----

----

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

| Large Accelerated Filer £                                                        |   | Accelerated Filer £ |
|---------------------------------------------------------------------------------------|--------|-------------------------------|
| Non-accelerated filer £ (Do not check if a smaller reporting company)  |   | Smaller reporting company T   |

----

----

----

| HIGHLANDS BANKSHARES, INC.                                        |
|-------------------------------------------------------------------|
| Quarterly Report on Form 10-Q For The Period Ended March 31, 2011 |
|                                                              |   |   |   |   |
|                                                              |   | INDEX |   |   |
|                                                              |   |   |   | Page |
| PART I                                                            |   | FINANCIAL INFORMATION |   |   |
|                                                              |   |   |   |   |
| Item 1.                                                           |   | Financial Statements |   |   |
|                                                              |   |   |   |   |
|                                                              |   | Unaudited Consolidated Statements of Income |   |   |
|                                                              |   | Three Months Ended March 31, 2011 and 2010 |   | 3 |
|                                                              |   |   |   |   |
|                                                              |   | Unaudited Consolidated Balance Sheet for March 31, 2011 |   |   |
|                                                              |   | and Audited Consolidated Balance Sheet for December 31, 2010 |   | 4 |
|                                                              |   |   |   |   |
|                                                              |   | Unaudited Consolidated Statements of Changes in Stockholders’ |   |   |
|                                                              |   | Equity for the Three Months Ended March 31, 2011 and 2010 |   | 5 |
|                                                              |   |   |   |   |
|                                                              |   | Unaudited Consolidated Statements of Cash Flows for the Three |   |   |
|                                                              |   | Months Ended March 31, 2011 and 2010 |   | 6 |
|                                                              |   |   |   |   |
|                                                              |   | Notes to Consolidated Financial Statements |   | 7 |
|                                                              |   |   |   |   |
| Item 2.                                                           |   | Management’s Discussion and Analysis of Financial Condition |   |   |
|                                                              |   | and Results of Operations |   | 20 |
|                                                              |   |   |   |   |
| Item 3.                                                           |   | Quantitative and Qualitative Disclosures About Market Risk |   | 32 |
|                                                              |   |   |   |   |
| Item 4.                                                           |   | Controls and Procedures |   | 32 |
|                                                              |   |   |   |   |
| PART II                                                           |   | OTHER INFORMATION |   |   |
|                                                              |   |   |   |   |
| Item 1.                                                           |   | Legal Proceedings |   | 32 |
|                                                              |   |   |   |   |
| Item 1A.                                                          |   | Risk Factors |   | 32 |
|                                                              |   |   |   |   |
| Item 2.                                                           |   | Unregistered Sales of Equity Securities and Use of Proceeds |   | 32 |
|                                                              |   |   |   |   |
| Item 3.                                                           |   | Defaults Upon Senior Securities |   | 32 |
|                                                              |   |   |   |   |
| Item 4.                                                           |   | (Removed and Reserved) |   | 33 |
|                                                              |   |   |   |   |
| Item 5.                                                           |   | Other Information |   | 33 |
|                                                              |   |   |   |   |
| Item 6.                                                           |   | Exhibits |   | 33 |
|                                                              |   |   |   |   |
| SIGNATURES                                                        |   |    34 |

----

Index

R

HIGHLANDS 

|                                                |   | Three Months Ended March 31 |      |
|-----------------------------------------------------|--------|-----------------------------|-----------|
|                                                |   | 2011                        |      |   | 2010 |   |
|                                                |   | (unaudited)                 |      |   | (unaudited) |   |
| Interest Income                                     |   |                        |      |   |   |   |
| Interest and fees on loans                          |   | $                           | 5,156     |   |   | $ | 5,482 |   |
| Interest on federal funds sold                      |   |                        | 4         |   |   |   | 5 |   |
| Interest on deposits in other banks                 |   |                        | 1         |   |   |   | 3 |   |
| Interest and dividends on securities                |   |                        | 139       |   |   |   | 187 |   |
| Total Interest Income                               |   |                        | 5,300     |   |   |   | 5,677 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Interest Expense                                    |   |                        |      |   |   |   |   |   |
| Interest on deposits                                |   |                        | 1,161     |   |   |   | 1,606 |   |
| Interest on borrowed money                          |   |                        | 108       |   |   |   | 115 |   |
| Total Interest Expense                              |   |                        | 1,269     |   |   |   | 1,721 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Net Interest Income                                 |   |                        | 4,031     |   |   |   | 3,956 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Provision for Loan Losses                           |   |                        | 585       |   |   |   | 1,092 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Net Interest Income After Provision for Loan Losses |   |                        | 3,446     |   |   |   | 2,864 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Non-interest Income                                 |   |                        |      |   |   |   |   |   |
| Service charges                                     |   |                        | 345       |   |   |   | 357 |   |
| Life insurance investment income                    |   |                        | 66        |   |   |   | 66 |   |
| Gains on securities transactions                    |   |                        | 0         |   |   |   | 33 |   |
| Gains on sale of foreclosed property                |   |                        | 14        |   |   |   | 4 |   |
| Other non-interest income                           |   |                        | 81        |   |   |   | 87 |   |
| Total Non-interest Income                           |   |                        | 506       |   |   |   | 547 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Non-interest Expense                                |   |                        |      |   |   |   |   |   |
| Salaries and employee benefits                      |   |                        | 1,662     |   |   |   | 1,720 |   |
| Occupancy and equipment expense                     |   |                        | 381       |   |   |   | 368 |   |
| Data processing expense                             |   |                        | 300       |   |   |   | 271 |   |
| Directors fees                                      |   |                        | 101       |   |   |   | 99 |   |
| Legal and professional fees                         |   |                        | 124       |   |   |   | 182 |   |
| Office supplies and postage and freight expense     |   |                        | 92        |   |   |   | 121 |   |
| FDIC premium                                        |   |                        | 166       |   |   |   | 162 |   |
| Loan and foreclosed asset expense                   |   |                        | 135       |   |   |   | 48 |   |
| Other non-interest expense                          |   |                        | 173       |   |   |   | 227 |   |
| Total Non-interest Expense                          |   |                        | 3,134     |   |   |   | 3,198 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Income Before Provision For Income Taxes            |   |                        | 818       |   |   |   | 213 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Provision for Income Taxes                          |   |                        | 266       |   |   |   | 52 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Net Income                                          |   | $                           | 552       |   |   | $ | 161 |   |
|                                                |   |                        |      |   |   |   |   |   |
| Per Share Data                                      |   |                        |      |   |   |   |   |   |
| Net Income                                          |   | $                           | 0.41      |   |   | $ | 0.12 |   |
| Cash Dividends                                      |   | $                           | 0.25      |   |   | $ | 0.27 |   |
| Weighted Average Common Shares Outstanding          |   |                        | 1,336,873 |   |   |   | 1,336,873 |   |

