----

----

| West Virginia                                                  | 55-0650743                           |
|----------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |

| P.O. Box 929 Petersburg, WV              | 26847      |
|------------------------------------------|------------|
| (Address of principal executive offices) | (Zip Code) |

----

| Part I     |                                                                                                               | Page   |
|------------|--------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.    | Business                                                                                                           | 3      |
| Item 1A.   | Risk Factors                                                                                                       | 9      |
| Item 1B.   | Unresolved Staff Comments                                                                                          | 9      |
| Item 2.    | Properties                                                                                                         | 9      |
| Item 3.    | Legal Proceedings                                                                                                  | 9      |
| Item 4.    | (Removed and Reserved)                                                                                             | 9      |
|       |                                                                                                               |   |
| Part II    |                                                                                                               |   |
| Item 5.    | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 9      |
| Item 6.    | Selected Financial Data                                                                                            | 10     |
| Item 7.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 11     |
| Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk                                                         | 26     |
| Item 8.    | Financial Statements and Supplementary Data                                                                        | 27     |
| Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                               | 62     |
| Item 9A.   | Controls and Procedures                                                                                            | 62     |
| Item 9B.   | Other Information                                                                                                  | 62     |
|       |                                                                                                               |   |
| Part III   |                                                                                                               |   |
| *Item 10.  | Directors and Executive Officers and Corporate Governance                                                          | 63     |
| *Item 11.  | Executive Compensation                                                                                             | 63     |
| *Item 12.  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                     | 63     |
| *Item 13.  | Certain Relationships,  Related Transactions and Director Independence                                   | 63     |
| *Item 14.  | Principal Accounting Fees and Services                                                                             | 64     |
|       |                                                                                                               |   |
| Part IV    |                                                                                                               |   |
| Item 15.   | Exhibits and Financial Statement Schedules                                                                         | 64     |
|       |                                                                                                               |   |
| Signatures | 65                                                                                                                 |

----

| Item 1. | Business |
|---------|----------|

----

----

----

|                            |   | Actual RatioDecember 31, 2010 |   |   | Actual RatioDecember 31, 2009 |   |   | RegulatoryMinimum |   |
|---------------------------------|--------|-------------------------------|--------|--------|-------------------------------|--------|--------|-------------------|--------|
| Total Risk Based Capital        |   |                          |   |   |                          |   |   |              |   |
| Highlands Bankshares            |   |                          | 14.49  | %      |                          |   | 14.33  | %                 |   |   | 8.00 | % |
| The Grant County Bank           |   |                          | 14.58  | %      |                          |   | 14.12  | %                 |   |   | 8.00 | % |
| Capon Valley Bank               |   |                          | 12.50  | %      |                          |   | 12.86  | %                 |   |   | 8.00 | % |
|                            |   |                          |   |   |                          |   |   |              |   |   |   |   |
| Tier 1 Leverage Ratio           |   |                          |   |   |                          |   |   |              |   |   |   |   |
| Highlands Bankshares            |   |                          | 9.91   | %      |                          |   | 9.81   | %                 |   |   | 4.00 | % |
| The Grant County Bank           |   |                          | 10.26  | %      |                          |   | 9.91   | %                 |   |   | 4.00 | % |
| Capon Valley Bank               |   |                          | 8.33   | %      |                          |   | 8.38   | %                 |   |   | 4.00 | % |
|                            |   |                          |   |   |                          |   |   |              |   |   |   |   |
| Tier 1 Risk Based Capital Ratio |   |                          |   |   |                          |   |   |              |   |   |   |   |
| Highlands Bankshares            |   |                          | 13.24  | %      |                          |   | 13.08  | %                 |   |   | 4.00 | % |
| The Grant County Bank           |   |                          | 13.32  | %      |                          |   | 12.89  | %                 |   |   | 4.00 | % |
| Capon Valley Bank               |   |                          | 11.24  | %      |                          |   | 11.60  | %                 |   |   | 4.00 | % |

----

----

|             |   | Age    |                             | Position with the Company | Principal Occupation (Past Five Years)                  |
|------------------|--------|--------|----------------------------------|---------------------------|---------------------------------------------------------|
| C.E. Porter      |   |   | 62      |                      | Chief Executive Officer                                 | CEO of Highlands since 2004, President of The Grant County Bank since 1991 |
|             |   |   |                             |                      |                                                    |   |
| Alan L. Brill    |   |   | 56      |                      | Secretary and Treasurer; President of Capon Valley Bank | President of Capon Valley Bank since 2001 |
|             |   |   |                             |                      |                                                    |   |
| Jeffrey B. Reedy |   |   | 48      |                      | Chief Financial Officer                                 | CFO of Highlands since March 2010, Prior to Highlands, Corporate Controller for American Woodmark Corporation. |

----

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

| Item 1B. | Unresolved Staff Comments |
|----------|---------------------------|

| Item 2. | Properties |
|---------|------------|

| Location                                               | Description                           |
|--------------------------------------------------------|---------------------------------------|
| 3 N. Main Street, Petersburg, WV  26847      | Primary Office, The Grant County Bank |
| Route 33, Riverton, WV  26814                | Branch Office, The Grant County Bank  |
| 500 S. Main Street, Moorefield, WV  26836    | Branch Office, The Grant County Bank  |
| Route 220 & Josie Dr., Keyser, WV  26726 | Branch Office, The Grant County Bank  |
| Main Street, Harman, WV  26270               | Branch Office, The Grant County Bank  |
| William Avenue, Davis, WV  26260             | Branch Office, The Grant County Bank  |
| 5502 Appalachian Hwy., Davis, WV  26260      | Branch Office, The Grant County Bank  |
| 2 W. Main Street, Wardensville, WV  26851    | Primary Office, Capon Valley Bank     |
| 717 N. Main Street, Moorefield, WV  26836    | Branch Office, Capon Valley Bank      |
| 17558 SR55, Baker, WV  26801                 | Branch Office, Capon Valley Bank      |
| 6701 Northwestern Pike, Gore, VA  22637      | Branch Office, Capon Valley Bank      |
| 5511 Main Street, Stephens City, VA 22655              | Branch Office, Capon Valley Bank      |

| Item 3. | Legal Proceedings |
|---------|-------------------|

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

| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
|---------|--------------------------------------------------------------------------------------------------------------------|

----

| Highlands Bankshares, Inc. Common Stock |   |
|-----------------------------------------|--------|
|                                    |   |
|                                    |   |   |   |   | Estimated Market Range |   |
|                                    |   | Dividends Per Share |   |   | High |   |   | Low |   |
| 2010                                    |   |   |   |   |   |   |   |   |   |
| First Quarter                           |   | $ | .27 |   |   | $ | 25.75 |   |   | $ | 20.55 |   |
| Second Quarter                          |   | $ | .27 |   |   | $ | 29.75 |   |   | $ | 20.00 |   |
| Third Quarter                           |   | $ | .25 |   |   | $ | 24.00 |   |   | $ | 18.50 |   |
| Fourth Quarter                          |   | $ | .25 |   |   | $ | 24.00 |   |   | $ | 18.10 |   |
|                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| 2009                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                           |   | $ | .29 |   |   | $ | 35.00 |   |   | $ | 26.50 |   |
| Second Quarter                          |   | $ | .29 |   |   | $ | 27.65 |   |   | $ | 27.25 |   |
| Third Quarter                           |   | $ | .29 |   |   | $ | 27.50 |   |   | $ | 21.50 |   |
| Fourth Quarter                          |   | $ | .29 |   |   | $ | 22.50 |   |   | $ | 21.00 |   |

| Item 6. | Selected Financial Data |
|---------|-------------------------|

|                                                |   | Years Ending December 31,                               |    |
|-----------------------------------------------------|--------|---------------------------------------------------------|---------|
|                                                |   | (In thousands of dollars, except for per share amounts) |    |
|                                                |   | 2010                                                    |    |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Total Interest Income                               |   | $                                                       | 22,897  |   |   | $ | 24,274 |   |   | $ | 26,203 |   |   | $ | 27,664 |   |   | $ | 23,894 |   |
| Total Interest Expense                              |   |                                                    | 6,214   |   |   |   | 7,841 |   |   |   | 8,866 |   |   |   | 10,703 |   |   |   | 7,909 |   |
| Net Interest Income                                 |   |                                                    | 16,683  |   |   |   | 16,433 |   |   |   | 17,337 |   |   |   | 16,961 |   |   |   | 15,985 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                           |   |                                                    | 3,487   |   |   |   | 1,864 |   |   |   | 909 |   |   |   | 837 |   |   |   | 682 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income After Provision for Loan Losses |   |                                                    | 13,196  |   |   |   | 14,569 |   |   |   | 16,428 |   |   |   | 16,124 |   |   |   | 15,303 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Income                                        |   |                                                    | 2,092   |   |   |   | 2,532 |   |   |   | 2,699 |   |   |   | 2,080 |   |   |   | 1,997 |   |
| Other Expenses                                      |   |                                                    | 13,056  |   |   |   | 12,053 |   |   |   | 11,419 |   |   |   | 10,952 |   |   |   | 10,394 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income Before Income Taxes                          |   |                                                    | 2,232   |   |   |   | 5,048 |   |   |   | 7,708 |   |   |   | 7,252 |   |   |   | 6,906 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income Tax Expense                                  |   |                                                    | 640     |   |   |   | 1,692 |   |   |   | 2,738 |   |   |   | 2,599 |   |   |   | 2,391 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income                                          |   | $                                                       | 1,592   |   |   | $ | 3,356 |   |   | $ | 4,970 |   |   | $ | 4,653 |   |   | $ | 4,515 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Assets at Year End                            |   | $                                                       | 399,900 |   |   | $ | 407,810 |   |   | $ | 378,295 |   |   | $ | 380,936 |   |   | $ | 357,316 |   |
| Long Term Debt at Year End                          |   | $                                                       | 9,393   |   |   | $ | 10,866 |   |   | $ | 11,317 |   |   | $ | 11,819 |   |   | $ | 14,992 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income Per Share of Common Stock                |   | $                                                       | 1.19    |   |   | $ | 2.51 |   |   | $ | 3.59 |   |   | $ | 3.24 |   |   | $ | 3.14 |   |
| Dividends Per Share of Common Stock                 |   | $                                                       | 1.04    |   |   | $ | 1.16 |   |   | $ | 1.08 |   |   | $ | 1.00 |   |   | $ | .94 |   |
|                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Return on Average Assets                            |   |                                                    | 0.38    | % |   |   | 0.84 | % |   |   | 1.32 | % |   |   | 1.24 | % |   |   | 1.29 | % |
| Return on Average Equity                            |   |                                                    | 4.00    | % |   |   | 8.33 | % |   |   | 12.38 | % |   |   | 12.03 | % |   |   | 12.67 | % |
| Dividend Payout Ratio                               |   |                                                    | 87.31   | % |   |   | 46.19 | % |   |   | 30.12 | % |   |   | 30.88 | % |   |   | 29.91 | % |
| Year End Equity to Assets Ratio                     |   |                                                    | 10.34   | % |   |   | 10.16 | % |   |   | 10.41 | % |   |   | 10.66 | % |   |   | 10.38 | % |

