| Gains (losses) on securities transactions           |   |                                | 34        |   |   |   | (13 | ) |
| Gains (losses) on sale of foreclosed property       |   |                                | (24       | ) |   |   | 1 |   |
| Impairment of foreclosed assets                     |   |                                | (88       | ) |   |   | 0 |   |
| Other non-interest income                           |   |                                | 297       |   |   |   | 411 |   |
| Total Non-interest Income                           |   |                                | 1,574     |   |   |   | 1,827 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Non-interest Expense                                |   |                                |      |   |   |   |   |   |
| Salaries and employee benefits                      |   |                                | 5,187     |   |   |   | 4,998 |   |
| Occupancy and equipment expense                     |   |                                | 1,085     |   |   |   | 1,023 |   |
| Data processing expense                             |   |                                | 819       |   |   |   | 502 |   |
| Directors fees                                      |   |                                | 292       |   |   |   | 310 |   |
| Legal and professional fees                         |   |                                | 455       |   |   |   | 432 |   |
| Other non-interest expense                          |   |                                | 1,800     |   |   |   | 1,954 |   |
| Total Non-interest Expense                          |   |                                | 9,638     |   |   |   | 9,219 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Income Before Provision For Income Taxes            |   |                                | 1,397     |   |   |   | 3,670 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Provision for Income Taxes                          |   |                                | 423       |   |   |   | 1,312 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Net Income                                          |   | $                                   | 974       |   |   | $ | 2,358 |   |
|                                                |   |                                |      |   |   |   |   |   |
| Per Share Data                                      |   |                                |      |   |   |   |   |   |
| Net Income                                          |   | $                                   | 0.73      |   |   | $ | 1.76 |   |
| Cash Dividends                                      |   | $                                   | 0.79      |   |   | $ | 0.87 |   |
| Weighted Average Common Shares Outstanding          |   |                                | 1,336,873 |   |   |   | 1,336,873 |   |

----

Index

HIGHLANDS 

|                                                |   | Three Months Ended September 30 |      |
|-----------------------------------------------------|--------|---------------------------------|-----------|
|                                                |   | 2010                            |      |   | 2009 |   |
|                                                |   | (unaudited)                     |      |   | (unaudited) |   |
| Interest Income                                     |   |                            |      |   |   |   |
| Interest and fees on loans                          |   | $                               | 5,499     |   |   | $ | 5,812 |   |
| Interest on federal funds sold                      |   |                            | 2         |   |   |   | 6 |   |
| Interest on deposits in other banks                 |   |                            | 1         |   |   |   | 5 |   |
| Interest and dividends on securities                |   |                            | 187       |   |   |   | 217 |   |
| Total Interest Income                               |   |                            | 5,689     |   |   |   | 6,040 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Interest Expense                                    |   |                            |      |   |   |   |   |   |
| Interest on deposits                                |   |                            | 1,371     |   |   |   | 1,856 |   |
| Interest on borrowed money                          |   |                            | 124       |   |   |   | 128 |   |
| Total Interest Expense                              |   |                            | 1,495     |   |   |   | 1,984 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Net Interest Income                                 |   |                            | 4,194     |   |   |   | 4,056 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Provision for Loan Losses                           |   |                            | 591       |   |   |   | 354 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Net Interest Income After Provision for Loan Losses |   |                            | 3,603     |   |   |   | 3,702 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Non-interest Income                                 |   |                            |      |   |   |   |   |   |
| Service charges                                     |   |                            | 402       |   |   |   | 455 |   |
| Life insurance investment income                    |   |                            | 66        |   |   |   | 56 |   |
| Gains (losses) on securities transactions           |   |                            | 1         |   |   |   | 0 |   |
| Gains on sale of foreclosed property                |   |                            | 11        |   |   |   | 0 |   |
| Impairment of foreclosed assets                     |   |                            | (88       | ) |   |   | 0 |   |
| Other non-interest income                           |   |                            | 117       |   |   |   | 169 |   |
| Total Non-interest Income                           |   |                            | 509       |   |   |   | 680 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Non-interest Expense                                |   |                            |      |   |   |   |   |   |
| Salaries and employee benefits                      |   |                            | 1,742     |   |   |   | 1,741 |   |
| Occupancy and equipment expense                     |   |                            | 356       |   |   |   | 351 |   |
| Data processing expense                             |   |                            | 274       |   |   |   | 163 |   |
| Directors fees                                      |   |                            | 105       |   |   |   | 125 |   |
| Legal and professional fees                         |   |                            | 137       |   |   |   | 204 |   |
| Other non-interest expense                          |   |                            | 652       |   |   |   | 659 |   |
| Total Non-interest Expense                          |   |                            | 3,266     |   |   |   | 3,243 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Income Before Provision For Income Taxes            |   |                            | 846       |   |   |   | 1,139 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Provision for Income Taxes                          |   |                            | 262       |   |   |   | 404 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Net Income                                          |   | $                               | 584       |   |   | $ | 735 |   |
|                                                |   |                            |      |   |   |   |   |   |
| Per Share Data                                      |   |                            |      |   |   |   |   |   |
| Net Income                                          |   | $                               | 0.44      |   |   | $ | 0.55 |   |
| Cash Dividends                                      |   | $                               | 0.25      |   |   | $ | 0.29 |   |
| Weighted Average Common Shares Outstanding          |   |                            | 1,336,873 |   |   |   | 1,336,873 |   |