----

Index

HIGHLANDS 

|                                              |   | March 31, 2011 |    |   | December 31, 2010 |   |
|---------------------------------------------------|--------|----------------|---------|--------|-------------------|--------|
|                                              |   | (unaudited)    |    |   | (audited)         |   |
| ASSETS                                            |   |           |    |   |              |   |
| Cash and due from banks                           |   | $              | 7,131   |   |              | $      | 8,282 |   |
| Interest bearing deposits in banks                |   |           | 2,657   |   |              |   | 3,532 |   |
| Federal funds sold                                |   |           | 9,091   |   |              |   | 5,836 |   |
| Investment securities available for sale          |   |           | 30,702  |   |              |   | 25,324 |   |
| Restricted investments                            |   |           | 1,993   |   |              |   | 2,087 |   |
| Loans                                             |   |           | 325,459 |   |              |   | 329,336 |   |
| Allowance for loan losses                         |   |           | (5,729  | )      |              |   | (5,407 | ) |
| Bank premises and equipment, net of depreciation  |   |           | 9,776   |   |              |   | 9,901 |   |
| Interest receivable                               |   |           | 1,645   |   |              |   | 1,791 |   |
| Investment in life insurance contracts            |   |           | 7,097   |   |              |   | 7,031 |   |
| Foreclosed assets                                 |   |           | 5,353   |   |              |   | 4,700 |   |
| Goodwill                                          |   |           | 1,534   |   |              |   | 1,534 |   |
| Other intangible assets                           |   |           | 784     |   |              |   | 830 |   |
| Other assets                                      |   |           | 4,966   |   |              |   | 5,123 |   |
| Total Assets                                      |   | $              | 402,459 |   |              | $      | 399,900 |   |
|                                              |   |           |    |   |              |   |   |   |
| LIABILITIES                                       |   |           |    |   |              |   |   |   |
| Deposits                                          |   |           |    |   |              |   |   |   |
| Non-interest bearing deposits                     |   | $              | 56,212  |   |              | $      | 54,693 |   |
| Interest bearing transaction and savings accounts |   |           | 80,012  |   |              |   | 77,392 |   |
| Time deposits over $100,000                       |   |           | 74,304  |   |              |   | 75,003 |   |
| All other time deposits                           |   |           | 134,609 |   |              |   | 135,724 |   |
| Total Deposits                                    |   |           | 345,137 |   |              |   | 342,812 |   |
|                                              |   |           |    |   |              |   |   |   |
| Long term debt instruments                        |   |           | 9,272   |   |              |   | 9,393 |   |
| Accrued expenses and other liabilities            |   |           | 6,459   |   |              |   | 6,327 |   |
| Total Liabilities                                 |   |           | 360,868 |   |              |   | 358,532 |   |
|                                              |   |           |    |   |              |   |   |   |
| 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                                 |   |           | 37,383  |   |              |   | 37,165 |   |
| Other accumulated comprehensive loss              |   |           | (1,266  | )      |              |   | (1,271 | ) |
| Total Stockholders’ Equity                  |   |           | 41,591  |   |              |   | 41,368 |   |
|                                              |   |           |    |   |              |   |   |   |
| Total Liabilities and Stockholders’ Equity  |   | $              | 402,459 |   |              | $      | 399,900 |   |

----

Index

HIGHLANDS 

|                                                                                                           |   | Common Stock |   |   | Surplus |   |   | Treasury Stock |   |   | Retained Earnings |   |   | Accumulated Other Comprehensive Income (Loss) |   |   | Total  |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------|---------|--------|--------|----------------|--------|--------|-------------------|--------|--------|-----------------------------------------------|--------|--------|--------|--------|
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |
| Balances at December 31, 2009                                                                                  |   | $            | 7,184  |   |    | $      | 1,662  |           |   | $      | (3,372            | )      |   | $                                             | 36,963 |   |   | $      | (1,015 | ) |   | $ | 41,422 |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive Income:                                                                                    |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                                                                     |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          | 161    |   |   |   |   |   |   |   | 161 |   |
| Change in other comprehensive incomefor unrealized gains or losses oninvestment securities available for sales |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   | (41 | ) |   |   | (41 | ) |
| Total Comprehensive Income                                                                                     |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   | 120 |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Dividends Paid                                                                                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          | (361   | )      |   |   |   |   |   |   | (361 | ) |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Balances March 31, 2010                                                                                        |   | $            | 7,184  |   |    | $      | 1,662  |           |   | $      | (3,372            | )      |   | $                                             | 36,763 |   |   | $      | (1,056 | ) |   | $ | 41,181 |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Balances at December 31, 2010                                                                                  |   | $            | 7,184  |   |    | $      | 1,662  |           |   | $      | (3,372            | )      |   | $                                             | 37,165 |   |   | $      | (1,271 | ) |   | $ | 41,368 |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive Income:                                                                                    |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                                                                     |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          | 552    |   |   |   |   |   |   |   | 552 |   |
| Change in other comprehensive incomefor unrealized gains or losses oninvestment securities available for sales |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   | 5 |   |   |   | 5 |   |
| Total Comprehensive Income                                                                                     |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   | 557 |   |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Dividends Paid                                                                                                 |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          | (334   | )      |   |   |   |   |   |   | (334 | ) |
|                                                                                                           |   |         |   |   |    |   |   |           |   |   |              |   |   |                                          |   |   |   |   |   |   |   |   |   |   |
| Balances March 31, 2011                                                                                        |   | $            | 7,184  |   |    | $      | 1,662  |           |   | $      | (3,372            | )      |   | $                                             | 37,383 |   |   | $      | (1,266 | ) |   | $ | 41,591 |   |

----

Index

HIGHLANDS BANKSHARES, INC.

|                                                     |   | Three Months Ended March 31 |   |
|----------------------------------------------------------|--------|-----------------------------|--------|
|                                                     |   | 2011                        |   |   | 2010 |   |
|                                                     |   | (unaudited)                 |   |   | (unaudited) |   |
| Cash Flows From Operating Activities                     |   |                        |   |   |   |   |
| Net Income                                               |   | $                           | 552    |   |   | $ | 161 |   |
| Adjustments to reconcile net income to net               |   |                        |   |   |   |   |   |   |
| cash provided by operating activities                    |   |                        |   |   |   |   |   |   |
| (Gain) on securities transactions                        |   |                        | 0      |   |   |   | (33 | ) |
| (Gain) loss on sale of foreclosed assets                 |   |                        | 14     |   |   |   | (4 | ) |
| Depreciation                                             |   |                        | 196    |   |   |   | 182 |   |
| Income from life insurance contracts                     |   |                        | (132   | ) |   |   | (66 | ) |
| Net amortization of securities premiums                  |   |                        | 48     |   |   |   | 31 |   |
| Provision for loan losses                                |   |                        | 585    |   |   |   | 1,092 |   |
| Write-down on foreclosed assets                          |   |                        | 65     |   |   |   | 18 |   |
| Amortization of intangibles                              |   |                        | 46     |   |   |   | 49 |   |
| Decrease in interest receivable                          |   |                        | 146    |   |   |   | 110 |   |
| Decrease in other assets                                 |   |                        | 157    |   |   |   | 344 |   |
| Increase in accrued expenses                             |   |                        | 198    |   |   |   | 223 |   |
| Net Cash Provided by Operating Activities                |   |                        | 1,875  |   |   |   | 2,107 |   |
|                                                     |   |                        |   |   |   |   |   |   |
| Cash Flows From Investing Activities                     |   |                        |   |   |   |   |   |   |
| Proceeds from sale of foreclosed assets and fixed assets |   |                        | 155    |   |   |   | 63 |   |
| Proceeds from maturity of securities available for sales |   |                        | 1,652  |   |   |   | 1,442 |   |
| Purchase of securities available for sale                |   |                        | (7,073 | ) |   |   | (2,640 | ) |
| Net change in other investments                          |   |                        | 94     |   |   |   | 0 |   |
| Net change in interest bearing deposits in other banks   |   |                        | 875    |   |   |   | (827 | ) |
| Net change in federal funds sold                         |   |                        | (3,255 | ) |   |   | (3,620 | ) |
| Net decrease in loans                                    |   |                        | 2,727  |   |   |   | 453 |   |
| Purchase of property and equipment                       |   |                        | (71    | ) |   |   | (283 | ) |
| Net Cash (Used in) Investing Activities                  |   |                        | (4,896 | ) |   |   | (5,412 | ) |
|                                                     |   |                        |   |   |   |   |   |   |
| Cash Flows From Financing Activities                     |   |                        |   |   |   |   |   |   |
| Net change in time deposits                              |   |                        | (1,814 | ) |   |   | (904 | ) |
| Net change in other deposit accounts                     |   |                        | 4,139  |   |   |   | 3,722 |   |
| Repayment of long term borrowings                        |   |                        | (121   | ) |   |   | (116 | ) |
| Dividends paid in cash                                   |   |                        | (334   | ) |   |   | (361 | ) |
| Net Cash Provided by Financing Activities                |   |                        | 1,870  |   |   |   | 2,341 |   |
| Net (decrease)  in Cash and Cash Equivalents   |   |                        | (1,151 | ) |   |   | (964 | ) |
| Cash and Cash Equivalents, Beginning of Period           |   |                        | 8,282  |   |   |   | 7,062 |   |
| Cash and Cash Equivalents, End of Period                 |   | $                           | 7,131  |   |   | $ | 6,098 |   |
|                                                     |   |                        |   |   |   |   |   |   |
| Supplemental Disclosures                                 |   |                        |   |   |   |   |   |   |
| Cash paid for income taxes                               |   | $                           | 125    |   |   | $ | 0 |   |
| Cash paid for interest                                   |   | $                           | 113    |   |   | $ | 1,733 |   |
| Noncash Investing and Financing Activities for other     |   |                        |   |   |   |   |   |   |
| real estate acquired in settlement of loans              |   | $                           | 883    |   |   | $ | 415 |   |