----

| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results or Operations |
|---------|---------------------------------------------------------------------------------------------|

----

----

|                                |   | 2010   |   |   | 2009   |   |
|-------------------------------------|--------|--------|--------|--------|--------|--------|
| Annualized return on average assets |   |   | 0.38   | %      |   |   | 0.84 | % |
| Annualized return on average equity |   |   | 4.00   | %      |   |   | 8.33 | % |
| Net interest margin (1)             |   |   | 4.49   | %      |   |   | 4.50 | % |
| Efficiency Ratio (2)                |   |   | 69.54  | %      |   |   | 63.55 | % |
| Earnings per share (3)              |   | $      | 1.19   |   |   | $      | 2.51 |   |

----

|                              |   | Due to change in:   |   |   |              |   |
|-----------------------------------|--------|---------------------|--------|--------|-------------------|--------|
|                              |   | Average Volume |   |   | Average Rate |   |   | Total Change |   |
| Interest Income                   |   |                |   |   |              |   |   |   |   |
| Loans                             |   | $                   | 74     |   |              | $      | (1,298 | ) |   | $ | (1,224 | ) |
| Taxable investment securities     |   |                | 126    |   |              |   | (230 | ) |   |   | (104 | ) |
| Non-taxable investment securities |   |                | (32    | )      |              |   | (56 | ) |   |   | (88 | ) |
| Interest bearing deposits         |   |                | 5      |   |              |   | (4 | ) |   |   | 1 |   |
| Federal funds sold                |   |                | (3     | )      |              |   | (3 | ) |   |   | (6 | ) |
| Total Interest Income             |   |                | 170    |   |              |   | (1,591 | ) |   |   | (1,421 | ) |
|                              |   |                |   |   |              |   |   |   |   |   |   |   |
| Interest Expense                  |   |                |   |   |              |   |   |   |   |   |   |   |
| Demand deposits                   |   |                | 1      |   |              |   | (46 | ) |   |   | (45 | ) |
| Savings deposits                  |   |                | 11     |   |              |   | (27 | ) |   |   | (16 | ) |
| Time deposits                     |   |                | 154    |   |              |   | (1,668 | ) |   |   | (1,514 | ) |
| Borrowings                        |   |                | (102   | )      |              |   | 50 |   |   |   | (52 | ) |
| Total Interest Expense            |   |                | 64     |   |              |   | (1,691 | ) |   |   | (1,627 | ) |
|                              |   |                |   |   |              |   |   |   |   |   |   |   |
| Net Interest Income               |   | $                   | 106    |   |              | $      | 100 |   |   | $ | 206 |   |

----

|                                             |   | 2010           |    |   | 2009           |   |
|--------------------------------------------------|--------|----------------|---------|--------|----------------|--------|
|                                             |   | AverageBalance |    |   | Income/Expense |   |   | Yield/Rate |   |   | AverageBalance |   |   | Income/Expense |   |   | Yield/Rate |   |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earning Assets                                   |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                            |   | $              | 332,846 |   |           | $      | 22,144 |   |   |   | 6.65 | % |   | $ | 331,740 |   |   | $ | 23,368 |   |   |   | 7.04 | % |
| Taxable investment securities                    |   |           | 25,243  |   |           |   | 625 |   |   |   | 2.48 | % |   |   | 20,180 |   |   |   | 729 |   |   |   | 3.61 | % |
| Non-taxable investment securities                |   |           | 3,357   |   |           |   | 152 |   |   |   | 4.53 | % |   |   | 4,059 |   |   |   | 240 |   |   |   | 5.92 | % |
| Interest bearing deposits                        |   |           | 2,928   |   |           |   | 8 |   |   |   | .27 | % |   |   | 1,028 |   |   |   | 7 |   |   |   | .68 | % |
| Federal funds sold                               |   |           | 8,502   |   |           |   | 14 |   |   |   | .16 | % |   |   | 10,288 |   |   |   | 20 |   |   |   | .19 | % |
| Total Earning Assets                             |   |           | 372,876 |   |           |   | 22,943 |   |   |   | 6.15 | % |   |   | 367,295 |   |   |   | 24,364 |   |   |   | 6.63 | % |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                        |   |           | (4,811  | )      |           |   |   |   |   |   |   |   |   |   | (3,755 | ) |   |   |   |   |   |   |   |   |
| Other non-earning assets                         |   |           | 40,705  |   |           |   |   |   |   |   |   |   |   |   | 34,097 |   |   |   |   |   |   |   |   |   |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |   | $              | 408,770 |   |           |   |   |   |   |   |   |   |   | $ | 397,637 |   |   |   |   |   |   |   |   |   |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities                     |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   | $              | 23,337  |   |           | $      | 29 |   |   |   | .12 | % |   | $ | 22,430 |   |   | $ | 74 |   |   |   | .33 | % |
| Savings deposits                                 |   |           | 52,857  |   |           |   | 176 |   |   |   | .33 | % |   |   | 49,618 |   |   |   | 192 |   |   |   | .39 | % |
| Time deposits                                    |   |           | 219,593 |   |           |   | 5,535 |   |   |   | 2.52 | % |   |   | 213,483 |   |   |   | 7,049 |   |   |   | 3.30 | % |
| Overnight and other short-term debt              |   |           | 0       |   |           |   | 0 |   |   |   | 0.00 | % |   |   | 1,407 |   |   |   | 7 |   |   |   | .50 | % |
| Long-term debt                                   |   |           | 10,412  |   |           |   | 474 |   |   |   | 4.55 | % |   |   | 11,237 |   |   |   | 519 |   |   |   | 4.62 | % |
| Total Interest Bearing Liabilities               |   |           | 306,199 |   |           |   | 6,214 |   |   |   | 2.03 | % |   |   | 298,175 |   |   |   | 7,841 |   |   |   | 2.63 | % |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   |           | 53,771  |   |           |   |   |   |   |   |   |   |   |   | 50,650 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                |   |           | 9,007   |   |           |   |   |   |   |   |   |   |   |   | 8,524 |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                       |   |           | 39,793  |   |           |   |   |   |   |   |   |   |   |   | 40,288 |   |   |   |   |   |   |   |   |   |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities and Stockholders’ Equity |   | $              | 408,770 |   |           |   |   |   |   |   |   |   |   | $ | 397,637 |   |   |   |   |   |   |   |   |   |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                              |   |           |    |   |           | $      | 16,729 |   |   |   |   |   |   |   |   |   |   | $ | 16,523 |   |   |   |   |   |
| Net Yield on Earning Assets                      |   |           |    |   |           |   |   |   |   |   | 4.49 | % |   |   |   |   |   |   |   |   |   |   | 4.50 | % |
|                                             |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes:                                           |   |           |    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                      |   | At December 31, |    |
|---------------------------|--------|-----------------|---------|
|                      |   | 2010            |    |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Real estate mortgage      |   | $               | 168,226 |   |   | $ | 162,619 |   |   | $ | 156,877 |   |   | $ | 169,122 |   |   | $ | 164,243 |   |
| Real estate construction  |   |            | 33,746  |   |   |   | 30,759 |   |   |   | 27,210 |   |   |   | 15,560 |   |   |   | 14,828 |   |
| Commercial                |   |            | 97,089  |   |   |   | 97,606 |   |   |   | 97,709 |   |   |   | 79,892 |   |   |   | 70,408 |   |
| Installment               |   |            | 30,275  |   |   |   | 44,499 |   |   |   | 43,958 |   |   |   | 45,625 |   |   |   | 43,37 |   |
| Total Loans               |   |            | 329,336 |   |   |   | 335,483 |   |   |   | 325,754 |   |   |   | 310,199 |   |   |   | 292,816 |   |
|                      |   |            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses |   |            | (5,407  | ) |   |   | (4,021 | ) |   |   | (3,667 | ) |   |   | (3,577 | ) |   |   | (3,482 | ) |
|                      |   |            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loans                 |   | $               | 323,929 |   |   | $ | 331,462 |   |   | $ | 322,087 |   |   | $ | 306,622 |   |   | $ | 289,334 |   |

|                                  |   | Maturity Range   |    |
|---------------------------------------|--------|------------------|---------|
|                                  |   | Less than 1 Year |    |   | 1-5 Years |   |   | Over 5 Years |   |   | Total |   |
| Loan Type                             |   |             |    |   |   |   |   |   |   |   |   |   |
| Commercial                            |   | $                | 35,085  |   |   | $ | 16,561 |   |   | $ | 43,887 |   |   | $ | 95,533 |   |
| Real estate mortgage and construction |   |             | 61,560  |   |   |   | 41,008 |   |   |   | 99,405 |   |   |   | 201,973 |   |
| Installment                           |   |             | 7,249   |   |   |   | 20,691 |   |   |   | 3,890 |   |   |   | 31,830 |   |
| Total Loans                           |   | $                | 103,894 |   |   | $ | 78,260 |   |   | $ | 147,182 |   |   | $ | 329,336 |   |

----

|                                       |   | At December 31, |   |
|--------------------------------------------|--------|-----------------|--------|
|                                       |   | 2010            |   |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Loans accounted for on a non-accrual basis |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer                                   |   | $               | 386    |   |   | $ | 269 |   |   | $ | 180 |   |   | $ | 71 |   |   | $ | 83 |   |
| Commercial                                 |   |            | 1,352  |   |   |   | 90 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Real estate                                |   |            | 5,241  |   |   |   | 2,208 |   |   |   | 1,166 |   |   |   | 845 |   |   |   | 161 |   |
| Total Non-accrual Loans                    |   |            | 6,979  |   |   |   | 2,567 |   |   |   | 1,346 |   |   |   | 916 |   |   |   | 244 |   |
|                                       |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans delinquent 90 days or more           |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer                                   |   |            | 121    |   |   |   | 167 |   |   |   | 575 |   |   |   | 497 |   |   |   | 122 |   |
| Commercial                                 |   |            | 101    |   |   |   | 90 |   |   |   | 65 |   |   |   | 3 |   |   |   | 0 |   |
| Real estate                                |   |            | 644    |   |   |   | 1,935 |   |   |   | 2,832 |   |   |   | 1,744 |   |   |   | 1,335 |   |
| Total delinquent loans                     |   |            | 866    |   |   |   | 2,192 |   |   |   | 3,472 |   |   |   | 2,244 |   |   |   | 1,457 |   |
|                                       |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Non-performing loans                 |   | $               | 7,845  |   |   | $ | 4,759 |   |   | $ | 4,818 |   |   | $ | 3,160 |   |   | $ | 1,701 |   |