----

Index

HIGHLANDS 

|                                              |   | September 30, 2010 |    |   | December 31, 2009 |   |
|---------------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
|                                              |   | (unaudited)             |    |   | (audited)              |   |
| ASSETS                                            |   |                    |    |   |                   |   |
| Cash and due from banks                           |   | $                       | 7,244   |   |                   | $      | 7,062 |   |
| Interest bearing deposits in banks                |   |                    | 1,724   |   |                   |   | 1,880 |   |
| Federal funds sold                                |   |                    | 3,829   |   |                   |   | 8,936 |   |
| Investment securities available for sale          |   |                    | 28,475  |   |                   |   | 26,936 |   |
| Restricted investments                            |   |                    | 2,185   |   |                   |   | 2,185 |   |
| Loans                                             |   |                    | 332,264 |   |                   |   | 335,483 |   |
| Allowance for loan losses                         |   |                    | (5,346  | )      |                   |   | (4,021 | ) |
| Bank premises and equipment, net of depreciation  |   |                    | 10,023  |   |                   |   | 9,326 |   |
| Interest receivable                               |   |                    | 1,804   |   |                   |   | 1,908 |   |
| Investment in life insurance contracts            |   |                    | 6,953   |   |                   |   | 6,755 |   |
| Foreclosed Assets                                 |   |                    | 4,989   |   |                   |   | 3,223 |   |
| Goodwill                                          |   |                    | 1,534   |   |                   |   | 1,534 |   |
| Other intangible assets                           |   |                    | 873     |   |                   |   | 1,020 |   |
| Other assets                                      |   |                    | 5,075   |   |                   |   | 5,583 |   |
| Total Assets                                      |   | $                       | 401,626 |   |                   | $      | 407,810 |   |
|                                              |   |                    |    |   |                   |   |   |   |
| LIABILITIES                                       |   |                    |    |   |                   |   |   |   |
| Deposits                                          |   |                    |    |   |                   |   |   |   |
| Non-interest bearing deposits                     |   | $                       | 53,141  |   |                   | $      | 52,378 |   |
| Interest bearing transaction and savings accounts |   |                    | 76,134  |   |                   |   | 73,053 |   |
| Time deposits over $100,000                       |   |                    | 74,127  |   |                   |   | 75,596 |   |
| All other time deposits                           |   |                    | 140,125 |   |                   |   | 148,850 |   |
| Total Deposits                                    |   |                    | 343,527 |   |                   |   | 349,877 |   |
|                                              |   |                    |    |   |                   |   |   |   |
| Long term debt instruments                        |   |                    | 10,514  |   |                   |   | 10,866 |   |
| Accrued expenses and other liabilities            |   |                    | 6,258   |   |                   |   | 5,645 |   |
| Total Liabilities                                 |   |                    | 360,299 |   |                   |   | 366,388 |   |
|                                              |   |                    |    |   |                   |   |   |   |
| 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                                 |   |                    | 36,881  |   |                   |   | 36,963 |   |
| Other accumulated comprehensive loss              |   |                    | (1,028  | )      |                   |   | (1,015 | ) |
| Total Stockholders’ Equity                  |   |                    | 41,327  |   |                   |   | 41,422 |   |
|                                              |   |                    |    |   |                   |   |   |   |
| Total Liabilities and Stockholders’ Equity  |   | $                       | 401,626 |   |                   | $      | 407,810 |   |

----

Index

HIGHLANDS 

|                                 |   | Common Stock |   |   | Surplus |   |   | Treasury Stock |   |   | Retained Earnings |   |   | Accumulated Other Comprehensive Income (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 |   |
|                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Balances at December 31, 2009        |   | $            | 7,184  |   |    | $      | 1,662  |           |   | $      | (3,372            | )      |   | $                                             | 36,963 |   |   | $      | (1,015 | ) |   | $ | 41,422 |   |
|                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive Income:          |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Net Income                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          | 974    |   |   |   |   |   |   |   | 974 |   |
| Change in other comprehensive income |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   | (13 | ) |   |   | (13 | ) |
| Total Comprehensive Income           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   | 961 |   |
|                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Dividends Paid                       |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          | (1,056 | )      |   |   |   |   |   |   | (1,056 | ) |
|                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Balances September 30, 2010          |   | $            | 7,184  |   |    | $      | 1,662  |           |   | $      | (3,372            | )      |   | $                                             | 36,881 |   |   | $      | (1,028 | ) |   | $ | 41,327 |   |