----

Index

NOTES 

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

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

|                |   | March 31, 2011 |    |   | December 31, 2010 |   |
|---------------------|--------|----------------|---------|--------|-------------------|--------|
| Commercial Mortgage |   | $              | 145,731 |   |              | $      | 142,896 |   |
| Commercial Other    |   | $              | 14,337  |   |              | $      | 15,037 |   |
| Consumer Mortgage   |   | $              | 139,373 |   |              | $      | 142,505 |   |
| Consumer Other      |   | $              | 26,018  |   |              | $      | 28,898 |   |
|                |   | $              | 325,459 |   |              | $      | 329,336 |   |

| Impaired Loans                      |   |
|-------------------------------------|--------|
| As of March 31, 2011                |   |
|                                |   | Recorded Investment |   |   | Unpaid Principal Balance |   |   | Related Allowance |   |   | Average Recorded Investment |   |   | Interest Income Recognized |   |
|                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| With no related allowance recorded: |   |   |   |   |   |   |   |   |   |   |
| Commercial Mortgage                 |   | $ | 20,112 |   |   | $ | 20,112 |   |   | $ | 0 |   |   | $ | 22,222 |   |   | $ | 221 |   |
| Commercial Other                    |   |   | 160 |   |   |   | 160 |   |   |   | 0 |   |   |   | 177 |   |   |   | 4 |   |
| Consumer Mortgage                   |   |   | 31 |   |   |   | 31 |   |   |   | 0 |   |   |   | 31 |   |   |   | 0 |   |
| Sub-total                           |   | $ | 20,303 |   |   | $ | 20,303 |   |   | $ | 0 |   |   | $ | 22,430 |   |   | $ | 225 |   |
| With an allowance recorded:         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial Mortgage                 |   |   | 6,625 |   |   |   | 6,625 |   |   |   | 1,351 |   |   |   | 7,505 |   |   |   | 71 |   |
| Commercial Other                    |   |   | 313 |   |   |   | 313 |   |   |   | 84 |   |   |   | 441 |   |   |   | 9 |   |
| Consumer Mortgage                   |   |   | 577 |   |   |   | 577 |   |   |   | 59 |   |   |   | 581 |   |   |   | 4 |   |
| Sub-total                           |   | $ | 7,515 |   |   | $ | 7,515 |   |   | $ | 1,494 |   |   | $ | 8,527 |   |   | $ | 84 |   |
| Total                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial Mortgage                 |   |   | 26,737 |   |   |   | 26,737 |   |   |   | 1,351 |   |   |   | 29,727 |   |   |   | 292 |   |
| Commercial Other                    |   |   | 473 |   |   |   | 473 |   |   |   | 84 |   |   |   | 618 |   |   |   | 13 |   |
| Consumer Mortgage                   |   |   | 608 |   |   |   | 608 |   |   |   | 59 |   |   |   | 612 |   |   |   | 4 |   |
| Total                               |   | $ | 27,818 |   |   | $ | 27,818 |   |   | $ | 1,494 |   |   | $ | 30,957 |   |   | $ | 309 |   |

----

Index

| Impaired Loans                      |   |
|-------------------------------------|--------|
| As of December 31, 2010             |   |
|                                |   | RecordedInvestment |   |   | Unpaid Principal Balance |   |   | Related Allowance |   |   | Average Recorded Investment |   |   | Interest Income Recognized |   |
|                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| With no related allowance recorded: |   |   |   |   |   |   |   |   |   |   |
| Commercial Mortgage                 |   | $ | 18,455 |   |   | $ | 18,455 |   |   | $ | 0 |   |   | $ | 26,557 |   |   | $ | 137 |   |
| Commercial Other                    |   |   | 840 |   |   |   | 840 |   |   |   | 0 |   |   |   | 1,159 |   |   |   | 13 |   |
| Consumer Mortgage                   |   |   | 253 |   |   |   | 253 |   |   |   | 0 |   |   |   | 256 |   |   |   | 2 |   |
| Sub-total                           |   | $ | 19,548 |   |   | $ | 19,548 |   |   | $ | 0 |   |   | $ | 27,972 |   |   | $ | 152 |   |
| With an allowance recorded:         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial Mortgage                 |   |   | 5,692 |   |   |   | 5,692 |   |   |   | 904 |   |   |   | 6,871 |   |   |   | 272 |   |
| Commercial Other                    |   |   | 148 |   |   |   | 148 |   |   |   | 21 |   |   |   | 203 |   |   |   | 19 |   |
| Sub-total                           |   | $ | 5,840 |   |   | $ | 5,840 |   |   | $ | 925 |   |   | $ | 7,074 |   |   | $ | 291 |   |
| Total                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial Mortgage                 |   |   | 24,147 |   |   |   | 24,147 |   |   |   | 904 |   |   |   | 33,428 |   |   |   | 409 |   |
| Commercial Other                    |   |   | 988 |   |   |   | 988 |   |   |   | 21 |   |   |   | 1,362 |   |   |   | 32 |   |
| Consumer Mortgage                   |   |   | 253 |   |   |   | 253 |   |   |   | 0 |   |   |   | 256 |   |   |   | 2 |   |
| Total                               |   | $ | 25,388 |   |   | $ | 25,388 |   |   | $ | 925 |   |   | $ | 35,046 |   |   | $ | 443 |   |
|                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                        |   |           |   |   |              |   |
|-----------------------------|--------|----------------|--------|--------|-------------------|--------|
|                        |   | March 31, 2011 |   |   | December 31, 2010 |   |
| Loans on non-accrual status |   |           |   |   |              |   |
| Commercial Mortgage         |   | $              | 4,828  |   |              | $      | 2,215 |   |
| Commercial Other            |   |           | 131    |   |              |   | 139 |   |
| Consumer Mortgage           |   |           | 3,768  |   |              |   | 4,240 |   |
| Consumer Other              |   |           | 136    |   |              |   | 385 |   |
| Total non-accrual loans     |   | $              | 8,863  |   |              | $      | 6,979 |   |