----

| December 31, 2010   |   |
|---------------------|--------|
| Loan Type           |   | Balance |   |   | IdentifiedImpairment |   |
| Commercial mortgage |   | $ | 24,147 |   |   | $ | 904 |   |
| Commercial other    |   |   | 988 |   |   |   | 21 |   |
| Consumer mortgage   |   |   | 253 |   |   |   | 0 |   |
|                |   | $ | 25,388 |   |   | $ | 925 |   |

----

|        |   | Dollars |   |   | Percent of Total |   |
|-------------|--------|---------|--------|--------|----------------------------|--------|
| Commercial  |   | $       | 1,868  |   |                       |   | 34 | % |
| Real Estate |   |    | 1,686  |   |                       |   | 31 | % |
| Consumer    |   |    | 1,947  |   |                       |   | 35 | % |
| Total       |   | $       | 5,501  |   |                       |   |   |   |

|                                                                          |   | 2010   |   |   | 2009   |   |   | 2008   |   |   | 2007   |   |   | 2006   |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Balance at beginning of period                                                |   | $      | 4,021  |   |   | $      | 3,667  |   |   | $      | 3,577  |   |   | $      | 3,482  |   |   | $ | 3,129 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Charge-offs:                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                                                              |   |   | 849    |   |   |   | 492    |   |   |   | 198    |   |   |   | 540    |   |   |   | 27 |   |
| Real estate loans                                                             |   |   | 1,230  |   |   |   | 445    |   |   |   | 228    |   |   |   | 47     |   |   |   | 1 |   |
| Consumer loans                                                                |   |   | 668    |   |   |   | 863    |   |   |   | 524    |   |   |   | 494    |   |   |   | 551 |   |
| Total Charge-offs:                                                            |   |   | 2,747  |   |   |   | 1,800  |   |   |   | 950    |   |   |   | 1,081  |   |   |   | 579 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Recoveries:                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                                                              |   |   | 144    |   |   |   | 10     |   |   |   | 20     |   |   |   | 59     |   |   |   | 5 |   |
| Real estate loans                                                             |   |   | 167    |   |   |   | 72     |   |   |   | 2      |   |   |   | 4      |   |   |   | 20 |   |
| Consumer loans                                                                |   |   | 335    |   |   |   | 208    |   |   |   | 109    |   |   |   | 276    |   |   |   | 225 |   |
| Total Recoveries                                                              |   |   | 646    |   |   |   | 290    |   |   |   | 131    |   |   |   | 339    |   |   |   | 250 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Charge-offs                                                               |   |   | 2,101  |   |   |   | 1,510  |   |   |   | 819    |   |   |   | 742    |   |   |   | 329 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for loan losses                                                     |   |   | 3,487  |   |   |   | 1,864  |   |   |   | 909    |   |   |   | 837    |   |   |   | 682 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at end of period                                                      |   | $      | 5,407  |   |   | $      | 4,021  |   |   | $      | 3,667  |   |   | $      | 3,577  |   |   | $ | 3,482 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Percent of net charge-offs to average net loans outstanding during the period |   |   | .63    | %      |   |   | .46    | %      |   |   | .26    | %      |   |   | .24    | % |   |   | .11 | % |

----

|        |   | At December 31, |   |
|-------------|--------|-----------------|--------|
|        |   | 2010            |   |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
|        |   |  Amount    |   |   | Percent of Loans |   |   |  Amount |   |   | Percent ofLoans |   |   |  Amount |   |   | Percent ofLoans |   |   |  Amount |   |   | Percentof Loans |   |   |  Amount |   |   | Percent ofLoans |   |
| Commercial  |   | $               | 2,232  |   |   |   | 30 | % |   | $ | 1,669 |   |   |   | 29 | % |   | $ | 1,349 |   |   |   | 30 | % |   | $ | 1,140 |   |   |   | 26 | % |   | $ | 1,492 |   |   |   | 24 | % |
| Mortgage    |   |            | 1,662  |   |   |   | 61 | % |   |   | 1,034 |   |   |   | 58 | % |   |   | 994 |   |   |   | 57 | % |   |   | 1,200 |   |   |   | 59 | % |   |   | 996 |   |   |   | 61 | % |
| Consumer    |   |            | 968    |   |   |   | 9 | % |   |   | 1,220 |   |   |   | 13 | % |   |   | 1,285 |   |   |   | 13 | % |   |   | 1,172 |   |   |   | 15 | % |   |   | 967 |   |   |   | 15 | % |
| Unallocated |   |            | 545    |   |   |   |   |   |   |   | 98 |   |   |   |   |   |   |   | 39 |   |   |   |   |   |   |   | 65 |   |   |   |   |   |   |   | 27 |   |   |   |   |   |
| Totals      |   | $               | 5,407  |   |   |   | 100 | % |   | $ | 4,021 |   |   |   | 100 | % |   | $ | 3,667 |   |   |   | 100 | % |   | $ | 3,577 |   |   |   | 100 | % |   | $ | 3,482 |   |   |   | 100 | % |

----

|                                          |   | 2010   |   |   | 2009   |   |   | Increase (Decrease) |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
| Revenues                                      |   |   |   |   |   |   |   |                |   |
| Gross commissions and insurance revenues      |   | $      | 158    |   |   | $      | 195    |                |   | $ | (37 | ) |
|                                          |   |   |   |   |   |   |   |                |   |   |   |   |
| Expenses                                      |   |   |   |   |   |   |   |                |   |   |   |   |
| Benefits Paid                                 |   |   | 8      |   |   |   | 44     |                |   |   | (36 | ) |
| Changes in required policy and claim reserves |   |   | (55    | )      |   |   | (90    | )                   |   |   | 35 |   |
| Expense allowance                             |   |   | 68     |   |   |   | 89     |                |   |   | (21 | ) |
| Total Expenses                                |   |   | 21     |   |   |   | 43     |                |   |   | (22 | ) |
|                                          |   |   |   |   |   |   |   |                |   |   |   |   |
| Net insurance income                          |   | $      | 137    |   |   | $      | 152    |                |   | $ | (15 | ) |

| Salary and Benefits Expense |   |
|-----------------------------|--------|
|                        |   | 2010 |   |   | 2009 |   |   | Increase (Decrease) |   |
| Employee salaries           |   | $ | 4,493 |   |   | $ | 4,443 |   |   | $ | 50 |   |
| Employee benefit insurance  |   |   | 1,117 |   |   |   | 976 |   |   |   | 141 |   |
| Payroll taxes               |   |   | 351 |   |   |   | 352 |   |   |   | (1 | ) |
| Post retirement plans       |   |   | 976 |   |   |   | 803 |   |   |   | 173 |   |
| Total                       |   | $ | 6,937 |   |   | $ | 6,574 |   |   | $ | 363 |   |

|                                                                                  |   | Amount |   |
|---------------------------------------------------------------------------------------|--------|--------|--------|
| Changes due to decrease in average cost per full time equivalent employee             |   | $      | (23    | ) |
| Changes due to increase in the average full time equivalent employees for the periods |   |   | 73     |   |
| Total increase in salary expense                                                      |   | $      | 50     |   |

----

|                                             |   | 2010   |   |   | 2009   |   |   | Increase (Decrease) |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
| Depreciation of buildings and equipment          |   | $      | 787    |   |   | $      | 672    |                |   | $ | 115 |   |
| Maintenance expense on buildings and equipment   |   |   | 369    |   |   |   | 401    |                |   |   | (32 | ) |
| Utilities expense                                |   |   | 133    |   |   |   | 121    |                |   |   | 12 |   |
| Real estate and personal property tax            |   |   | 100    |   |   |   | 101    |                |   |   | (1 | ) |
| Other expense related to occupancy and equipment |   |   | 98     |   |   |   | 90     |                |   |   | 8 |   |
| Total occupancy and equipment expense            |   | $      | 1,487  |   |   | $      | 1,385  |                |   | $ | 102 |   |

|                                                   |   | 2010   |   |   | 2009   |   |   | Increase (Decrease) |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
| ATM expense                                            |   | $      | (72    | )      |   | $      | 192    |                |   | $ | (264 | ) |
| Advertising and marketing expense                      |   |   | 158    |   |   |   | 159    |                |   |   | (1 | ) |
| Amortization of intangible assets                      |   |   | 190    |   |   |   | 194    |                |   |   | (4 | ) |
| Franchise taxes                                        |   |   | 96     |   |   |   | 110    |                |   |   | (14 | ) |
| Miscellaneous components of other non-interest expense |   |   | 584    |   |   |   | 631    |                |   |   | (47 | ) |
| Total                                                  |   | $      | 956    |   |   | $      | 1,286  |                |   | $ | (330 | ) |

----

|                                |   | Available for SaleCarrying ValueDecember 31, |   |
|-------------------------------------|--------|----------------------------------------------|--------|
|                                |   | 2010                                         |   |   | 2009 |   |   | 2008 |   |
| U.S. Treasuries and Agencies        |   | $                                            | 9,258  |   |   | $ | 12,426 |   |   | $ | 7,726 |   |
| Mortgage backed securities          |   |                                         | 5,651  |   |   |   | 5,836 |   |   |   | 10,342 |   |
| Collateralized mortgage obligations |   |                                         | 1,764  |   |   |   | 0 |   |   |   | 0 |   |
| State and municipals                |   |                                         | 2,157  |   |   |   | 3,946 |   |   |   | 3,609 |   |
| Certificates of deposit             |   |                                         | 6,465  |   |   |   | 4,703 |   |   |   | 0 |   |
| Marketable equities                 |   |                                         | 29     |   |   |   | 25 |   |   |   | 15 |   |
| Total                               |   | $                                            | 25,324 |   |   | $ | 26,936 |   |   | $ | 21,692 |   |

|                               |   | Amortized Cost |   |   | Fair Value |   |   | Equivalent Average Yield |   |
|------------------------------------|--------|---------------------|--------|--------|-----------------|--------|--------|------------------------------------|--------|
|                               |   |                |   |   |            |   |   |                               |   |
| Securities Available for Sale      |   |                |   |   |            |   |   |                               |   |
| Due in next twelve months          |   | $                   | 3,078  |   |            | $      | 3,101  |                               |   |   | 1.68 | % |
| Due after one year through five    |   |                | 14,404 |   |            |   | 14,583 |                               |   |   | 1.80 | % |
| Due five years through ten years   |   |                | 195    |   |            |   | 196    |                               |   |   | 4.25 | % |
| Mortgage backed securities         |   |                | 7,269  |   |            |   | 7,415  |                               |   |   | 2.83 | % |
| Equity securities with no maturity |   |                | 15     |   |            |   | 29     |                               |   |   |   |   |
| Total Available For Sale           |   | $                   | 24,981 |   |            | $      | 25,324 |                               |   |   | 2.11 | % |