----

Index

HIGHLANDS 

|                                                            |   | Nine Months Ended September 30, |    |
|-----------------------------------------------------------------|--------|---------------------------------|---------|
|                                                            |   | 2010                            |    |   | 2009 |   |
|                                                            |   | (unaudited)                     |    |   | (unaudited) |   |
| Cash Flows From Operating Activities                            |   |                            |    |   |   |   |
| Net Income                                                      |   | $                               | 974     |   |   | $ | 2,358 |   |
| Adjustments to reconcile net income to net                      |   |                            |    |   |   |   |   |   |
| cash provided by operating activities                           |   |                            |    |   |   |   |   |   |
| Loss (gain) on securities transactions                          |   |                            | (34     | ) |   |   | 13 |   |
| (Gain) loss on sale of OREO                                     |   |                            | 24      |   |   |   | (37 | ) |
| Depreciation                                                    |   |                            | 561     |   |   |   | 488 |   |
| Change in insurance contracts                                   |   |                            | (164    | ) |   |   | (184 | ) |
| Net amortization of securities                                  |   |                            | 111     |   |   |   | 61 |   |
| Provision for loan losses                                       |   |                            | 2,896   |   |   |   | 1,175 |   |
| Write-down of OREO                                              |   |                            | 107     |   |   |   | 40 |   |
| Deferred income tax benefit                                     |   |                            | (319    | ) |   |   | 0 |   |
| Amortization of intangibles                                     |   |                            | 147     |   |   |   | 146 |   |
| Decrease in interest receivable                                 |   |                            | 104     |   |   |   | 335 |   |
| (Increase) decrease in other assets                             |   |                            | 827     |   |   |   | 31 |   |
| Increase in accrued expenses and other liabilities              |   |                            | 586     |   |   |   | 163 |   |
| Net Cash Provided by Operating Activities                       |   |                            | 5,820   |   |   |   | 4,589 |   |
|                                                            |   |                            |    |   |   |   |   |   |
| Cash Flows From Investing Activities                            |   |                            |    |   |   |   |   |   |
| (Increase) decrease in federal funds sold                       |   |                            | 5,107   |   |   |   | (11,955 | ) |
| Proceeds from maturities of securities available for sale       |   |                            | 11,373  |   |   |   | 5,777 |   |
| Purchase of securities available for sale                       |   |                            | (13,009 | ) |   |   | (10,813 | ) |
| (Increase) in restricted investments                            |   |                            | 0       |   |   |   | (8 | ) |
| Proceeds from sale of fixed assets and OREO                     |   |                            | 335     |   |   |   | 669 |   |
| (Increase) decrease in interest bearing deposits in banks       |   |                            | 156     |   |   |   | (589 | ) |
| Purchase of property and equipment                              |   |                            | (1,259  | ) |   |   | (1,626 | ) |
| Net (increase) in loans                                         |   |                            | (583    | ) |   |   | (11,117 | ) |
| Net Cash provided by (used in) Investing Activities             |   |                            | 2,120   |   |   |   | (29,662 | ) |
| Cash Flows From Financing Activities                            |   |                            |    |   |   |   |   |   |
| Net change in time deposits                                     |   |                            | (10,194 | ) |   |   | 30,331 |   |
| Net change in other deposit accounts                            |   |                            | 3,844   |   |   |   | 0 |   |
| Net change in short term borrowings                             |   |                            | 0       |   |   |   | (4,800 | ) |
| Repayment of long term borrowings                               |   |                            | (352    | ) |   |   | (336 | ) |
| Dividends paid in cash                                          |   |                            | (1,056  | ) |   |   | (1,162 | ) |
| Net Cash Provided by (used in) Financing Activities             |   |                            | (7,758  | ) |   |   | 24,033 |   |
| Net increase (decrease)  in Cash and Cash Equivalents |   |                            | 182     |   |   |   | (1,040 | ) |
| Cash and Cash Equivalents, Beginning of Period                  |   |                            | 7,062   |   |   |   | 7,589 |   |
| Cash and Cash Equivalents, End of Period                        |   | $                               | 7,244   |   |   | $ | 6,549 |   |
|                                                            |   |                            |    |   |   |   |   |   |
| Supplemental Disclosures                                        |   |                            |    |   |   |   |   |   |
| Cash paid for income taxes                                      |   | $                               | 438     |   |   | $ | 1,111 |   |
| Cash paid for interest                                          |   | $                               | 5,082   |   |   | $ | 5,793 |   |

----

Index

NOTES 

|                      |   | September 30, 2010 |    |   | December 31, 2009 |   |
|---------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Loan Type                 |   |               |    |   |              |   |
| Real Estate mortgage      |   | $                  | 168,291 |   |              | $      | 162,619 |   |
| Real Estate construction  |   |               | 34,218  |   |              |   | 30,759 |   |
| Commercial                |   |               | 98,457  |   |              |   | 97,606 |   |
| Installment               |   |               | 31,298  |   |              |   | 44,499 |   |
| Total Loans               |   | $                  | 332,264 |   |              | $      | 335,483 |   |
|                      |   |               |    |   |              |   |   |   |
| Allowance for loan losses |   | $                  | (5,346  | )      |              | $      | (4,021 | ) |

|                             |   | 2010   |   |   | 2009   |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|
| Balance, beginning of period     |   | $      | 4,021  |   |   | $      | 3,667 |   |
| Provisions charged to operations |   |   | 2,896  |   |   |   | 1,175 |   |
| Loan recoveries                  |   |   | 366    |   |   |   | 234 |   |
| Loan charge-offs                 |   |   | (1,937 | )      |   |   | (1,174 | ) |
| Balance, end of period           |   | $      | 5,346  |   |   | $      | 3,902 |   |

|                                  |   | 2010   |   |   | 2009   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|
| Period end balance, impaired loans    |   | $      | 10,293 |   |   | $      | 3,425 |   |
| Allowance for impairments, period end |   |   | 2,143  |   |   |   | 662 |   |