----

Index

| Age Analysis of Past Due Financing Receivables |   |
|------------------------------------------------|--------|
| As of March 31, 2011                           |   |
|                                           |   | 30-59 Days Past Due |   |   | 60-89 Days Past Due |   |   | Greater Than 90 Days |   |   | Total Past Due |   |   | Current |   |   | Total Financing Receivables |   |   | Recorded Investment > 90 Days and Accruing |   |
|                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial - Mortgage                          |   | $ | 2,384 |   |   | $ | 378 |   |   | $ | 4,220 |   |   | $ | 6,982 |   |   | $ | 138,749 |   |   | $ | 145,731 |   |   | $ | 320 |   |
| Commercial -Other                              |   |   | 571 |   |   |   | 186 |   |   |   | 0 |   |   |   | 757 |   |   |   | 13,580 |   |   |   | 14,337 |   |   |   | 0 |   |
| Consumer - Mortgage                            |   |   | 3,399 |   |   |   | 1,117 |   |   |   | 2,724 |   |   |   | 7,240 |   |   |   | 132,133 |   |   |   | 139,373 |   |   |   | 253 |   |
| Consumer - Other                               |   |   | 683 |   |   |   | 199 |   |   |   | 54 |   |   |   | 936 |   |   |   | 25,082 |   |   |   | 26,018 |   |   |   | 23 |   |
| Total                                          |   | $ | 7,037 |   |   | $ | 1,880 |   |   | $ | 6,998 |   |   | $ | 15,915 |   |   | $ | 309,544 |   |   | $ | 325,459 |   |   | $ | 596 |   |
|                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Age Analysis of Past Due Financing Receivables |   |
| As of December 31, 2010                        |   |
|                                           |   | 30-59 Days Past Due |   |   | 60-89 Days Past Due |   |   | Greater Than 90 Days |   |   | Total Past Due |   |   | Current |   |   | Total Financing Receivables |   |   | Recorded Investment > 90 Days and Accruing |   |
|                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial - Mortgage                          |   | $ | 3,691 |   |   | $ | 663 |   |   | $ | 2,188 |   |   | $ | 6,542 |   |   | $ | 136,354 |   |   | $ | 142,896 |   |   | $ | 301 |   |
| Commercial -Other                              |   |   | 234 |   |   |   | 396 |   |   |   | 46 |   |   |   | 676 |   |   |   | 14,361 |   |   |   | 15,037 |   |   |   | 46 |   |
| Consumer - Mortgage                            |   |   | 5,391 |   |   |   | 2,952 |   |   |   | 4,089 |   |   |   | 12,432 |   |   |   | 130,073 |   |   |   | 142,505 |   |   |   | 397 |   |
| Consumer - Other                               |   |   | 917 |   |   |   | 580 |   |   |   | 171 |   |   |   | 1,668 |   |   |   | 27,230 |   |   |   | 28,898 |   |   |   | 122 |   |
| Total                                          |   | $ | 10,233 |   |   | $ | 4,591 |   |   | $ | 6,494 |   |   | $ | 21,318 |   |   | $ | 308,018 |   |   | $ | 329,336 |   |   | $ | 866 |   |

----

Index

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

| Allowance for Credit Losses and Recorded Investment in Financing Receivables |   |
|------------------------------------------------------------------------------|--------|
| As of and For the Three Month Period Ended March 31, 2011                    |   |
|                                                                         |   | Commercial Mortgage |   |   | Commercial Other |   |   | Consumer Mortgage |   |   | Consumer Other |   |   | Unallocated |   |   | Total |   |
|                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for Credit Losses:                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning Balance 12/31/2010                                                 |   | $ | 1,345 |   |   | $ | 887 |   |   | $ | 1,662 |   |   | $ | 968 |   |   | $ | 545 |   |   | $ | 5,407 |   |
| Charge-offs                                                                  |   |   | 31 |   |   |   | 0 |   |   |   | 307 |   |   |   | 122 |   |   |   |  0 |   |   |   | 460 |   |
| Recoveries                                                                   |   |   | 106 |   |   |   | 21 |   |   |   | 10 |   |   |   | 60 |   |   |   |  0 |   |   |   | 197 |   |
| Provision                                                                    |   |   | 1,322 |   |   |   | (294 | ) |   |   | 115 |   |   |   | (265 | ) |   |   | (293 | ) |   |   | 585 |   |
| Ending Balance 3/31/2011                                                     |   | $ | 2,742 |   |   | $ | 614 |   |   | $ | 1,480 |   |   | $ | 641 |   |   | $ | 252 |   |   | $ | 5,729 |   |
| Ending Balance: individually evaluated for impairment                        |   |   | 1,351 |   |   |   | 84 |   |   |   | 59 |   |   |   | 0 |   |   |   | 0 |   |   |   | 1,494 |   |
| Ending Balance:  collectively evaluated for impairment             |   |   | 1,391 |   |   |   | 530 |   |   |   | 1,421 |   |   |   | 641 |   |   |   | 252 |   |   |   | 4,235 |   |
|                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financing Receivables:                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ending Balance                                                               |   |   | 145,731 |   |   |   | 14,337 |   |   |   | 139,373 |   |   |   | 26,018 |   |   |   | 0 |   |   |   | 325,459 |   |
| Ending Balance: individually evaluated for impairment                        |   |   | 26,737 |   |   |   | 473 |   |   |   | 608 |   |   |   | 0 |   |   |   | 0 |   |   |   | 27,818 |   |
| Ending Balance:  collectively evaluated for impairment             |   | $ | 118,994 |   |   | $ | 13,864 |   |   | $ | 138,765 |   |   | $ | 26,018 |   |   | $ | 0 |   |   | $ | 297,641 |   |

----

Index

| Allowance for Credit Losses and Recorded Investment in Financing Receivables |   |
|------------------------------------------------------------------------------|--------|
| As of and For the Year Ended December 31, 2010                               |   |
|                                                                         |   | Commercial Mortgage |   |   | Commercial Other |   |   | Consumer Mortgage |   |   | Consumer Other |   |   | Unallocated |   |   | Total |   |
|                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for Credit Losses:                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ending Balance 12/31/2010                                                    |   | $ | 1,345 |   |   | $ | 887 |   |   | $ | 1,662 |   |   | $ | 968 |   |   | $ | 545 |   |   | $ | 5,407 |   |
| Ending Balance: individually evaluated for impairment                        |   |   | 904 |   |   |   | 21 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 925 |   |
| Ending Balance:  collectively evaluated for impairment             |   |   | 441 |   |   |   | 866 |   |   |   | 1,662 |   |   |   | 968 |   |   |   | 545 |   |   |   | 4,482 |   |
|                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financing Receivables:                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ending Balance                                                               |   |   | 142,896 |   |   |   | 15,037 |   |   |   | 142,505 |   |   |   | 28,898 |   |   |   | 0 |   |   |   | 329,336 |   |
| Ending Balance: individually evaluated for impairment                        |   |   | 24,147 |   |   |   | 988 |   |   |   | 253 |   |   |   | 0 |   |   |   | 0 |   |   |   | 25,388 |   |
| Ending Balance:  collectively evaluated for impairment             |   | $ | 118,749 |   |   | $ | 14,049 |   |   | $ | 142,252 |   |   | $ | 28,898 |   |   | $ | 0 |   |   | $ | 303,948 |   |
|                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