----

|                                 |   | Amortized Cost |   |   | Gross Unrealized Gains |   |   | Gross Unrealized Losses |   |   | Market Value |   |
|--------------------------------------|--------|----------------|--------|--------|-----------------------------|--------|--------|------------------------------|--------|--------|--------------|--------|
| Ratings Provided by Ratings Agencies |   |           |   |   |                        |   |   |                         |   |   |         |   |
| Moody’s                        |   | S&P        |   |   |                        |   |   |                         |   |   |         |   |   |   |
|                                 |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |
| U.S. Treasuries and Agencies         |   |           |   |   |                        |   |   |                         |   |   |         |   |
| Aaa                                  |   | AAA            |   | $      | 9,132                       |   |   | $                            | 133    |   |         | $      | 7 |   |   | $ | 9,258 |   |
|                                 |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |   |   |
| Mortgage Backed Securities           |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |
| Aaa                                  |   | AAA            |   |   | 5,505                       |   |   |                         | 153    |   |         |   | 7 |   |   |   | 5,651 |   |
|                                 |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |   |   |
| Commercial Mortgage Obligations      |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |
| Aaa                                  |   | AAA            |   |   | 1,764                       |   |   |                         | 0      |   |         |   | 0 |   |   |   | 1,764 |   |
|                                 |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |   |   |
| State and Municipals                 |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |
| Aa3                                  |   | AA+            |   |   | 954                         |   |   |                         | 28     |   |         |   | 0 |   |   |   | 982 |   |
| Aa3                                  |   | No Rating      |   |   | 70                          |   |   |                         | 2      |   |         |   | 0 |   |   |   | 72 |   |
| No Rating                            |   | AA+            |   |   | 403                         |   |   |                         | 1      |   |         |   | 0 |   |   |   | 404 |   |
| No Rating                            |   | No Rating      |   |   | 696                         |   |   |                         | 3      |   |         |   | 0 |   |   |   | 699 |   |
|                                 |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |
|                                 |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |   |   |
| Marketable Equities                  |   |           |   |   |                        |   |   |                         |   |   |         |   |   |   |   |   |
| No Rating                            |   | $              | 15     |   |                        | $      | 14     |                         |   | $      | 0            |   |   | $ | 29 |   |

|                     |   | At December 31, |   |
|--------------------------|--------|-----------------|--------|
|                     |   | 2010            |   |   | 2009 |   |   | 2008 |   |
| Three months or less     |   | $               | 11,725 |   |   | $ | 11,133 |   |   | $ | 12,136 |   |
| Four to twelve months    |   |            | 36,431 |   |   |   | 36,512 |   |   |   | 32,828 |   |
| One year to three years  |   |            | 22,419 |   |   |   | 23,447 |   |   |   | 14,127 |   |
| Four years to five years |   |            | 4,428  |   |   |   | 4,504 |   |   |   | 5,688 |   |
| Total                    |   | $               | 75,003 |   |   | $ | 75,596 |   |   | $ | 64,779 |   |

----

----

| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
|----------|------------------------------------------------------------|

----

| Item 8. | Financial Statements and Supplementary Data |
|---------|---------------------------------------------|

|                                                                             |   | 2010   |    |   | 2009   |   |
|----------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| ASSETS                                                                           |   |   |    |   |   |   |
| Cash and due from banks                                                          |   | $      | 8,282   |   |   | $      | 7,062 |   |
| Interest bearing deposits in banks                                               |   |   | 3,532   |   |   |   | 1,880 |   |
| Federal funds sold                                                               |   |   | 5,836   |   |   |   | 8,936 |   |
| Investment securities available for sale                                         |   |   | 25,324  |   |   |   | 26,936 |   |
| Restricted investments                                                           |   |   | 2,087   |   |   |   | 2,185 |   |
| Loans                                                                            |   |   | 329,336 |   |   |   | 335,483 |   |
| Allowance for loan losses                                                        |   |   | (5,407  | )      |   |   | (4,021 | ) |
| Bank premises and equipment                                                      |   |   | 9,901   |   |   |   | 9,326 |   |
| Interest receivable                                                              |   |   | 1,791   |   |   |   | 1,908 |   |
| Investment in life insurance contracts                                           |   |   | 7,031   |   |   |   | 6,755 |   |
| Foreclosed assets                                                                |   |   | 4,700   |   |   |   | 3,223 |   |
| Goodwill                                                                         |   |   | 1,534   |   |   |   | 1,534 |   |
| Other intangible assets                                                          |   |   | 830     |   |   |   | 1,020 |   |
| Other assets                                                                     |   |   | 5,123   |   |   |   | 5,583 |   |
| Total Assets                                                                     |   | $      | 399,900 |   |   | $      | 407,810 |   |
|                                                                             |   |   |    |   |   |   |   |   |
| LIABILITIES                                                                      |   |   |    |   |   |   |   |   |
| Deposits                                                                         |   |   |    |   |   |   |   |   |
| Non-interest bearing deposits                                                    |   | $      | 54,693  |   |   | $      | 52,378 |   |
| Interest bearing transaction and savings accounts                                |   |   | 77,392  |   |   |   | 73,053 |   |
| Time deposits over $100,000                                                      |   |   | 75,003  |   |   |   | 75,596 |   |
| All other time deposits                                                          |   |   | 135,724 |   |   |   | 148,850 |   |
| Total Deposits                                                                   |   |   | 342,812 |   |   |   | 349,877 |   |
|                                                                             |   |   |    |   |   |   |   |   |
| Long-term debt instruments                                                       |   |   | 9,393   |   |   |   | 10,866 |   |
| Accrued expenses and other liabilities                                           |   |   | 6,327   |   |   |   | 5,645 |   |
| Total Liabilities                                                                |   |   | 358,532 |   |   |   | 366,388 |   |
|                                                                             |   |   |    |   |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                       |   |   |    |   |   |   |   |   |
| Common Stock, $5 par value, 3,000,000 shares authorized, 1,436,874 shares issued |   |   | 7,184   |   |   |   | 7,184 |   |
| Surplus                                                                          |   |   | 1,662   |   |   |   | 1,662 |   |
| Treasury stock (100,001 shares, at cost)                                         |   |   | (3,372  | )      |   |   | (3,372 | ) |
| Retained earnings                                                                |   |   | 37,165  |   |   |   | 36,963 |   |
| Accumulated other comprehensive loss                                             |   |   | (1,271  | )      |   |   | (1,015 | ) |
| Total Stockholders’ Equity                                                 |   |   | 41,368  |   |   |   | 41,422 |   |
|                                                                             |   |   |    |   |   |   |   |   |
| Total Liabilities and Stockholders’ Equity                                 |   | $      | 399,900 |   |   | $      | 407,810 |   |
|                                                                             |   |   |    |   |   |   |   |   |

----

|                                                        |   | 2010   |      |   | 2009   |   |
|-------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
| Interest and Dividend Income                                |   |   |      |   |   |   |
| Loans, including fees                                       |   | $      | 22,144    |   |   | $      | 23,368 |   |
| Federal funds sold                                          |   |   | 14        |   |   |   | 20 |   |
| Interest bearing deposits                                   |   |   | 8         |   |   |   | 7 |   |
| Investment securities                                       |   |   | 731       |   |   |   | 879 |   |
| Total Interest Income                                       |   |   | 22,897    |   |   |   | 24,274 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Interest Expense                                            |   |   |      |   |   |   |   |   |
| Interest on deposits                                        |   |   | 5,740     |   |   |   | 7,315 |   |
| Interest on overnight and other short term debt instruments |   |   | 1         |   |   |   | 7 |   |
| Interest on long term debt instruments                      |   |   | 473       |   |   |   | 519 |   |
| Total Interest Expense                                      |   |   | 6,214     |   |   |   | 7,841 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Net Interest Income                                         |   |   | 16,683    |   |   |   | 16,433 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Provision for Loan Losses                                   |   |   | 3,487     |   |   |   | 1,864 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Net Interest Income after Provision for Loan Losses         |   |   | 13,196    |   |   |   | 14,569 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Non-interest Income                                         |   |   |      |   |   |   |   |   |
| Service charges                                             |   |   | 1,559     |   |   |   | 1,718 |   |
| Life insurance investment income                            |   |   | 120       |   |   |   | 233 |   |
| Gain (loss) on securities transactions                      |   |   | 52        |   |   |   | (7 | ) |
| Gain (loss) on sale of foreclosed property                  |   |   | (52       | )      |   |   | 80 |   |
| Gain on sale of fixed assets                                |   |   | 0         |   |   |   | 2 |   |
| Other operating income                                      |   |   | 413       |   |   |   | 506 |   |
| Total Non-interest Income                                   |   |   | 2,092     |   |   |   | 2,532 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Non-interest Expenses                                       |   |   |      |   |   |   |   |   |
| Salaries and benefits                                       |   |   | 6,937     |   |   |   | 6,574 |   |
| Occupancy and equipment expense                             |   |   | 1,487     |   |   |   | 1,385 |   |
| Data processing expense                                     |   |   | 1,101     |   |   |   | 680 |   |
| Legal and professional fees                                 |   |   | 604       |   |   |   | 457 |   |
| Directors fees                                              |   |   | 388       |   |   |   | 403 |   |
| Office supplies and postage and freight expense             |   |   | 407       |   |   |   | 487 |   |
| FDIC Premium                                                |   |   | 662       |   |   |   | 576 |   |
| Loan and foreclosed asset expense                           |   |   | 514       |   |   |   | 205 |   |
| Other operating expenses                                    |   |   | 956       |   |   |   | 1,286 |   |
| Total Non-interest Expenses                                 |   |   | 13,056    |   |   |   | 12,053 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Income Before Income Tax Expense                            |   |   | 2,232     |   |   |   | 5,048 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Income Tax Expense                                          |   |   | 640       |   |   |   | 1,692 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Net Income                                                  |   | $      | 1,592     |   |   | $      | 3,356 |   |
|                                                        |   |   |      |   |   |   |   |   |
| Earnings Per Weighted Average Share Outstanding             |   | $      | 1.19      |   |   | $      | 2.51 |   |
| Dividends Per Share                                         |   | $      | 1.04      |   |   | $      | 1.16 |   |
| Weighted Average Shares Outstanding                         |   |   | 1,336,873 |   |   |   | 1,336,873 |   |