----

Index

|                            |   | September 30, 2010 |   |   | December 31, 2009 |   |
|---------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                            |   |               |   |   | Gross             |   |   | Gross |   |   |   |   |   |   |   |   | Gross |   |   | Gross |   |   |   |   |
|                            |   | Amortized          |   |   | Unrealized        |   |   | Unrealized |   |   | Market |   |   | Amortized |   |   | Unrealized |   |   | Unrealized |   |   | Market |   |
|                            |   | Cost               |   |   | Gains             |   |   | Losses |   |   | Value |   |   | Cost |   |   | Gains |   |   | Losses |   |   | Value |   |
| Available For Sale Securities   |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies    |   | $                  | 10,160 |   |              | $      | 178 |   |   | $ | 0 |   |   | $ | 10,338 |   |   | $ | 12,250 |   |   | $ | 177 |   |   | $ | 1 |   |   | $ | 12,426 |   |
| Mortgage backed securities      |   |               | 3,936  |   |              |   | 184 |   |   |   | 0 |   |   |   | 4,120 |   |   |   | 5,630 |   |   |   | 206 |   |   |   | 0 |   |   |   | 5,836 |   |
| States and municipalities       |   |               | 3,359  |   |              |   | 81 |   |   |   | 0 |   |   |   | 3,440 |   |   |   | 3,832 |   |   |   | 114 |   |   |   | 0 |   |   |   | 3,946 |   |
| Certificates of deposit         |   |               | 8,572  |   |              |   | 40 |   |   |   | 2 |   |   |   | 8,610 |   |   |   | 4,696 |   |   |   | 9 |   |   |   | 2 |   |   |   | 4,703 |   |
| Marketable equities             |   |               | 1,945  |   |              |   | 22 |   |   |   | - |   |   |   | 1,967 |   |   |   | 15 |   |   |   | 10 |   |   |   | - |   |   |   | 25 |   |
| Total Avail For Sale Securities |   | $                  | 27,972 |   |              | $      | 505 |   |   | $ | 2 |   |   | $ | 28,475 |   |   | $ | 26,423 |   |   | $ | 516 |   |   | $ | 3 |   |   | $ | 26,936 |   |

|                         |   | Total      |   |   | Less than 12 Months     |   |   | 12 Months or Greater |   |
|------------------------------|--------|------------|--------|--------|-------------------------|--------|--------|----------------------|--------|
|                         |   | Fair Value |   |   | Gross Unrealized Losses |   |   | Fair Value           |   |   | Gross Unrealized Losses |   |   | Fair Value |   |   | Gross Unrealized Losses |   |
| September 30, 2010           |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Investment Category          |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies |   |       | 0      |   |                    |   | 0      |                 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Mortgage backed securities   |   |       | 14     |   |                    |   | 0      |                 |   |   | 14 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Certificates of deposit      |   |       | 644    |   |                    |   | (2     | )                    |   |   | 644 |   |   |   | (2 | ) |   |   | 0 |   |   |   | 0 |   |
| Marketable equities          |   |       | 0      |   |                    |   | 0      |                 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Total                        |   | $          | 658    |   |                    | $      | (2     | )                    |   | $ | 658 |   |   | $ | (2 | ) |   | $ | 0 |   |   | $ | 0 |   |
|                         |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009            |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment Category          |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies |   |       | 999    |   |                    |   | (1     | )                    |   |   | 999 |   |   |   | (1 | ) |   |   | 0 |   |   |   | 0 |   |
| Mortgage backed securities   |   |       | 24     |   |                    |   | 0      |                 |   |   | 24 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Certificates of deposit      |   |       | 246    |   |                    |   | (2     | )                    |   |   | 246 |   |   |   | (2 | ) |   |   | 0 |   |   |   | 0 |   |
| Marketable equities          |   |       | 0      |   |                    |   | 0      |                 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Total                        |   | $          | 1,269  |   |                    | $      | (3     | )                    |   | $ | 1,269 |   |   | $ | (3 | ) |   | $ | 0 |   |   | $ | 0 |   |

----

Index

|                                             |   | 2010   |   |   | 2009   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Service cost                                     |   | $      | 141    |   |   | $      | 126 |   |
| Interest cost                                    |   |   | 227    |   |   |   | 207 |   |
| Expected return on plan assets                   |   |   | (252   | )      |   |   | (230 | ) |
| Recognized net actuarial loss                    |   |   | 73     |   |   |   | 55 |   |
| Amortization of unrecognized prior service costs |   |   | 0      |   |   |   | 0 |   |
| Net periodic expense                             |   | $      | 189    |   |   | $      | 158 |   |

----

Index

|   | · | 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------|

| 30-Sep-10                           |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair Value Measurements |   |
|-------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|-------------------------------|--------|
| U.S. Treasuries and Agencies        |   | $       | 0      |   |    | $      | 10,338 |    |   | $      | 0                             |   |   | $ | 10,338 |   |
| Mortgage backed securities          |   |    | 0      |   |    |   | 4,120  |    |   |   | 0                             |   |   |   | 4,120 |   |
| States and municipalities           |   |    | 0      |   |    |   | 3,440  |    |   |   | 0                             |   |   |   | 3,440 |   |
| Certificates of deposit             |   |    | 0      |   |    |   | 8,610  |    |   |   | 0                             |   |   |   | 8,610 |   |
| Marketable equities                 |   |    | 0      |   |    |   | 1,967  |    |   |   | 0                             |   |   |   | 1,967 |   |
| Total Available For Sale Securities |   | $       | 0      |   |    | $      | 28,475 |    |   | $      | 0                             |   |   | $ | 28,475 |   |

| 31-Dec-09                           |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair Value Measurements |   |
|-------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|-------------------------------|--------|
| U.S. Treasuries and Agencies        |   | $       | 0      |   |    | $      | 12,426 |    |   | $      | 0                             |   |   | $ | 12,426 |   |
| Mortgage backed securities          |   |    | 0      |   |    |   | 5,836  |    |   |   | 0                             |   |   |   | 5,836 |   |
| States and municipalities           |   |    | 0      |   |    |   | 3,946  |    |   |   | 0                             |   |   |   | 3,946 |   |
| Certificates of deposit             |   |    | 0      |   |    |   | 4,703  |    |   |   | 0                             |   |   |   | 4,703 |   |
| Marketable equities                 |   |    | 0      |   |    |   | 25     |    |   |   | 0                             |   |   |   | 25 |   |
| Total Available For Sale Securities |   | $       | 0      |   |    | $      | 26,936 |    |   | $      | 0                             |   |   | $ | 26,936 |   |