Index

| Credit Quality Indicators                        |   |
|--------------------------------------------------|--------|
| As of March 31, 2011                             |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit Risk Profile by Internally Assigned Grade |   |   |   |   |   |   |   |   |   |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   | Commercial |   |   | Commercial |   |   | Consumer |   |   | Consumer |   |   | Total |   |
|                                             |   | Mortgage |   |   | Other |   |   | Mortgage |   |   | Other |   |   |   |   |
| Grade:                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Excellent                                  |   | $ | 1,519 |   |   | $ | 1,379 |   |   | $ | 2,891 |   |   | $ | 2,878 |   |   | $ | 8,667 |   |
| Very Good                                        |   |   | 13,236 |   |   |   | 1,528 |   |   |   | 28,597 |   |   |   | 4,767 |   |   |   | 48,128 |   |
| Pass                                             |   |   | 85,500 |   |   |   | 9,886 |   |   |   | 86,491 |   |   |   | 16,375 |   |   |   | 198,252 |   |
| Pass-Watch                                       |   |   | 7,596 |   |   |   | 552 |   |   |   | 3,445 |   |   |   | 122 |   |   |   | 11,715 |   |
| Special Mention                                  |   |   | 9,349 |   |   |   | 211 |   |   |   | 4,896 |   |   |   | 1,212 |   |   |   | 15,668 |   |
| Substandard                                      |   |   | 26,783 |   |   |   | 639 |   |   |   | 8,361 |   |   |   | 545 |   |   |   | 36,328 |   |
| Doubtful                                         |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Loss                                             |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Total                                            |   | $ | 143,983 |   |   | $ | 14,195 |   |   | $ | 134,681 |   |   | $ | 25,899 |   |   | $ | 318,758 |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit Quality Indicators                        |   |
| As of December 31, 2010                          |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit Risk Profile by Internally Assigned Grade |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   | Commercial |   |   | Commercial |   |   | Consumer |   |   | Consumer |   |   | Total |   |
|                                             |   | Mortgage |   |   | Other |   |   | Mortgage |   |   | Other |   |   |   |   |   |
| Grade:                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Excellent                                  |   | $ | 1,573 |   |   | $ | 968 |   |   | $ | 2,964 |   |   | $ | 2,793 |   |   | $ | 8,298 |   |
| Very Good                                        |   |   | 16,509 |   |   |   | 1,648 |   |   |   | 28,611 |   |   |   | 5,765 |   |   |   | 52,533 |   |
| Pass                                             |   |   | 88,366 |   |   |   | 8,610 |   |   |   | 91,889 |   |   |   | 18,104 |   |   |   | 206,969 |   |
| Pass-Watch                                       |   |   | 3,160 |   |   |   | 619 |   |   |   | 1,228 |   |   |   | 120 |   |   |   | 5,127 |   |
| Special Mention                                  |   |   | 7,262 |   |   |   | 1,876 |   |   |   | 6,050 |   |   |   | 1,526 |   |   |   | 16,714 |   |
| Substandard                                      |   |   | 24,194 |   |   |   | 1,025 |   |   |   | 6,747 |   |   |   | 450 |   |   |   | 32,416 |   |
| Doubtful                                         |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Loss                                             |   |   | 0 |   |   |   | 0 |   |   |   | 129 |   |   |   | 0 |   |   |   | 129 |   |
| Total                                            |   | $ | 141,064 |   |   | $ | 14,746 |   |   | $ | 137,618 |   |   | $ | 28,758 |   |   | $ | 322,186 |   |

----

Index

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

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

|                                |   | Available For Sale Securities |   |
|-------------------------------------|--------|-------------------------------|--------|
|                                |   | As of March 31, 2011          |   |
|                                |   |                          |   |   | Gross |   |   | Gross |   |   |   |   |
|                                |   | Amortized                     |   |   | Unrealized |   |   | Unrealized |   |   | Market |   |
|                                |   | Cost                          |   |   | Gains |   |   | Losses |   |   | Value |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies        |   | $                             | 13,720 |   |   | $ | 132 |   |   | $ | 5 |   |   | $ | 13,847 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage backed securities          |   |                          | 5,017  |   |   |   | 139 |   |   |   | 4 |   |   |   | 5,152 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collateralized mortgage obligations |   |                          | 3,038  |   |   |   | 8 |   |   |   | 0 |   |   |   | 3,046 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| States and municipalities           |   |                          | 2,122  |   |   |   | 37 |   |   |   | 0 |   |   |   | 2,159 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit             |   |                          | 6,442  |   |   |   | 31 |   |   |   | 4 |   |   |   | 6,469 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketable equities                 |   |                          | 15     |   |   |   | 14 |   |   |   | 0 |   |   |   | 29 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Available For Sale Securities |   | $                             | 30,354 |   |   | $ | 361 |   |   | $ | 13 |   |   | $ | 30,702 |   |

----

Index

|                                |   | Available For Sale Securities |   |
|-------------------------------------|--------|-------------------------------|--------|
|                                |   | As of December 31, 2010       |   |
|                                |   |                          |   |   | Gross |   |   | Gross |   |   |   |   |
|                                |   | Amortized                     |   |   | Unrealized |   |   | Unrealized |   |   | Market |   |
|                                |   | Cost                          |   |   | Gains |   |   | Losses |   |   | Value |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies        |   | $                             | 9,132  |   |   | $ | 133 |   |   | $ | 7 |   |   | $ | 9,258 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage backed securities          |   |                          | 5,505  |   |   |   | 153 |   |   |   | 7 |   |   |   | 5,651 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collateralized mortgage obligations |   |                          | 1,764  |   |   |   | 0 |   |   |   | 0 |   |   |   | 1,764 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| States and municipalities           |   |                          | 2,123  |   |   |   | 34 |   |   |   | 0 |   |   |   | 2,157 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit             |   |                          | 6,442  |   |   |   | 25 |   |   |   | 2 |   |   |   | 6,465 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketable equities                 |   |                          | 15     |   |   |   | 14 |   |   |   | 0 |   |   |   | 29 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Available For Sale Securities |   | $                             | 24,981 |   |   | $ | 359 |   |   | $ | 16 |   |   | $ | 25,324 |   |
|                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| As of March 31, 2011                |   | Total      |   |   | Less than 12 Months     |   |   | 12 Months or Greater |   |
|-------------------------------------|--------|------------|--------|--------|-------------------------|--------|--------|----------------------|--------|
|                                |   | Fair Value |   |   | Gross Unrealized Losses |   |   | Fair Value           |   |   | Gross Unrealized Losses |   |   | Fair Value |   |   | Gross Unrealized Losses |   |
|                                |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Investment Category                 |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies        |   | $          | 1,497  |   |                    | $      | (5     | )                    |   | $ | 1,497 |   |   | $ | (5 | ) |   | $ | 0 |   |   | $ | 0 |   |
| Mortgage backed securities          |   |       | 1,160  |   |                    |   | (4     | )                    |   |   | 1,160 |   |   |   | (4 | ) |   |   | 0 |   |   |   | 0 |   |
| Collateralized mortgage obligations |   |       | 0      |   |                    |   | 0      |                 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Certificates of deposit             |   |       | 492    |   |                    |   | (4     | )                    |   |   | 492 |   |   |   | (4 | ) |   |   | 0 |   |   |   | 0 |   |
| Total                               |   | $          | 3,149  |   |                    | $      | (13    | )                    |   | $ | 3,149 |   |   | $ | (13 | ) |   | $ | 0 |   |   | $ | 0 |   |

----

Index

| As of December 31, 2010             |   | Total      |   |   | Less than 12 Months     |   |   | 12 Months or Greater |   |
|-------------------------------------|--------|------------|--------|--------|-------------------------|--------|--------|----------------------|--------|
|                                |   | Fair Value |   |   | Gross Unrealized Losses |   |   | Fair Value           |   |   | Gross Unrealized Losses |   |   | Fair Value |   |   | Gross Unrealized Losses |   |
|                                |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Investment Category                 |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies        |   | $          | 993    |   |                    | $      | (7     | )                    |   | $ | 993 |   |   | $ | (7 | ) |   | $ | 0 |   |   | $ | 0 |   |
| Mortgage backed securities          |   |       | 2,283  |   |                    |   | (7     | )                    |   |   | 2,283 |   |   |   | (7 | ) |   |   | 0 |   |   |   | 0 |   |
| Collateralized mortgage obligations |   |       | 827    |   |                    |   | 0      |                 |   |   | 827 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Certificates of deposit             |   |       | 494    |   |                    |   | (2     | )                    |   |   | 494 |   |   |   | (2 | ) |   |   | 0 |   |   |   | 0 |   |
| Total                               |   | $          | 4,597  |   |                    | $      | (16    | )                    |   | $ | 4,597 |   |   | $ | (16 | ) |   | $ | 0 |   |   | $ | 0 |   |