----

|                                 |   | Common Stock |   |   | Surplus |    |   | Treasury Stock |   |    | Retained Earnings |   |   | Accumulated Other Comprehensive Income (Loss) |   |   | Total  |    |
|--------------------------------------|--------|--------------|--------|--------|---------|---------|--------|----------------|--------|---------|-------------------|--------|--------|----------------------------------------------------|--------|--------|--------|---------|
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |
| Balances at January 1, 2009          |   | $       | 7,184  |   |    | $  | 1,662  |           |   | $  | (3,372            | )      |   | $                                             | 35,157 |   |   | $  | (1,232 | ) |   | $  | 39,399 |   |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Comprehensive income:                |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Net income                           |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               | 3,356  |   |   |    |   |   |   |   | 3,356 |   |
| Change in other comprehensive income |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    | 217 |   |   |   | 217 |   |
| Total comprehensive income           |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   | 3,573 |   |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Cash dividends                       |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               | (1,550 | )      |   |    |   |   |   |   | (1,550 | ) |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Balances at December 31, 2009        |   | $       | 7,184  |   |    | $  | 1,662  |           |   | $  | (3,372            | )      |   | $                                             | 36,963 |   |   | $  | (1,015 | ) |   | $  | 41,422 |   |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Comprehensive income:                |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Net income                           |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               | 1,592  |   |   |    |   |   |   |   | 1,592 |   |
| Change in other comprehensive income |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    | (256 | ) |   |   | (256 | ) |
| Total comprehensive income           |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   | 1,336 |   |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Cash dividends                       |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               | (1,390 | )      |   |    |   |   |   |   | (1,390 | ) |
|                                 |   |         |   |   |    |    |   |           |   |    |              |   |   |                                               |   |   |   |    |   |   |   |   |   |   |
| Balances at December 31, 2010        |   | $            | 7,184  |   |    | $       | 1,662  |           |   | $       | (3,372            | )      |   | $                                                  | 37,165 |   |   | $       | (1,271 | ) |   | $ | 41,368 |   |

----

|                                                                                                                        |   | 2010   |    |   | 2009   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                                        |   |   |    |   |   |   |
| Net Income                                                                                                                  |   | $      | 1,592   |   |   | $      | 3,356 |   |
| Adjustments to reconcile net income to net cash provided by operating activities                                            |   |   |    |   |   |   |   |   |
| (Gain) loss on securities transactions                                                                                      |   |   | (52     | )      |   |   | 7 |   |
| (Gain) on sale of property and equipment                                                                                    |   |   | 0       |   |   |   | (2 | ) |
| (Gain) loss on sale of foreclosed assets                                                                                    |   |   | 52      |   |   |   | (80 | ) |
| Depreciation                                                                                                                |   |   | 787     |   |   |   | 672 |   |
| Income from life insurance contracts                                                                                        |   |   | (120    | )      |   |   | (233 | ) |
| Net amortization of securities premiums                                                                                     |   |   | 141     |   |   |   | 95 |   |
| Provision for loan losses                                                                                                   |   |   | 3,487   |   |   |   | 1,864 |   |
| Write-down on foreclosed assets                                                                                             |   |   | 159     |   |   |   | 107 |   |
| Deferred income tax expense (benefit)                                                                                       |   |   | (483    | )      |   |   | 120 |   |
| Amortization of intangibles                                                                                                 |   |   | 190     |   |   |   | 195 |   |
| Decrease in interest receivable                                                                                             |   |   | 117     |   |   |   | 256 |   |
| (Increase) decrease in other assets                                                                                         |   |   | 857     |   |   |   | (2,348 | ) |
| Increase (decrease) in accrued expenses                                                                                     |   |   | 526     |   |   |   | (881 | ) |
| Net Cash Provided by Operating Activities                                                                                   |   |   | 7,253   |   |   |   | 3,128 |   |
|                                                                                                                        |   |   |    |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                                        |   |   |    |   |   |   |   |   |
| Proceeds from sale of foreclosed assets and fixedassets                                                                     |   |   | 834     |   |   |   | 1,095 |   |
| Proceeds from maturity of securities available for sale                                                                     |   |   | 19,650  |   |   |   | 12,357 |   |
| Purchase of securities available for sale                                                                                   |   |   | (18,297 | )      |   |   | (17,542 | ) |
| Net change in other investments                                                                                             |   |   | 98      |   |   |   | (9 | ) |
| Net change in interest bearing deposits in other banks                                                                      |   |   | (1,652  | )      |   |   | (1,378 | ) |
| Net change in federal funds sold                                                                                            |   |   | 3,100   |   |   |   | (8,776 | ) |
| Net (increase) decrease in loans                                                                                            |   |   | 1,524   |   |   |   | (14,224 | ) |
| Purchase of property and equipment                                                                                          |   |   | (1,362  | )      |   |   | (1,967 | ) |
| Net Cash Provided by (Used in) Investing Activities                                                                         |   |   | 3,895   |   |   |   | (30,444 | ) |
|                                                                                                                        |   |   |    |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                                        |   |   |    |   |   |   |   |   |
| Net change in time deposits                                                                                                 |   |   | (13,719 | )      |   |   | 26,373 |   |
| Net change in other deposit accounts                                                                                        |   |   | 6,654   |   |   |   | 7,217 |   |
| Repayment of long-term debt                                                                                                 |   |   | (1,473  | )      |   |   | (451 | ) |
| Additional (repayment of) short-term borrowings                                                                             |   |   | 0       |   |   |   | (4,800 | ) |
| Dividends paid in cash                                                                                                      |   |   | (1,390  | )      |   |   | (1,550 | ) |
| Net Cash Provided by (Used in) Financing Activities                                                                         |   |   | (9,928  | )      |   |   | 26,789 |   |
|                                                                                                                        |   |   |    |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS                                                                                                   |   |   |    |   |   |   |   |   |
| Net increase (decrease) in cash and due from banks                                                                          |   |   | 1,220   |   |   |   | (527 | ) |
| Cash and due from banks, beginning of year                                                                                  |   |   | 7,062   |   |   |   | 7,589 |   |
|                                                                                                                        |   |   |    |   |   |   |   |   |
| Cash and due from banks, end of year                                                                                        |   | $      | 8,282   |   |   | $      | 7,062 |   |
|                                                                                                                        |   |   |    |   |   |   |   |   |
| Supplemental Disclosures, Cash Paid For:                                                                                    |   |   |    |   |   |   |   |   |
| Interest Expense                                                                                                            |   | $      | 6,382   |   |   | $      | 8,028 |   |
| Income Taxes                                                                                                                |   | $      | 743     |   |   | $      | 1,511 |   |
|                                                                                                                        |   |   |    |   |   |   |   |   |
| Supplemental Disclosure of noncash Investing and Financing Activities for other real estate acquired in settlement of loans |   | $      | 2,522   |   |   | $      | 2,985 |   |

----

| (a) | Principles of Consolidation |
|-----|-----------------------------|

| (b) | Use of Estimates in the Preparation of Financial Statements |
|-----|-------------------------------------------------------------|

| (c) | Cash and Cash Equivalents |
|-----|---------------------------|

| (d) | Foreclosed Real Estate |
|-----|------------------------|

| (e) | Loans |
|-----|-------|

----

| f) | Securities |
|----|------------|

| (g) | Allowance For Loan Losses |
|-----|---------------------------|

----

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

----

| (h) | Per Share Calculations |
|-----|------------------------|

| (i) | Bank Premises and Equipment |
|-----|-----------------------------|

| (j) | Comprehensive Income |
|-----|----------------------|

| (k) | Bank Owned Life Insurance Contracts |
|-----|-------------------------------------|

| (l) | Advertising |
|-----|-------------|

| (m) | Goodwill and Other Intangible Assets |
|-----|--------------------------------------|

----

| (n) | Income Taxes |
|-----|--------------|

| (o) | Reclassifications |
|-----|-------------------|

| (p) | Recent Accounting Standards |
|-----|-----------------------------|

----

----

----

|                               |   | Year Ended December 31, |   |
|------------------------------------|--------|-------------------------|--------|
|                               |   | 2010                    |   |   | 2009 |   |
| Investment securities, taxable     |   | $                       | 625    |   |   | $ | 728 |   |
| Investment securities, non-taxable |   |                    | 106    |   |   |   | 151 |   |

| Available for Sale Securities       |   |
|-------------------------------------|--------|
|                                |   | Amortized Cost |   |   | Unrealized Gains |   |   | Unrealized Losses |   |   | Fair Value |   |
| December 31, 2010                   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
| State and municipals                |   |   | 2,123 |   |   |   | 34 |   |   |   | 0 |   |   |   | 2,157 |   |
| Certificates of deposit             |   |   | 6,442 |   |   |   | 25 |   |   |   | 2 |   |   |   | 6,465 |   |
| Marketable equities                 |   |   | 15 |   |   |   | 14 |   |   |   | 0 |   |   |   | 29 |   |
| Total Securities Available for Sale |   | $ | 24,981 |   |   | $ | 359 |   |   | $ | 16 |   |   | $ | 25,324 |   |
|                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies        |   | $ | 12,250 |   |   | $ | 177 |   |   | $ | 1 |   |   | $ | 12,426 |   |
| Mortgage backed securities          |   |   | 5,630 |   |   |   | 206 |   |   |   | 0 |   |   |   | 5,836 |   |
| State and municipals                |   |   | 3,832 |   |   |   | 114 |   |   |   | 0 |   |   |   | 3,946 |   |
| Certifications of deposit           |   |   | 4,696 |   |   |   | 9 |   |   |   | 2 |   |   |   | 4,703 |   |
| Marketable equities                 |   |   | 15 |   |   |   | 10 |   |   |   | 0 |   |   |   | 25 |   |
| Total Securities Available for Sale |   | $ | 26,423 |   |   | $ | 516 |   |   | $ | 3 |   |   | $ | 26,936 |   |

| Securities Available for Sale          |   |
|----------------------------------------|--------|
|                                   |   | Amortized Cost |   |   | Fair Value |   |
| Due in one year or less                |   | $ | 3,078 |   |   | $ | 3,101 |   |
| Due after one year through five years  |   |   | 14,424 |   |   |   | 14,583 |   |
| Due after five years through ten years |   |   | 195 |   |   |   | 196 |   |
| Mortgage backed securities             |   |   | 7,269 |   |   |   | 7,415 |   |
| Equity securities with no maturity     |   |   | 15 |   |   |   | 29 |   |
|                                   |   |   |   |   |   |   |   |   |
| Total Securities Available for Sale    |   | $ | 24,981 |   |   | $ | 25,324 |   |