| 30-Sep-10               |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair Value Measurements |   |   | Three Months Ended Sept 30, 2010 |   |   | Nine Months Ended Sept 30, 2010 |   |
|-------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|-------------------------------|--------|--------|---------------------------------------|--------|--------|--------------------------------------|--------|
|                    |   |    |   |   |    |   |   |    |   |   |                          |   |   | Total gains/(losses)                  |   |   | Total gains/(losses)                 |   |
| Other real estate owned |   | $       | 0      |   |    | $      | 1,170  |    |   | $      | 3,819                         |   |   | $                                     | 4,989  |   |                                 |   | (88 | ) |   |   | (88 | ) |
| Impaired Loans          |   |    | 123    |   |    |   | 340    |    |   |   | 7,687                         |   |   |                                  | 8,150  |   |                                 |   | 0 |   |   |   | 0 |   |
| Total                   |   | $       | 123    |   |    | $      | 1,510  |    |   | $      | 11,506                        |   |   | $                                     | 13,139 |   |                                 |   | (88 | ) |   |   | (88 | ) |

----

Index

----

Index

|                                            |   | September 30, 2010 |    |   | December 31, 2009 |   |
|-------------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
|                                            |   | Carrying           |    |   | Estimated         |   |   | Carrying |   |   | Estimated |   |
|                                            |   | Amount             |    |   | Fair Value        |   |   | Amount |   |   | Fair Value |   |
| Financial Assets:                               |   |               |    |   |              |   |   |   |   |   |   |   |
| Cash and due from banks                         |   |               | 7,244   |   |              |   | 7,244 |   |   |   | 7,062 |   |   |   | 7,062 |   |
| Interest bearing deposits                       |   |               | 1,724   |   |              |   | 1,724 |   |   |   | 1,880 |   |   |   | 1,880 |   |
| Federal funds sold                              |   |               | 3,829   |   |              |   | 3,829 |   |   |   | 8,936 |   |   |   | 8,936 |   |
| Securities available for sale                   |   |               | 28,475  |   |              |   | 28,475 |   |   |   | 26,936 |   |   |   | 26,936 |   |
| Restricted investments                          |   |               | 2,185   |   |              |   | 2,185 |   |   |   | 2,185 |   |   |   | 2,185 |   |
| Loans, net                                      |   |               | 326,918 |   |              |   | 327,879 |   |   |   | 331,462 |   |   |   | 332,999 |   |
| Interest receivable                             |   |               | 1,804   |   |              |   | 1,804 |   |   |   | 1,908 |   |   |   | 1,908 |   |
| Life insurance contracts                        |   |               | 6,953   |   |              |   | 6,953 |   |   |   | 6,755 |   |   |   | 6,755 |   |
|                                            |   |               |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities:                          |   |               |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Demand and savings deposits                     |   |               | 129,275 |   |              |   | 129,275 |   |   |   | 125,431 |   |   |   | 125,431 |   |
| Time deposits                                   |   |               | 214,252 |   |              |   | 215,012 |   |   |   | 224,446 |   |   |   | 226,057 |   |
| Overnight and other short term debt instruments |   |               | 0       |   |              |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Long term debt instruments                      |   |               | 10,514  |   |              |   | 11,353 |   |   |   | 10,866 |   |   |   | 11,733 |   |
| Interest payable                                |   |               | 530     |   |              |   | 530 |   |   |   | 656 |   |   |   | 656 |   |

----

Index

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

----

Index

----

Index

----

Index

|                                |   | Nine months endedSeptember 30, |   |
|-------------------------------------|--------|--------------------------------|--------|
|                                |   | 2010                           |   |   | 2009 |   |
| Annualized return on average assets |   |                           | 0.30   | % |   |   | 0.80 | % |
| Annualized return on average equity |   |                           | 3.19   | % |   |   | 7.84 | % |
| Net interest margin (1)             |   |                           | 4.41   | % |   |   | 4.51 | % |
| Efficiency Ratio (2)                |   |                           | 69.19  | % |   |   | 65.55 | % |
| Earnings per share (3)              |   | $                              | 0.73   |   |   | $ | 1.76 |   |

|   | (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. |
|--------|-----|-----------------------------------------------------------------------------------|

----

Index

|                                                       |   | September 30, 2010 |   |   | December 31, 2009 |   |
|------------------------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
| Allowance for loan losses as a percentage of gross loans   |   |               | 1.61   | %      |              |   | 1.20 | % |
| Non performing loans as a percentage of gross loans        |   |               | 2.27   | %      |              |   | 1.42 | % |
| Ratio of allowance for loan losses to non-performing loans |   |               | 0.71   |   |              |   | 0.85 |   |

----

Index

|                                               |   | September 30, 2010 |   |   | December 31, 2009 |   |
|----------------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
| Non-accrual loans                                  |   | $                  | 6,220  |   |              | $      | 2,567 |   |
| Loans past due 90 days and still accruing interest |   |               | 1,309  |   |              |   | 2,192 |   |
| Total non-performing loans                         |   | $                  | 7,529  |   |              | $      | 4,759 |   |