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

| NOTE SEVEN: | DEBT INSTRUMENTS |
|-------------|------------------|

| NOTE EIGHT: | INTANGIBLE ASSETS |
|-------------|-------------------|

----

Index

| NOTE NINE: | EMPLOYEE BENEFITS |
|------------|-------------------|

|                                             |   |   | 2011  |   |   |   | 2010  |   |
|--------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|
| Service cost                                     |   | $      | 51         |   |   | $      | 47         |   |
| Interest cost                                    |   |   | 81         |   |   |   | 76         |   |
| Expected return on plan assets                   |   |   | (88        | )      |   |   | (84        | )      |
| Recognized net actuarial loss                    |   |   | 38         |   |   |   | 24         |   |
| Amortization of unrecognized prior service costs |   |   | 0          |   |   |   | 0          |   |
| Net periodic expense                             |   | $      | 82         |   |   | $      | 63         |   |

| NOTE TEN: | 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------|

----

Index

| March 31, 2011                      |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair Value Measurements |   |
|-------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|-------------------------------|--------|
| U.S. Treasuries and Agencies        |   | $       | 0      |   |    | $      | 13,847 |    |   | $      | 0                             |   |   | $ | 13,847 |   |
| Mortgage backed securities          |   |    | 0      |   |    |   | 5,152  |    |   |   | 0                             |   |   |   | 5,152 |   |
| Collateralized mortgage obligations |   |    | 0      |   |    |   | 3,046  |    |   |   | 0                             |   |   |   | 3,046 |   |
| States and municipalities           |   |    | 0      |   |    |   | 2,159  |    |   |   | 0                             |   |   |   | 2,159 |   |
| Certificates of deposit             |   |    | 0      |   |    |   | 6,469  |    |   |   | 0                             |   |   |   | 6,469 |   |
| Marketable equities                 |   |    | 0      |   |    |   | 29     |    |   |   | 0                             |   |   |   | 29 |   |
| Total Available For Sale Securities |   | $       | 0      |   |    | $      | 30,702 |    |   | $      | 0                             |   |   | $ | 30,702 |   |
|                                |   |    |   |   |    |   |   |    |   |   |                          |   |   |   |   |   |
| December 31, 2010                   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair Value Measurements |   |
| U.S. Treasuries and Agencies        |   | $       | 0      |   |    | $      | 9,258  |    |   | $      | 0                             |   |   | $ | 9,258 |   |
| Mortgage backed securities          |   |    | 0      |   |    |   | 5,651  |    |   |   | 0                             |   |   |   | 5,651 |   |
| Collateralized mortgage obligations |   |    | 0      |   |    |   | 1,764  |    |   |   | 0                             |   |   |   | 1,764 |   |
| States and municipalities           |   |    | 0      |   |    |   | 2,157  |    |   |   | 0                             |   |   |   | 2,157 |   |
| Certificates of deposit             |   |    | 0      |   |    |   | 6,465  |    |   |   | 0                             |   |   |   | 6,465 |   |
| Marketable equities                 |   |    | 0      |   |    |   | 29     |    |   |   | 0                             |   |   |   | 29 |   |
| Total Available For Sale Securities |   | $       | 0      |   |    | $      | 25,324 |    |   | $      | 0                             |   |   | $ | 25,324 |   |

----

Index

|                    |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair Value Measurements |   |   | Three Months Ended March 31, 2011 Total gains/(losses) |   |
|-------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|-------------------------------|--------|--------|------------------------------------------------------------------|--------|
|                    |   |    |   |   |    |   |   |    |   |   |                          |   |   |                                                             |   |
| Other real estate owned |   | $       | 0      |   |    | $      | 2,153  |    |   | $      | 3,200                         |   |   | $                                                                | 5,353  |   |   | $ | (65 | ) |
| Impaired Loans          |   |    | 0      |   |    |   | 1,290  |    |   |   | 4,731                         |   |   |                                                             | 6,021  |   |   |   | 0 |   |
| Total                   |   | $       | 0      |   |    | $      | 3,443  |    |   | $      | 7,931                         |   |   | $                                                                | 11,374 |   |   | $ | (65 | ) |
|                    |   |    |   |   |    |   |   |    |   |   |                          |   |   |                                                             |   |   |   |   |   |   |

----

Index

|                          |   | March 31, 2011 |    |       | December 31, 2010 |   |
|-------------------------------|--------|----------------|---------|------------|-------------------|--------|
|                          |   | Carrying       |    |       | Estimated         |   |   | Carrying |   |   | Estimated |   |
|                          | Amount |           |    | Fair Value |              |   | Amount |   |   | Fair Value |   |
| Financial Assets:             |   |           |    |       |              |   |
| Cash and due from banks       |   | $              | 7,131   |       |              | $      | 7,131 |   |   | $ | 8,282 |   |   | $ | 8,282 |   |
| Interest bearing deposits     |   |           | 2,657   |       |              |   | 2,657 |   |   |   | 3,532 |   |   |   | 3,532 |   |
| Federal funds sold            |   |           | 9,091   |       |              |   | 9,091 |   |   |   | 5,836 |   |   |   | 5,836 |   |
| Securities available for sale |   |           | 30,702  |       |              |   | 30,702 |   |   |   | 25,324 |   |   |   | 25,324 |   |
| Restricted investments        |   |           | 1,993   |       |              |   | 1,993 |   |   |   | 2,087 |   |   |   | 2,087 |   |
| Loans, net                    |   |           | 319,730 |       |              |   | 320,483 |   |   |   | 323,929 |   |   |   | 324,780 |   |
| Interest receivable           |   |           | 1,645   |       |              |   | 1,645 |   |   |   | 1,791 |   |   |   | 1,791 |   |
| Life insurance contracts      |   |           | 7,097   |       |              |   | 7,097 |   |   |   | 7,031 |   |   |   | 7,031 |   |
|                          |   |           |    |       |              |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities:        |   |           |    |       |              |   |   |   |   |   |   |   |   |   |   |   |
| Demand and savings deposits   |   |           | 136,224 |       |              |   | 136,224 |   |   |   | 132,085 |   |   |   | 132,085 |   |
| Time deposits                 |   |           | 208,913 |       |              |   | 209,656 |   |   |   | 210,727 |   |   |   | 211,590 |   |
| Long term debt instruments    |   |           | 9,272   |       |              |   | 10,012 |   |   |   | 9,393 |   |   |   | 10,142 |   |
| Interest payable              |   |           | 483     |       |              |   | 483 |   |   |   | 488 |   |   |   | 488 |   |

----

Index

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

----

Index

|   | · | Changes in lending policies and procedures, including changes in underwriting standards or collection, charge-off and recovery practices. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Changes in national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including unemployment trends and GDP and other leading economic indicators. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Changes in the nature and volume of the portfolio. |
|--------|--------|----------------------------------------------------|

|   | · | Changes in the experience, ability and depth of lending management and staff. |
|--------|--------|-------------------------------------------------------------------------------|

|   | · | Changes in the volume and severity of past due and classified loans, the volume of nonaccrual loans, troubled debt restructurings and other loan modifications. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Changes in the quality of the Banks’ loan review systems. |
|--------|--------|-----------------------------------------------------------------|

|   | · | The existence and effect of any concentrations of credit, and the changes in the level of such concentrations. |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

|   | · | Changes in the value of underlying collateral. |
|--------|--------|------------------------------------------------|

|   | · | The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Index

----

Index

|                                |   | Three months ended March 31, |   |
|-------------------------------------|--------|------------------------------|--------|
|                                |   | 2011                         |   |   | 2010 |   |
| Annualized return on average assets |   |                         | 0.55   | % |   |   | 0.16 | % |
| Annualized return on average equity |   |                         | 5.44   | % |   |   | 1.57 | % |
| Net interest margin (1)             |   |                         | 4.39   | % |   |   | 4.23 | % |
| Efficiency Ratio (2)                |   |                         | 69.08  | % |   |   | 71.02 | % |
| Earnings per share (3)              |   | $                            | 0.41   |   |   | $ | 0.12 |   |