----

|                                |   | Total      |   |   | Less than 12 Months     |   |   | 12 Months or Greater |   |
|-------------------------------------|--------|------------|--------|--------|-------------------------|--------|--------|----------------------|--------|
|                                |   | Fair Value |   |   | Gross Unrealized Losses |   |   | Fair Value           |   |   | Gross Unrealized Losses |   |   | Fair Value |   |   | Gross Unrealized Losses |   |
| December 31, 2010                   |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |
| 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 |   |
| Marketable equities                 |   |       | 0      |   |                    |   | 0      |                 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Total                               |   | $          | 4,597  |   |                    | $      | (16    | )                    |   | $ | 4,597 |   |   | $ | (16 | ) |   | $ | 0 |   |   | $ | 0 |   |
|                                |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009                   |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment Category                 |   |       |   |   |                    |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries and Agencies        |   | $          | 999    |   |                    | $      | (1     | )                    |   | $ | 999 |   |   | $ | (1 | ) |   | $ | 0 |   |   | $ | 0 |   |
| Mortgage backed securities          |   |       | 24     |   |                    |   | 0      |                 |   |   | 24 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| State and municipals                |   |       | 246    |   |                    |   | (2     | )                    |   |   | 246 |   |   |   | (2 | ) |   |   | 0 |   |   |   | 0 |   |
| Marketable equities                 |   |       | 0      |   |                    |   | 0      |                 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Total                               |   | $          | 1,269  |   |                    | $      | (3     | )                    |   | $ | 1,269 |   |   | $ | (3 | ) |   | $ | 0 |   |   | $ | 0 |   |

|                                |   | Total  |   |   | Loss Position less than 12Months |   |   | Loss Position greater than 12Months |   |
|-------------------------------------|--------|--------|--------|--------|----------------------------------|--------|--------|-------------------------------------|--------|
| U.S. Treasuries and Agencies        |   |   | 1      |   |                             |   | 1      |                                |   |   | 0 |   |
| Mortgage backed securities          |   |   | 3      |   |                             |   | 3      |                                |   |   | 0 |   |
| Collateralized mortgage obligations |   |   | 1      |   |                             |   | 1      |                                |   |   | 0 |   |
| Certificates of deposit             |   |   | 2      |   |                             |   | 2      |                                |   |   | 0 |   |
| Total                               |   |   | 7      |   |                             |   | 7      |                                |   |   | 0 |   |

----

|                     |   | 2010   |    |   | 2009   |   |
|--------------------------|--------|--------|---------|--------|--------|--------|
| Commercial               |   | $      | 97,089  |   |   | $      | 97,606 |   |
| Real Estate Construction |   |   | 33,746  |   |   |   | 30,759 |   |
| Real Estate Mortgage     |   |   | 168,226 |   |   |   | 162,619 |   |
| Consumer Installment     |   |   | 30,275  |   |   |   | 44,499 |   |
| Total Loans              |   | $      | 329,336 |   |   | $      | 335,483 |   |

|                                |   | Impaired LoansFor the Years Ended December 31, 2010 |   |   |                     |   |   |              |   |
|-------------------------------------|--------|-----------------------------------------------------|--------|--------|--------------------------|--------|--------|-------------------|--------|
|                                |   | Recorded Investment                                 |   |   | 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 |   |

|                                                      |   | 2009   |   |
|-----------------------------------------------------------|--------|--------|--------|
| Year end balance, impaired loans                          |   | $      | 3,425  |   |
| Allowance for impairments, year end                       |   |   | 662    |   |
| Average balance impaired loans, year ended December 31    |   |   | 3,691  |   |
| Income recorded on impaired loans, year ended December 31 |   |   | 246    |   |

----

| Financing Receivables on Nonaccrual StatusAs of December 31, 2010 |   |
|-------------------------------------------------------------------|--------|
|                                                              |
|                                                              |   |   |   |
| Commercial Mortgage                                               |   | $ | 2,215 |   |
| Commercial Other                                                  |   |   | 139 |   |
| Consumer Mortgage                                                 |   |   | 4,240 |   |
| Consumer Other                                                    |   |   | 385 |   |
|                                                              |   |   |   |   |
|                                                              |   | $ | 6,979 |   |

|                                                                          |   | 2009    |   |
|-------------------------------------------------------------------------------|--------|---------|--------|
| Non-accrual loans at year end                                                 |   | $       | 2,567  |   |
| Loans past due ninety days or greater and still accruing interest at year end |   | $  | 2,192  |   |

| Age Analysis of Past Due Financing ReceivablesAs 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 |   |

----

|                                                                     |   | 2010   |   |   | 2009   |   |
|--------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Balance at beginning of year                                             |   | $      | 4,021  |   |   | $      | 3,667 |   |
| Provision charged to operating expenses                                  |   |   | 3,487  |   |   |   | 1,864 |   |
| Loan recoveries                                                          |   |   | 646    |   |   |   | 290 |   |
| Loans charged off                                                        |   |   | (2,747 | )      |   |   | (1,800 | ) |
| Balance at end of year                                                   |   | $      | 5,407  |   |   | $      | 4,021 |   |
|                                                                     |   |   |   |   |   |   |   |   |
| Allowance for Loan Losses as percentage of outstanding loans at year end |   |   | 1.64   | %      |   |   | 1.20 | % |

| Allowance for Credit Losses and Outstanding Balance in Financing ReceivablesFor the Years 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 |   |   | $ | 25,388 |   |
| Ending Balance:  collectively evaluated for impairment                                                  |   | $ | 118,749 |   |   | $ | 14,049 |   |   | $ | 142,505 |   |   | $ | 28,645 |   |   | $  |  0 |   |   | $ | 303,948 |   |

----

| Credit Quality IndicatorsAs of December 31, 2010 |   |
|--------------------------------------------------|--------|
|                                             |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit Risk Profile by Internally Assigned Grade |   |   |   |   |   |   |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   | CommercialMortgage |   |   | CommercialOther |   |   | ConsumerMortgage |   |   | ConsumerOther |   |   | Total |   |
| Grade:                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Excellent (1)                              |   | $ | 1,573 |   |   | $ | 968 |   |   | $ | 2,964 |   |   | $ | 2,793 |   |   | $ | 8,298 |   |
| Very Good (2)                                    |   |   | 16,509 |   |   |   | 1,648 |   |   |   | 28,611 |   |   |   | 5,765 |   |   |   | 52,533 |   |
| Pass (3)                                         |   |   | 88,366 |   |   |   | 8,610 |   |   |   | 91,889 |   |   |   | 18,104 |   |   |   | 206,969 |   |
| Special Mention (4)                              |   |   | 7,262 |   |   |   | 1,876 |   |   |   | 6,050 |   |   |   | 1,526 |   |   |   | 16,714 |   |
| Substandard (5)                                  |   |   | 24,194 |   |   |   | 1,025 |   |   |   | 6,747 |   |   |   | 450 |   |   |   | 32,416 |   |
| Doubtful (6)                                     |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Loss (7)                                         |   |   | 0 |   |   |   | 0 |   |   |   | 129 |   |   |   | 0 |   |   |   | 129 |   |
| Pass-Watch (8)                                   |   |   | 3,160 |   |   |   | 619 |   |   |   | 1,228 |   |   |   | 120 |   |   |   | 5,127 |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                            |   | $ | 141,064 |   |   | $ | 14,746 |   |   | $ | 137,618 |   |   | $ | 28,758 |   |   | $ | 322,186 |   |

|                          |   | 2010   |   |   | 2009   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|
| Land                          |   | $      | 2,237  |   |   | $      | 2,227 |   |
| Buildings and improvements    |   |   | 9,445  |   |   |   | 8,736 |   |
| Furniture and equipment       |   |   | 5,805  |   |   |   | 5,519 |   |
|                          |   |   |   |   |   |   |   |   |
| Total Cost                    |   |   | 17,487 |   |   |   | 16,482 |   |
| Less accumulated depreciation |   |   | (7,586 | )      |   |   | (7,156 | ) |
|                          |   |   |   |   |   |   |   |   |
| Net Book Value                |   | $      | 9,901  |   |   | $      | 9,326 |   |

----

| Year |   | Provision forDepreciation |   |
|------|--------|--------------------------------|--------|
| 2010 |   | $                              | 787    |   |
| 2009 |   |                           | 672    |   |

| Year  |   | Amount Maturing |    |
|-------|--------|----------------------|---------|
| 2011  |   | $                    | 129,405 |   |
| 2012  |   |                 | 49,902  |   |
| 2013  |   |                 | 13,645  |   |
| 2014  |   |                 | 5,561   |   |
| 2015  |   |                 | 9,902   |   |
| 2016  |   |                 | 2,312   |   |
| Total |   | $                    | 210,727 |   |

----

|                                        |   | 2010   |   |   | 2009   |   |
|---------------------------------------------|--------|--------|--------|--------|--------|--------|
| Loans to related parties, beginning of year |   | $      | 8,402  |   |   | $      | 8,392 |   |
| New loans                                   |   |   | 798    |   |   |   | 809 |   |
| Additions for new executives                |   |   | 257    |   |   |   | 0 |   |
| Deletions for former executives             |   |   | 0      |   |   |   | (8 | ) |
| Repayments                                  |   |   | (780   | )      |   |   | (791 | ) |
| Loans to related parties, end of year       |   | $      | 8,677  |   |   | $      | 8,402 |   |

| Year       |   | Balance |   |
|------------|--------|---------|--------|
| 2011       |   | $       | 1,255  |   |
| 2012       |   |    | 5,695  |   |
| 2013       |   |    | 289    |   |
| 2014       |   |    | 622    |   |
| 2015       |   |    | 1,459  |   |
| Thereafter |   |    | 73     |   |
| Total      |   | $       | 9,393  |   |

----

|                            |   | 2010   |   |   | 2009   |   |
|---------------------------------|--------|--------|--------|--------|--------|--------|
| Current Expense                 |   |   |   |   |   |   |
| Federal                         |   | $      | 984    |   |   | $      | 1,356 |   |
| State                           |   |   | 139    |   |   |   | 216 |   |
| Total Current Expense           |   |   | 1,123  |   |   |   | 1,572 |   |
|                            |   |   |   |   |   |   |   |   |
| Deferred Expense (Benefit)      |   |   |   |   |   |   |   |   |
| Federal                         |   |   | (444   | )      |   |   | 110 |   |
| State                           |   |   | (39    | )      |   |   | 10 |   |
| Total Current Expense (Benefit) |   |   | (483   | )      |   |   | 120 |   |
|                            |   |   |   |   |   |   |
| Income Tax Expense              |   | $      | 640    |   |   | $      | 1,692 |   |

|                                        |   | 2010   |   |   | 2009   |   |
|---------------------------------------------|--------|--------|--------|--------|--------|--------|
| Provision for loan losses                   |   | $      | (519   | )      |   | $      | (119 | ) |
| Pension Expense                             |   |   | (91    | )      |   |   | 142 |   |
| Depreciation                                |   |   | 183    |   |   |   | 93 |   |
| Deferred compensation                       |   |   | (62    | )      |   |   | (7 | ) |
| Miscellaneous                               |   |   | 6      |   |   |   | 11 |   |
| Net increase in deferred income tax benefit |   | $      | (483   | )      |   | $      | 120 |   |