|                      |   | 2010   |   |   | 2009   |   |
|---------------------------|--------|--------|--------|--------|--------|--------|
| Charge-offs               |   |   |   |   |   |   |
| Commercial                |   | $      | (491   | )      |   | $      | (296 | ) |
| Mortgage and construction |   |   | (888   | )      |   |   | (288 | ) |
| Consumer                  |   |   | (558   | )      |   |   | (590 | ) |
| Total Charge-offs         |   |   | (1,937 | )      |   |   | (1,174 | ) |
|                      |   |   |   |   |   |   |   |   |
| Recoveries                |   |   |   |   |   |   |   |   |
| Commercial                |   |   | 73     |   |   |   | 1 |   |
| Mortgage                  |   |   | 35     |   |   |   | 51 |   |
| Consumer                  |   |   | 258    |   |   |   | 182 |   |
| Total Recoveries          |   |   | 366    |   |   |   | 234 |   |
|                      |   |   |   |   |   |   |   |   |
| Total Net Charge-offs     |   | $      | (1,571 | )      |   | $      | (940 | ) |

|                |   | September 30, 2010 |   |   | December 31, 2009 |   |
|---------------------|--------|--------------------|--------|--------|-------------------|--------|
|                |   | Amount             |   |   | Percent of Loans  |   |   | Amount |   |   | Percent of Loans |   |
| Loan Type           |   |               |   |   |              |   |   |   |   |   |   |   |
| Commercial-Mortgage |   | $                  | 2,198  |   |              |   | 43 | % |   | $ | 1,314 |   |   |   | 39 | % |
| Commercial-Other    |   |               | 335    |   |              |   | 5 | % |   |   | 340 |   |   |   | 4 | % |
| Consumer-Mortgage   |   |               | 1,493  |   |              |   | 43 | % |   |   | 1,051 |   |   |   | 45 | % |
| Consumer-Other      |   |               | 1,320  |   |              |   | 9 | % |   |   | 1,316 |   |   |   | 12 | % |
| Totals              |   | $                  | 5,346  |   |              |   | 100 | % |   | $ | 4,021 |   |   |   | 100 | % |

----

Index

|                             |   | Due to change in: |   |   |         |   |
|----------------------------------|--------|-------------------|--------|--------|--------------|--------|
|                             |   | Average Volume    |   |   | Average Rate |   |   | Total Change |   |
| Interest Income                  |   |              |   |   |         |   |   |   |   |
| Loans                            |   | $                 | 181    |   |         | $      | (1,083 | ) |   | $ | (902 | ) |
| Federal funds sold               |   |              | (1     | )      |         |   | (2 | ) |   | $ | (3 | ) |
| Interest bearing deposits        |   |              | 3      |   |         |   | (10 | ) |   | $ | (7 | ) |
| Taxable investment securities    |   |              | 115    |   |         |   | (191 | ) |   | $ | (76 | ) |
| Nontaxable investment securities |   |              | (14    | )      |         |   | (38 | ) |   | $ | (52 | ) |
| Total Interest Income            |   | $                 | 284    |   |         | $      | (1,324 | ) |   | $ | (1,040 | ) |
|                             |   |              |   |   |         |   |   |   |   |   |   |   |
| Interest Expense                 |   |              |   |   |         |   |   |   |   |   |   |   |
| Demand deposits                  |   |              | 1      |   |         |   | (12 | ) |   |   | (11 | ) |
| Savings deposits                 |   |              | 9      |   |         |   | (17 | ) |   |   | (8 | ) |
| Time deposits                    |   |              | 232    |   |         |   | (1,312 | ) |   |   | (1,080 | ) |
| Borrowings                       |   |              | (86    | )      |         |   | 52 |   |   |   | (34 | ) |
| Total Interest Expense           |   |              | 156    |   |         |   | (1,289 | ) |   |   | (1,133 | ) |
|                             |   |              |   |   |         |   |   |   |   |   |   |   |
| Net Interest Income              |   | $                 | 128    |   |         | $      | (35 | ) |   | $ | 93 |   |

----

Index

|                                             |   | 2010    |    |   | 2009    |   |
|--------------------------------------------------|--------|---------|---------|--------|---------|--------|
|                                             |   | Average |    |   | Income/ |   |   |   |   |   | Average |   |   | Income/ |   |   |   |   |
|                                             |   | Balance |    |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Earning Assets                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                            |   | $       | 333,615 |   |    | $      | 16,611 |   |   |   | 6.64 | % |   | $ | 329,987 |   |   | $ | 17,513 |   |   |   | 7.08 | % |
| Taxable investment securities                    |   |    | 25,765  |   |    |   | 472 |   |   |   | 2.44 | % |   |   | 19,467 |   |   |   | 548 |   |   |   | 3.76 | % |
| Non-taxable investment securities                |   |    | 3,564   |   |    |   | 127 |   |   |   | 4.75 | % |   |   | 3,946 |   |   |   | 179 |   |   |   | 6.05 | % |
| Interest bearing deposits                        |   |    | 2,935   |   |    |   | 4 |   |   |   | 0.18 | % |   |   | 622 |   |   |   | 11 |   |   |   | 2.26 | % |
| Federal funds sold                               |   |    | 9,072   |   |    |   | 12 |   |   |   | 0.18 | % |   |   | 9,887 |   |   |   | 15 |   |   |   | 0.20 | % |
| Total Earning Assets                             |   |    | 374,951 |   |    |   | 17,226 |   |   |   | 6.13 | % |   |   | 363,909 |   |   |   | 18,266 |   |   |   | 6.69 | % |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                        |   |    | (4,599  | )      |    |   |   |   |   |   |   |   |   |   | (3,711 | ) |   |   |   |   |   |   |   |   |
| Other non-earning assets                         |   |    | 39,957  |   |    |   |   |   |   |   |   |   |   |   | 33,828 |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |   | $       | 410,309 |   |    |   |   |   |   |   |   |   |   | $ | 394,026 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities                     |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   | $       | 23,144  |   |    | $      | 22 |   |   |   | 0.13 | % |   | $ | 22,308 |   |   | $ | 33 |   |   |   | 0.20 | % |
| Savings deposits                                 |   |    | 52,702  |   |    |   | 139 |   |   |   | 0.35 | % |   |   | 49,362 |   |   |   | 147 |   |   |   | 0.40 | % |
| Time deposits                                    |   |    | 221,797 |   |    |   | 4,306 |   |   |   | 2.59 | % |   |   | 209,817 |   |   |   | 5,386 |   |   |   | 3.42 | % |
| Long-term debt                                   |   |    | 10,693  |   |    |   | 363 |   |   |   | 4.53 | % |   |   | 13,222 |   |   |   | 397 |   |   |   | 4.01 | % |
| Total Interest Bearing Liabilities               |   |    | 308,336 |   |    |   | 4,830 |   |   |   | 2.09 | % |   |   | 294,709 |   |   |   | 5,963 |   |   |   | 2.70 | % |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   |    | 53,466  |   |    |   |   |   |   |   |   |   |   |   | 49,925 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                |   |    | 8,839   |   |    |   |   |   |   |   |   |   |   |   | 9,290 |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                       |   |    | 39,668  |   |    |   |   |   |   |   |   |   |   |   | 40,102 |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |   | $       | 410,309 |   |    |   |   |   |   |   |   |   |   | $ | 394,026 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                              |   |    |    |   |    | $      | 12,396 |   |   |   |   |   |   |   |   |   |   | $ | 12,303 |   |   |   |   |   |
| Net Yield on Earning Assets                      |   |    |    |   |    |   |   |   |   |   | 4.41 | % |   |   |   |   |   |   |   |   |   |   | 4.51 | % |