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

----

Index

|   | (3) | Per weighted average shares of common stock outstanding for the period indicated. |
|--------|-----|-----------------------------------------------------------------------------------|

----

Index

|                                                       |   | March 31, 2011 |   |   | December 31, 2010 |   |
|------------------------------------------------------------|--------|----------------|--------|--------|-------------------|--------|
| Allowance for loan losses as a percentage of gross loans   |   |           | 1.76   | %      |              |   | 1.64 | % |
| Non performing loans as a percentage of gross loans        |   |           | 2.91   | %      |              |   | 2.38 | % |
| Ratio of allowance for loan losses to non-performing loans |   |           | 0.61   |   |              |   | 0.69 |   |

|                                                |   | March 31, 2011 |   |   | December 31, 2010 |   |
|-----------------------------------------------------|--------|----------------|--------|--------|-------------------|--------|
| Loans accounted for on a non-accrual basis          |   |           |   |   |              |   |
| Commercial Mortgage                                 |   | $              | 4,828  |   |              | $      | 2,215 |   |
| Commercial Other                                    |   |           | 131    |   |              |   | 139 |   |
| Consumer Mortgage                                   |   |           | 3,768  |   |              |   | 4,240 |   |
| Consumer Other                                      |   |           | 136    |   |              |   | 385 |   |
| Total non-accrual loans                             |   | $              | 8,863  |   |              | $      | 6,979 |   |
|                                                |   |           |   |   |              |   |   |   |
| Loans delinquent 90 days or more and still accruing |   |           |   |   |              |
| Commercial Mortgage                                 |   | $              | 320    |   |              | $      | 301 |   |
| Commercial Other                                    |   |           | 0      |   |              |   | 46 |   |
| Consumer Mortgage                                   |   |           | 253    |   |              |   | 397 |   |
| Consumer Other                                      |   |           | 23     |   |              |   | 122 |   |
| Total delinquent loans                              |   | $              | 596    |   |              | $      | 866 |   |
|                                                |   |           |   |   |              |   |   |   |
| Total Non-Performing Loans                          |   | $              | 9,459  |   |              | $      | 7,845 |   |
|                                                |   |           |   |   |              |   |   |   |

----

Index

|                  |   | 2011   |   |   | 2010   |   |
|-----------------------|--------|--------|--------|--------|--------|--------|
| Charge-offs           |   |   |   |   |   |   |
| Commercial Mortgage   |   | $      | (31    | )      |   | $      | (225 | ) |
| Commercial Other      |   |   | 0      |   |   |   | (154 | ) |
| Consumer Mortgage     |   |   | (307   | )      |   |   | (88 | ) |
| Consumer Other        |   |   | (122   | )      |   |   | (227 | ) |
| Total Charge-offs     |   | $      | (460   | )      |   | $      | (694 | ) |
|                  |   |   |   |   |   |   |   |   |
| Recoveries            |   |   |   |   |   |   |   |   |
| Commercial Mortgage   |   | $      | 106    |   |   | $      | 0 |   |
| Commercial Other      |   |   | 21     |   |   |   | 0 |   |
| Consumer Mortgage     |   |   | 10     |   |   |   | 0 |   |
| Consumer Other        |   |   | 60     |   |   |   | 93 |   |
| Total Recoveries      |   | $      | 197    |   |   | $      | 93 |   |
|                  |   |   |   |   |   |   |   |   |
| Total Net Charge-offs |   | $      | (263   | )      |   | $      | (601 | ) |

|                |   | March 31, 2011 |   |   | December 31, 2010 |   |
|---------------------|--------|----------------|--------|--------|-------------------|--------|
|                |   | Amount         |   |   | Percent of Loans  |   |   | Amount |   |   | Percent of Loans |   |
| Loan Type           |   |           |   |   |              |   |   |   |   |   |   |   |
| Commercial Mortgage |   | $              | 2,742  |   |              |   | 45 | % |   | $ | 1,345 |   |   |   | 43 | % |
| Commercial Other    |   |           | 614    |   |              |   | 4 | % |   |   | 887 |   |   |   | 5 | % |
| Consumer Mortgage   |   |           | 1,480  |   |              |   | 43 | % |   |   | 1,662 |   |   |   | 43 | % |
| Consumer Other      |   |           | 641    |   |              |   | 8 | % |   |   | 968 |   |   |   | 9 | % |
| Unallocated         |   |           | 252    |   |              |   |   |   |   |   | 545 |   |   |   |   |   |
| Totals              |   | $              | 5,729  |   |              |   | 100 | % |   | $ | 5,407 |   |   |   | 100 | % |

----

Index

| EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME                                                |   |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |   |   |   |   |   |   |   |   |
| Increase (Decrease) Three Months Ended March 31, 2011 compared to Three Months Ended March 31, 2010 |   |
|                                                                                                |   | Due to change in: |   |   |   |   |
|                                                                                                |   | Average Volume |   |   | Average Rate |   |   | Total Change |   |
| Interest Income                                                                                     |   |   |   |   |   |   |   |   |   |
| Loans                                                                                               |   | $ | (104 | ) |   | $ | (222 | ) |   | $ | (326 | ) |
| Federal funds sold                                                                                  |   |   | (1 | ) |   |   | 0 |   |   |   | (1 | ) |
| Interest bearing deposits                                                                           |   |   | 0 |   |   |   | (2 | ) |   |   | (2 | ) |
| Taxable investment securities                                                                       |   |   | 6 |   |   |   | (28 | ) |   |   | (22 | ) |
| Nontaxable investment securities                                                                    |   |   | (15 | ) |   |   | (19 | ) |   |   | (34 | ) |
| Total Interest Income                                                                               |   |   | (114 | ) |   |   | (271 | ) |   |   | (385 | ) |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Expense                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                                                     |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Savings deposits                                                                                    |   |   | 2 |   |   |   | (14 | ) |   |   | (12 | ) |
| Time deposits                                                                                       |   |   | (70 | ) |   |   | (363 | ) |   |   | (433 | ) |
| Borrowings                                                                                          |   |   | (17 | ) |   |   | 10 |   |   |   | (7 | ) |
| Total Interest Expense                                                                              |   |   | (85 | ) |   |   | (367 | ) |   |   | (452 | ) |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                                                                                 |   | $ | (29 | ) |   | $ | 96 |   |   | $ | 67 |   |