----

|                                              |   | 2010   |   |   | 2009   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Deferred Tax Assets                               |   |   |   |   |   |   |
| Provision for loan losses                         |   | $      | 1,725  |   |   | $      | 1,204 |   |
| Insurance commissions                             |   |   | 19     |   |   |   | 24 |   |
| Deferred compensation                             |   |   | 983    |   |   |   | 938 |   |
| Pension obligation                                |   |   | 641    |   |   |   | 466 |   |
| Other                                             |   |   | 2      |   |   |   | 2 |   |
| Total Assets                                      |   |   | 3,370  |   |   |   | 2,634 |   |
|                                              |   |   |   |   |   |   |   |   |
| Deferred Tax Liabilities                          |   |   |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |   |   |
| Unrealized gains on securities available for sale |   |   | 125    |   |   |   | 190 |   |
| Depreciation                                      |   |   | 638    |   |   |   | 462 |   |
| Other                                             |   |   | 2      |   |   |   | 10 |   |
| Total Liabilities                                 |   |   | 765    |   |   |   | 662 |   |
|                                              |   |   |   |   |   |   |   |   |
| Net Deferred Tax Asset                            |   | $      | 2,605  |   |   | $      | 1,972 |   |

|                                                   |   | 2010   |   |   | 2009   |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Amounts at federal statutory rate                      |   | $      | 759    |   |   | $      | 1,716 |   |
| Additions (reductions) resulting from:                 |   |   |   |   |   |   |   |   |
| Tax exempt income                                      |   |   | (59    | )      |   |   | (104 | ) |
| Partially exempt income                                |   |   | (26    | )      |   |   | (28 | ) |
| State income taxes, net                                |   |   | 28     |   |   |   | 170 |   |
| Income from life insurance contracts                   |   |   | (43    | )      |   |   | (94 | ) |
| Non deductible expenses related to branch acquisitions |   |   | 53     |   |   |   | 65 |   |
| Other                                                  |   |   | (72    | )      |   |   | (33 | ) |
|                                                   |   |   |   |   |   |   |   |   |
| Income tax expense                                     |   | $      | 640    |   |   | $      | 1,692 |   |

----

|                                                          |   | 2010   |   |   | 2009   |   |
|---------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Change in Benefit Obligation                                  |   |   |   |   |   |   |
| Benefit obligation, beginning                                 |   | $      | 5,136  |   |   | $      | 4,492 |   |
| Service Cost                                                  |   |   | 188    |   |   |   | 168 |   |
| Interest Cost                                                 |   |   | 303    |   |   |   | 276 |   |
| Actuarial Loss (Gain)                                         |   |   | 464    |   |   |   | 281 |   |
| Benefits Paid                                                 |   |   | (80    | )      |   |   | (81 | ) |
| Benefit obligation, ending                                    |   | $      | 6,011  |   |   | $      | 5,136 |   |
|                                                          |   |   |   |   |   |   |   |   |
| Accumulated Benefit Obligation                                |   | $      | 5,037  |   |   | $      | 4,261 |   |
|                                                          |   |   |   |   |   |   |   |   |
| Change in Plan Assets                                         |   |   |   |   |   |   |   |   |
| Fair value of assets, beginning                               |   | $      | 3,858  |   |   | $      | 2,650 |   |
| Actual return on assets, net of administrative expenses       |   |   | 471    |   |   |   | 699 |   |
| Employer contributions                                        |   |   | 0      |   |   |   | 590 |   |
| Benefits paid                                                 |   |   | (80    | )      |   |   | (81 | ) |
| Fair value of assets, ending                                  |   | $      | 4,249  |   |   | $      | 3,858 |   |
|                                                          |   |   |   |   |   |   |   |   |
| Funded Status                                                 |   |   |   |   |   |   |   |   |
| Fair value of plan assets                                     |   | $      | 4,249  |   |   | $      | 3,858 |   |
| Projected benefit obligation                                  |   |   | 6,011  |   |   |   | 5,136 |   |
| Funded status                                                 |   |   | (1,762 | )      |   |   | (1,278 | ) |
|                                                          |   |   |   |   |   |   |   |   |
| Liabilities Recognized in the Statement of Financial Position |   | $      | (1,762 | )      |   | $      | (1,278 | ) |
|                                                          |   |   |   |   |   |   |   |   |
| Amounts Recognized in Accumulated Other Comprehensive Income  |   |   |   |   |   |   |   |   |
| Prior Service Cost                                            |   | $      | 0      |   |   | $      | 0 |   |
| Net (Gain)/Loss                                               |   |   | 2,356  |   |   |   | 2,124 |   |
| Total                                                         |   | $      | 2,356  |   |   | $      | 2,124 |   |

----

|                                         |   | 2010   |   |   | 2009   |   |
|----------------------------------------------|--------|--------|--------|--------|--------|--------|
| Service cost                                 |   | $      | 188    |   |   | $      | 168 |   |
| Interest cost                                |   |   | 303    |   |   |   | 276 |   |
| Expected return on plan assets               |   |   | (337   | )      |   |   | (306 | ) |
| Recognized net actuarial loss                |   |   | 98     |   |   |   | 47 |   |
| Adjustment due to change in measurement date |   |   | 0      |   |   |   | 25 |   |
| Net Periodic Pension Expense                 |   | $      | 252    |   |   | $      | 210 |   |

|                          |   Year |   |   |   |   | Expected Benefit Payments |   |
|-------------------------------|-------------|--------|--------|--------|--------|--------------------------------|--------|
|                          | 2011        |   |   |   |   | $                              | 202    |   |
|                          | 2012        |   |   |   |   |                           |   | 217 |   |
|                          | 2013        |   |   |   |   |                           |   | 269 |   |
|                          | 2014        |   |   |   |   |                           |   | 375 |   |
|                          | 2015        |   |   |   |   |                           |   | 388 |   |
| Years 2016 –  | 2019        |   |   |   |   |                           |   | 2,079 |   |

|                           |   | 2010   |   |   | 2009   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|
| Discount rate                  |   |   | 6.00   | %      |   |   | 6.25 | % |
| Expected return on plan assets |   |   | 8.00   | %      |   |   | 8.00 | % |
| Rate of compensation increase  |   |   | 3.00   | %      |   |   | 3.00 | % |

|              |   | 2010   |   |   | 2009   |   |
|-------------------|--------|--------|--------|--------|--------|--------|
| Equity Securities |   |   | 59     | %      |   |   | 63 | % |
| Debt Securities   |   |   | 31     | %      |   |   | 32 | % |
| Other             |   |   | 10     | %      |   |   | 5 | % |

----

|              |   | Target Allocation |   |   | Allowable Allocation Range |   |
|-------------------|--------|-------------------|--------|--------|----------------------------|--------|
| Equity Securities |   |              | 70%    |   |                       |   | 40%-80% |   |
| Debt Securities   |   |              | 25%    |   |                       |   | 20%-40% |   |
| Other             |   |              | 5%     |   |                       |   | 3%-10% |   |

|                      |   |  Fair Value Measurements Using |   |
|---------------------------|--------|-------------------------------------|--------|
|   Asset Category     |   | Balance as ofDecember 31,2010       |   |   |  Quoted PricesIn ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |   |   | SignificantUnobservableInputs(Level 3) |   |
| Cash and cash equivalents |   | $                                   | 404    |   |   | $ | 404 |   |   | $ | 0 |   |   | $ | 0 |   |
| Equity securities:        |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Companies            |   |                                | 1,870  |   |   |   | 1,870 |   |   |   |   |   |   |   |   |   |
| International Companies   |   |                                | 442    |   |   |   | 442 |   |   |   |   |   |   |   |   |   |
| Debt Securities           |   |                                | 1,313  |   |   |   |   |   |   |   | 1,313 |   |   |   |   |   |
| Real Estate               |   |                                | 220    |   |   |   | 220 |   |   |   |   |   |   |   |
| Totals                    |   | $                                   | 4,249  |   |   | $ | 2,936 |   |   | $ | 1,313 |   |   | $ | 0 |   |

----

|                         |   | 2010   |   |   | 2009   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|
| Commitments to extend credit |   | $      | 11,138 |   |   | $      | 16,289 |   |
| Standby letter of credit     |   |   | 342    |   |   |   | 858 |   |

|                                                                                                                              |   | 2010   |   |   | 2009   |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Balance January 1                                                                                                                 |   | $      | (1,015 | )      |   | $      | (1,232 | ) |
| Unrealized holding gains (losses) on available for sale securities net of income taxes of ($33,000) for 2010 and $59,000 for 2009 |   |   | (57    | )      |   |   | 93 |   |
| Less classification adjustment for (gains) losses realized in net income                                                          |   |   | (52    | )      |   |   | 7 |   |
| Accrued pension obligation net of income taxes of ($86,000) for 2010 and $69,000 for 2009                                         |   |   | (147   | )      |   |   | 117 |   |
| Net change for the year                                                                                                           |   |   | (256   | )      |   |   | 217 |   |
|                                                                                                                              |   |   |   |   |   |   |   |   |
| Balance December 31                                                                                                               |   | $      | (1,271 | )      |   | $      | (1,015 | ) |

----

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

----

| 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 |   |

| 2009                                |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair Value Measurements |   |
|-------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|------------------------------------|--------|
| U.S. Treasuries and Agencies        |   | $       | 0      |   |    | $      | 12,426 |    |   | $      | 0                                  |   |   | $ | 12,426 |   |
| Mortgage backed securities          |   |    | 0      |   |    |   | 5,836  |    |   |   | 0                                  |   |   |   | 5,836 |   |
| States and municipalities           |   |    | 0      |   |    |   | 3,946  |    |   |   | 0                                  |   |   |   | 3,946 |   |
| Certificates of deposit             |   |    | 0      |   |    |   | 4,703  |    |   |   | 0                                  |   |   |   | 4,703 |   |
| Marketable equities                 |   |    | 0      |   |    |   | 25     |    |   |   | 0                                  |   |   |   | 25 |   |
| Total Available For Sale Securities |   | $       | 0      |   |    | $      | 26,936 |    |   | $      | 0                                  |   |   | $ | 26,936 |   |

|                    |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Fair ValueMeasurements |   |   | Twelve Months Ended Dec 31, 2010Total Gains/(Losses) |   |
|-------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|------------------------------|--------|--------|------------------------------------------------------|--------|
| Other real estate owned |   | $       | 0      |   |    | $      | 1,042  |    |   | $      | 3,658                        |   |   | $                                                    | 4,700  |   |   | $ | (159 | ) |
| Impaired Loans          |   |    | 0      |   |    |   | 0      |    |   |   | 4,915                        |   |   |                                                 | 4,915  |   |   |   | 0 |   |
| Total                   |   | $       | 0      |   |    | $      | 1,042  |    |   | $      | 8,573                        |   |   | $                                                    | 9,615  |   |   | $ | (159 | ) |