----

Index

|                                             |   | 2010    |    |   | 2009    |   |
|--------------------------------------------------|--------|---------|---------|--------|---------|--------|
|                                             |   | Average |    |   | Income/ |   |   |   |   |   | Average |   |   | Income/ |   |   |   |   |
|                                             |   | Balance |    |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Earning Assets                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                            |   | $       | 333,377 |   |    | $      | 5,499 |   |   |   | 6.60 | % |   | $ | 330,801 |   |   | $ | 5,812 |   |   |   | 7.03 | % |
| Taxable investment securities                    |   |    | 27,301  |   |    |   | 161 |   |   |   | 2.36 | % |   |   | 21,467 |   |   |   | 176 |   |   |   | 3.26 | % |
| Non-taxable investment securities                |   |    | 3,396   |   |    |   | 38 |   |   |   | 4.48 | % |   |   | 4,516 |   |   |   | 64 |   |   |   | 5.67 | % |
| Interest bearing deposits                        |   |    | 3,036   |   |    |   | 1 |   |   |   | 0.13 | % |   |   | 845 |   |   |   | 5 |   |   |   | 2.10 | % |
| Federal funds sold                               |   |    | 4,572   |   |    |   | 2 |   |   |   | 0.17 | % |   |   | 12,798 |   |   |   | 6 |   |   |   | 0.19 | % |
| Total Earning Assets                             |   |    | 371,682 |   |    |   | 5,701 |   |   |   | 6.14 | % |   |   | 370,427 |   |   |   | 6,063 |   |   |   | 6.65 | % |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                        |   |    | (5,368  | )      |    |   |   |   |   |   |   |   |   |   | (3,795 | ) |   |   |   |   |   |   |   |   |
| Other non-earning assets                         |   |    | 40,706  |   |    |   |   |   |   |   |   |   |   |   | 35,080 |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |   | $       | 407,020 |   |    |   |   |   |   |   |   |   |   | $ | 401,712 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities                     |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   | $       | 23,119  |   |    | $      | 7 |   |   |   | 0.13 | % |   | $ | 22,037 |   |   | $ | 9 |   |   |   | 0.16 | % |
| Savings deposits                                 |   |    | 52,528  |   |    |   | 45 |   |   |   | 0.34 | % |   |   | 51,134 |   |   |   | 47 |   |   |   | 0.37 | % |
| Time deposits                                    |   |    | 218,116 |   |    |   | 1,319 |   |   |   | 2.42 | % |   |   | 219,523 |   |   |   | 1,800 |   |   |   | 3.28 | % |
| Long-term debt                                   |   |    | 10,577  |   |    |   | 124 |   |   |   | 4.68 | % |   |   | 11,040 |   |   |   | 128 |   |   |   | 4.65 | % |
| Total Interest Bearing Liabilities               |   |    | 304,340 |   |    |   | 1,495 |   |   |   | 1.96 | % |   |   | 303,734 |   |   |   | 1,984 |   |   |   | 2.61 | % |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   |    | 54,130  |   |    |   |   |   |   |   |   |   |   |   | 50,859 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                |   |    | 8,063   |   |    |   |   |   |   |   |   |   |   |   | 6,696 |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                       |   |    | 40,487  |   |    |   |   |   |   |   |   |   |   |   | 40,423 |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |   | $       | 407,021 |   |    |   |   |   |   |   |   |   |   | $ | 401,712 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                              |   |    |    |   |    | $      | 4,206 |   |   |   |   |   |   |   |   |   |   | $ | 4,079 |   |   |   |   |   |
| Net Yield on Earning Assets                      |   |    |    |   |    |   |   |   |   |   | 4.53 | % |   |   |   |   |   |   |   |   |   |   | 4.40 | % |