----

Index

|                                             |   | 2011    |    |   | 2010    |   |
|--------------------------------------------------|--------|---------|---------|--------|---------|--------|
|                                             |   | Average |    |   | Income/ |   |   |   |   |   | Average |   |   | Income/ |   |   |   |   |
|                                             |   | Balance |    |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Earning Assets                                   |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                            |   | $       | 327,633 |   |    | $      | 5,156 |   |   |   | 6.29 | % |   | $ | 334,232 |   |   | $ | 5,482 |   |   |   | 6.56 | % |
| Taxable investment securities                    |   |    | 24,863  |   |    |   | 126 |   |   |   | 2.03 | % |   |   | 23,684 |   |   |   | 148 |   |   |   | 2.51 | % |
| Non-taxable investment securities                |   |    | 2,148   |   |    |   | 19 |   |   |   | 3.54 | % |   |   | 3,871 |   |   |   | 53 |   |   |   | 5.49 | % |
| Interest bearing deposits                        |   |    | 3,988   |   |    |   | 1 |   |   |   | 0.10 | % |   |   | 2,144 |   |   |   | 3 |   |   |   | 0.48 | % |
| Federal funds sold                               |   |    | 8,792   |   |    |   | 4 |   |   |   | 0.18 | % |   |   | 11,515 |   |   |   | 5 |   |   |   | 0.18 | % |
| Total Earning Assets                             |   | $       | 367,424 |   |    | $      | 5,306 |   |   |   | 5.79 | % |   | $ | 375,446 |   |   | $ | 5,691 |   |   |   | 6.06 | % |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                        |   |    | (5,574  | )      |    |   |   |   |   |   |   |   |   |   | (3,954 | ) |   |   |   |   |   |   |   |   |
| Other non-earning assets                         |   |    | 41,506  |   |    |   |   |   |   |   |   |   |   |   | 38,143 |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |   | $       | 403,356 |   |    |   |   |   |   |   |   |   |   | $ | 409,635 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities                     |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   | $       | 23,062  |   |    | $      | 7 |   |   |   | 0.13 | % |   | $ | 23,000 |   |   | $ | 7 |   |   |   | 0.12 | % |
| Savings deposits                                 |   |    | 54,253  |   |    |   | 34 |   |   |   | 0.25 | % |   |   | 51,668 |   |   |   | 46 |   |   |   | 0.36 | % |
| Time deposits                                    |   |    | 210,987 |   |    |   | 1,120 |   |   |   | 2.12 | % |   |   | 224,235 |   |   |   | 1,553 |   |   |   | 2.77 | % |
| Long-term debt                                   |   |    | 9,335   |   |    |   | 108 |   |   |   | 4.63 | % |   |   | 10,813 |   |   |   | 115 |   |   |   | 4.26 | % |
| Total Interest Bearing Liabilities               |   | $       | 297,637 |   |    | $      | 1,269 |   |   |   | 1.71 | % |   | $ | 309,716 |   |   | $ | 1,721 |   |   |   | 2.22 | % |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   |    | 56,872  |   |    |   |   |   |   |   |   |   |   |   | 52,484 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                |   |    | 8,251   |   |    |   |   |   |   |   |   |   |   |   | 6,439 |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                       |   |    | 40,596  |   |    |   |   |   |   |   |   |   |   |   | 40,996 |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |   | $       | 403,356 |   |    |   |   |   |   |   |   |   |   | $ | 409,635 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |    |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                              |   |    |    |   |    | $      | 4,037 |   |   |   |   |   |   |   |   |   |   | $ | 3,970 |   |   |   |   |   |
| Net Yield on Earning Assets                      |   |    |    |   |    |   |   |   |   |   | 4.39 | % |   |   |   |   |   |   |   |   |   |   | 4.23 | % |

----

Index

| Salary and Benefits Expense              |   |   |   |   |   |   |   |                |   |
|------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
|                                     |   | 2011   |   |   | 2010   |   |   | Increase (Decrease) |   |
|                                     |   |   |   |   |   |   |   |                |   |
| Employee salaries                        |   | $      | 1,104  |   |   | $      | 1,097  |                |   | $ | 7 |   |
| Employee benefit insurance               |   |   | 320    |   |   |   | 271    |                |   |   | 49 |   |
| Payroll taxes                            |   |   | 70     |   |   |   | 101    |                |   |   | (31 | ) |
| Non-recurring post retirement adjustment |   |   | (70    | )      |   |   | 0      |                |   |   | (70 | ) |
| Post retirement plans                    |   |   | 238    |   |   |   | 251    |                |   |   | (13 | ) |
| Total                                    |   | $      | 1,662  |   |   | $      | 1,720  |                |   | $ | (58 | ) |

|                                             |   | 2011   |   |   | 2010   |   |   | Increase (Decrease) |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
| Depreciation of buildings and equipment          |   | $      | 196    |   |   | $      | 183    |                |   | $ | 13 |   |
| Maintenance expense on buildings and equipment   |   |   | 84     |   |   |   | 102    |                |   |   | (18 | ) |
| Utilities expense                                |   |   | 47     |   |   |   | 40     |                |   |   | 7 |   |
| Real estate and personal property tax            |   |   | 29     |   |   |   | 21     |                |   |   | 8 |   |
| Other expense related to occupancy and equipment |   |   | 25     |   |   |   | 22     |                |   |   | 3 |   |
| Total occupancy and equipment expense            |   | $      | 381    |   |   | $      | 368    |                |   | $ | 13 |   |

----

Index

|                                                   |   | 2011   |   |   | 2010   |   |   | Increase (Decrease) |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
| ATM expense                                            |   |   | (25    | )      |   |   | (12    | )                   |   |   | (13 | ) |
| Amortization of intangible assets                      |   |   | 46     |   |   |   | 49     |                |   |   | (3 | ) |
| Advertising and marketing expense                      |   |   | 34     |   |   |   | 37     |                |   |   | (3 | ) |
| Miscellaneous components of other non interest expense |   |   | 118    |   |   |   | 153    |                |   |   | (35 | ) |
| Total                                                  |   | $      | 173    |   |   | $      | 227    |                |   | $ | (54 | ) |

----

Index

|                            |   | March 31, 2011 |   |   | December 31, 2010 |   |
|---------------------------------|--------|----------------|--------|--------|-------------------|--------|
|                            |   | Actual         |   |   | Regulatory        |   |   | Actual |   |   | Regulatory |   |
|                            |   | Ratio          |   |   | Minimum           |   |   | Ratio |   |   | Minimum |   |
| Total Risk Based Capital Ratio  |   |           |   |   |              |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |           | 14.65  | %      |              |   | 8.00 | % |   |   | 14.49 | % |   |   | 8.00 | % |
| Capon Valley Bank               |   |           | 12.68  | %      |              |   | 8.00 | % |   |   | 12.50 | % |   |   | 8.00 | % |
| The Grant County Bank           |   |           | 14.66  | %      |              |   | 8.00 | % |   |   | 14.58 | % |   |   | 8.00 | % |
|                            |   |           |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Leverage Ratio           |   |           |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |           | 10.11  | %      |              |   | 4.00 | % |   |   | 9.91 | % |   |   | 4.00 | % |
| Capon Valley Bank               |   |           | 8.44   | %      |              |   | 4.00 | % |   |   | 8.33 | % |   |   | 4.00 | % |
| The Grant County Bank           |   |           | 10.29  | %      |              |   | 4.00 | % |   |   | 10.26 | % |   |   | 4.00 | % |
|                            |   |           |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Risk Based Capital Ratio |   |           |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |           | 13.40  | %      |              |   | 4.00 | % |   |   | 13.24 | % |   |   | 4.00 | % |
| Capon Valley Bank               |   |           | 11.41  | %      |              |   | 4.00 | % |   |   | 11.24 | % |   |   | 4.00 | % |
| The Grant County Bank           |   |           | 13.41  | %      |              |   | 4.00 | % |   |   | 13.32 | % |   |   | 4.00 | % |

----

Index

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

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

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

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

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

----

Index

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

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

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

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

| 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  of2002 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 of2002 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

ature

|         | HIGHLANDS BANKSHARES, INC.              |
|--------------|-----------------------------------------|
|         |                                    |
|         | /s/ C.E. Porter                         |
|         | C.E. Porter                             |
|         | President & Chief Executive Officer |
|         |                                    |
|         | /s/ Jeffrey B. Reedy                    |
|         | Jeffrey B. Reedy                        |
|         | Chief Financial Officer                 |
| May 16, 2011 |                                    |

----