----

Index

| Salary and Benefits Expense |   |
|-----------------------------|--------|
|                        |   | 2010 |   |   | 2009 |   |   | Increase (Decrease) |   |
|                        |   |   |   |   |   |   |   |   |   |
| Employee salaries           |   | $ | 3,355 |   |   | $ | 3,326 |   |   | $ | 29 |   |
| Employee benefit insurance  |   |   | 829 |   |   |   | 712 |   |   |   | 117 |   |
| Payroll taxes               |   |   | 258 |   |   |   | 277 |   |   |   | (19 | ) |
| Post retirement plans       |   |   | 745 |   |   |   | 683 |   |   |   | 62 |   |
| Total                       |   | $ | 5,187 |   |   | $ | 4,998 |   |   | $ | 189 |   |

|                                                                                      |   | Amount |   |
|-------------------------------------------------------------------------------------------|--------|--------|--------|
| Changes due to adjustment in average salary per full time equivalent employee             |   | $      | (26    | ) |
| Changes due to fluctuations in the average full time equivalent employees for the periods |   |   | 55     |   |
| Total increase in salary expense                                                          |   | $      | 29     |   |

----

Index

|                                             |   | 2010   |   |   | 2009   |   |   | Increase (Decrease) |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
| Depreciation of buildings and equipment          |   | $      | 565    |   |   | $      | 488    |                |   | $ | 77 |   |
| Maintenance expense on buildings and equipment   |   |   | 282    |   |   |   | 307    |                |   |   | (25 | ) |
| Utilities expense                                |   |   | 99     |   |   |   | 92     |                |   |   | 7 |   |
| Real estate and personal property tax            |   |   | 71     |   |   |   | 69     |                |   |   | 2 |   |
| Other expense related to occupancy and equipment |   |   | 68     |   |   |   | 67     |                |   |   | 1 |   |
| Total occupancy and equipment expense            |   | $      | 1,085  |   |   | $      | 1,023  |                |   | $ | 62 |   |

|                                                   |   | 2010   |   |   | 2009   |   |   | Increase (Decrease) |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
| Office supplies and postage & freight expense      |   | $      | 305    |   |   | $      | 346    |                |   | $ | (41 | ) |
| FDIC Premiums                                          |   |   | 495    |   |   |   | 442    |                |   |   | 53 |   |
| ATM expense                                            |   |   | (51    | )      |   |   | 162    |                |   |   | (213 | ) |
| Amortization of intangible assets                      |   |   | 146    |   |   |   | 146    |                |   |   | 0 |   |
| Advertising and marketing expense                      |   |   | 116    |   |   |   | 119    |                |   |   | (3 | ) |
| Miscellaneous components of other non interest expense |   |   | 789    |   |   |   | 739    |                |   |   | 50 |   |
| Total                                                  |   | $      | 1,800  |   |   | $      | 1,954  |                |   | $ | (154 | ) |

----

Index

|                            |   | September 30, 2010 |   |   | December 31, 2009 |   |
|---------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                            |   | Actual             |   |   | Regulatory        |   |   | Actual |   |   | Regulatory |   |
|                            |   | Ratio              |   |   | Minimum           |   |   | Ratio |   |   | Minimum |   |
| Total Risk Based Capital Ratio  |   |               |   |   |              |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |               | 14.27  | %      |              |   | 8.00 | % |   |   | 14.33 | % |   |   | 8.00 | % |
| Capon Valley Bank               |   |               | 12.38  | %      |              |   | 8.00 | % |   |   | 12.86 | % |   |   | 8.00 | % |
| The Grant County Bank           |   |               | 14.44  | %      |              |   | 8.00 | % |   |   | 14.12 | % |   |   | 8.00 | % |
|                            |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Leverage Ratio           |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |               | 9.79   | %      |              |   | 4.00 | % |   |   | 9.81 | % |   |   | 4.00 | % |
| Capon Valley Bank               |   |               | 8.21   | %      |              |   | 4.00 | % |   |   | 8.38 | % |   |   | 4.00 | % |
| The Grant County Bank           |   |               | 10.22  | %      |              |   | 4.00 | % |   |   | 9.91 | % |   |   | 4.00 | % |
|                            |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Risk Based Capital Ratio |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |               | 13.02  | %      |              |   | 4.00 | % |   |   | 13.08 | % |   |   | 4.00 | % |
| Capon Valley Bank               |   |               | 11.11  | %      |              |   | 4.00 | % |   |   | 11.60 | % |   |   | 4.00 | % |
| The Grant County Bank           |   |               | 13.18  | %      |              |   | 4.00 | % |   |   | 12.89 | % |   |   | 4.00 | % |

----

Index

| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
|---------|------------------------------------------------------------|

| Item 4. | Controls and Procedures |
|---------|-------------------------|

| PART II | OTHER INFORMATION |
|---------|-------------------|

| Item 1. | Legal Proceedings |
|---------|-------------------|

| Item 1A. | Risk Factors |
|----------|--------------|

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

| Item 3. | Defaults Upon Senior Securities |
|---------|---------------------------------|

| Item 4. | (Removed and Reserved) |
|---------|------------------------|

| Item 5. | Other Information |
|---------|-------------------|

| Item 6. | Exhibits |
|---------|----------|

----

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 Chief 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 Chief Financial Officer Pursuant to 18 U.S.C. §1350.                                                                                                                             |

----

Index

Signatures

|              | HIGHLANDS BANKSHARES, INC.              |
|-------------------|-----------------------------------------|
|              |                                    |
|              | /s/ C.E. Porter                         |
|              | C.E. Porter                             |
|              | President & Chief Executive Officer |
|              |                                    |
|              | /s/ Jeffrey B. Reedy                    |
|              | Jeffrey B. Reedy                        |
|              | Chief Financial Officer                 |
| November 15, 2010 |                                    |

----