----

----

|                          |   | December 31, 2010 |    |   | December 31, 2009   |   |
|-------------------------------|--------|-------------------|---------|--------|---------------------|--------|
|                          |   | CarryingAmount    |    |   | EstimatedFair Value |   |   | CarryingAmount |   |   | EstimatedFair Value |   |
|                          |
| Financial Assets:             |   |              |    |   |                |   |
| Cash and due from banks       |   | $                 | 8,282   |   |                | $      | 8,282 |   |   | $ | 7,062 |   |   | $ | 7,062 |   |
| Interest bearing deposits     |   |              | 3,532   |   |                |   | 3,532 |   |   |   | 1,880 |   |   |   | 1,880 |   |
| Federal funds sold            |   |              | 5,836   |   |                |   | 5,836 |   |   |   | 8,936 |   |   |   | 8,936 |   |
| Securities available for sale |   |              | 25,324  |   |                |   | 25,324 |   |   |   | 26,936 |   |   |   | 26,936 |   |
| Restricted investments        |   |              | 2,087   |   |                |   | 2,087 |   |   |   | 2,185 |   |   |   | 2,185 |   |
| Loans, net                    |   |              | 323,929 |   |                |   | 324,780 |   |   |   | 331,462 |   |   |   | 332,999 |   |
| Interest receivable           |   |              | 1,791   |   |                |   | 1,791 |   |   |   | 1,908 |   |   |   | 1,908 |   |
| Life insurance contracts      |   |              | 7,031   |   |                |   | 7,031 |   |   |   | 6,755 |   |   |   | 6,755 |   |
|                          |   |              |    |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities:        |   |              |    |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Demand and savings deposits   |   |              | 132,085 |   |                |   | 132,085 |   |   |   | 125,431 |   |   |   | 125,431 |   |
| Time deposits                 |   |              | 210,727 |   |                |   | 211,590 |   |   |   | 224,446 |   |   |   | 226,057 |   |
| Long term debt instruments    |   |              | 9,393   |   |                |   | 10,142 |   |   |   | 10,866 |   |   |   | 11,733 |   |
| Interest payable              |   |              | 488     |   |                |   | 488 |   |   |   | 656 |   |   |   | 656 |   |

|                           |   |   | 2010   |   |   | 2009   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Balance, beginning of period   |   |   | $      | 6,755  |   |   | $      | 6,499 |   |
| Increases in value of policies |   |   |   | 276    |   |   |   | 256 |   |
| Balance, end of period         |   |   | $      | 7,031  |   |   | $      | 6,755 |   |

----

| December 31, 2010               |   |
|---------------------------------|--------|
|                            |   |   |   |   |   |   |   | Regulatory Requirements |   |
|                            |   | Actual |   |   | Adequately Capitalized |   |   | Well Capitalized |   |
|                            |   | Amount |   |   | Percentage |   |   | Amount |   |   | Percentage |   |   | Amount |   |   | Percentage |   |
|                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Risk Based Capital Ratio  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   | $ | 44,086 |   |   |   | 14.49 | % |   | $ | 24,340 |   |   |   | 8.00 | % |   |   |   |   |   |   |
| Capon Valley Bank               |   |   | 14,496 |   |   |   | 12.50 | % |   |   | 9,277 |   |   |   | 8.00 | % |   | $ | 11,597 |   |   |   | 10.00 | % |
| The Grant County Bank           |   |   | 27,306 |   |   |   | 14.58 | % |   |   | 14,983 |   |   |   | 8.00 | % |   |   | 18,728 |   |   |   | 10.00 | % |
|                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Leverage Ratio           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |   | 40,275 |   |   |   | 9.91 | % |   |   | 16,256 |   |   |   | 4.00 | % |   |   |   |   |   |   |   |   |
| Capon Valley Bank               |   |   | 13,029 |   |   |   | 8.33 | % |   |   | 6,256 |   |   |   | 4.00 | % |   |   | 7,821 |   |   |   | 5.00 | % |
| The Grant County Bank           |   |   | 24,953 |   |   |   | 10.26 | % |   |   | 9,728 |   |   |   | 4.00 | % |   |   | 12,160 |   |   |   | 5.00 | % |
|                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Risk Based Capital Ratio |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |   | 40,275 |   |   |   | 13.24 | % |   |   | 12,168 |   |   |   | 4.00 | % |   |   |   |   |   |   |   |   |
| Capon Valley Bank               |   |   | 13,029 |   |   |   | 11.24 | % |   |   | 4,637 |   |   |   | 4.00 | % |   |   | 6,955 |   |   |   | 6.00 | % |
| The Grant County Bank           |   |   | 24,953 |   |   |   | 13.32 | % |   |   | 7,493 |   |   |   | 4.00 | % |   |   | 11,240 |   |   |   | 6.00 | % |

----

| December 31, 2009               |   |
|---------------------------------|--------|
|                            |   |   |   |   | Regulatory Requirements |   |
|                            |   | Actual |   |   | Adequately Capitalized |   |   | Well Capitalized |   |
|                            |   | Amount |   |   | Percentage |   |   | Amount |   |   | Percentage |   |   | Amount |   |   | Percentage |   |
|                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Risk Based Capital Ratio  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   | $ | 43,697 |   |   |   | 14.33 | % |   | $ | 24,401 |   |   |   | 8.00 | % |   |   |   |   |   |   |
| Capon Valley Bank               |   |   | 14,925 |   |   |   | 12.86 | % |   |   | 9,285 |   |   |   | 8.00 | % |   | $ | 11,606 |   |   |   | 10.00 | % |
| The Grant County Bank           |   |   | 26,630 |   |   |   | 14.12 | % |   |   | 15,090 |   |   |   | 8.00 | % |   |   | 18,862 |   |   |   | 10.00 | % |
|                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Leverage Ratio           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |   | 39,882 |   |   |   | 9.81 | % |   |   | 16,263 |   |   |   | 4.00 | % |   |   |   |   |   |   |   |   |
| Capon Valley Bank               |   |   | 13,466 |   |   |   | 8.38 | % |   |   | 6,428 |   |   |   | 4.00 | % |   |   | 8,035 |   |   |   | 5.00 | % |
| The Grant County Bank           |   |   | 24,309 |   |   |   | 9.91 | % |   |   | 9,814 |   |   |   | 4.00 | % |   |   | 12,267 |   |   |   | 5.00 | % |
|                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Risk Based Capital Ratio |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Highlands Bankshares            |   |   | 39,882 |   |   |   | 13.08 | % |   |   | 12,200 |   |   |   | 4.00 | % |   |   |   |   |   |   |   |   |
| Capon Valley Bank               |   |   | 13,466 |   |   |   | 11.60 | % |   |   | 4,642 |   |   |   | 4.00 | % |   |   | 6,964 |   |   |   | 6.00 | % |
| The Grant County Bank           |   |   | 24,309 |   |   |   | 12.89 | % |   |   | 7,545 |   |   |   | 4.00 | % |   |   | 11,317 |   |   |   | 6.00 | % |

|                              |   | 2010   |   |   | 2009   |   |
|-----------------------------------|--------|--------|--------|--------|--------|--------|
| Balance beginning of period       |   | $      | 2,554  |   |   | $      | 2,749 |   |
| Amortization of intangible assets |   |   | (190   | )      |   |   | (195 | ) |
| Balance end of period             |   | $      | 2,364  |   |   | $      | 2,554 |   |

| Year  |   |   |   |   | Expected Expense |   |
|-------|--------|--------|--------|--------|------------------|--------|
| 2011  |   |   |   |   |             | 184    |   |
| 2012  |   |   |   |   |             |   | 178 |   |
| 2013  |   |   |   |   |             |   | 165 |   |
| 2014  |   |   |   |   |             |   | 165 |   |
| 2015  |   |   |   |   |             |   | 138 |   |
| Total |   |   |   |   |             | $      | 830 |   |

----

| Balance Sheets                                                                      |   |
|-------------------------------------------------------------------------------------|--------|
| (in thousands of dollars)                                                           |   |
|                                                                                |   | December 31, |   |
|                                                                                |   | 2010 |   |   | 2009 |   |
| Assets                                                                              |   |   |   |   |   |   |
| Cash                                                                                |   | $ | 70 |   |   | $ | 314 |   |
| Investment in subsidiaries                                                          |   |   | 41,105 |   |   |   | 40,590 |   |
| Receivable from subsidiaries                                                        |   |   | 267 |   |   |   | 0 |   |
| Income taxes receivable                                                             |   |   | 0 |   |   |   | 459 |   |
| Fixed assets, net of accumulated depreciation                                       |   |   | 47 |   |   |   | 60 |   |
| Other assets                                                                        |   |   | 18 |   |   |   | 6 |   |
| Total Assets                                                                        |   | $ | 41,507 |   |   | $ | 41,429 |   |
|                                                                                |   |   |   |   |   |   |   |   |
| Liabilities                                                                         |   |   |   |   |   |   |   |   |
| Accrued expenses                                                                    |   | $ | 53 |   |   | $ | 7 |   |
| Income taxes payable                                                                |   |   | 86 |   |   |   | 0 |   |
| Total Liabilities                                                                   |   |   | 139 |   |   |   | 7 |   |
|                                                                                |   |   |   |   |   |   |   |   |
| Stockholders’ Equity                                                          |   |   |   |   |   |   |   |   |
| Common stock, par value $5 per share, 3,000,000 shares authorized, 1,436,874 issued |   |   | 7,184 |   |   |   | 7,184 |   |
| Surplus                                                                             |   |   | 1,662 |   |   |   | 1,662 |   |
| Treasury stock, at cost, 100,001 shares                                             |   |   | (3,372 | ) |   |   | (3,372 | ) |
| Retained earnings                                                                   |   |   | 37,165 |   |   |   | 36,963 |   |
| Other accumulated comprehensive income                                              |   |   | (1,271 | ) |   |   | (1,015 | ) |
| Total Stockholders’ Equity                                                    |   |   | 41,368 |   |   |   | 41,422 |   |
|                                                                                |   |   |   |   |   |   |   |   |
| Total Liabilities and Stockholders’ Equity                                    |   | $ | 41,507 |   |   | $ | 41,429 |   |

----

| Statements of Income and Retained Earnings                                   |   |
|------------------------------------------------------------------------------|--------|
| (in thousands of dollars)                                                    |   |
|                                                                         |   | Years ended December 31, |   |
|                                                                         |   | 2010 |   |   | 2009 |   |
| Income                                                                       |   |   |   |   |   |   |
| Dividends from subsidiaries                                                  |   | $ | 1,740 |   |   | $ | 2,061 |   |
| Management fees from subsidiaries                                            |   |   | 225 |   |   |   | 218 |   |
| Total Income                                                                 |   |   | 1,965 |   |   |   | 2,279 |   |
|                                                                         |   |   |   |   |   |   |   |   |
| Expenses                                                                     |   |   |   |   |   |   |   |   |
| Salary and benefits expense                                                  |   |   | 482 |   |   |   | 409 |   |
| Professional fees                                                            |   |   | 190 |   |   |   | 192 |   |
| Directors fees                                                               |   |   | 85 |   |   |   | 88 |   |
| Other expenses                                                               |   |   | 113 |   |   |   | 125 |   |
| Total Expenses                                                               |   |   | 870 |   |   |   | 814 |   |
|                                                                         |   |   |   |   |   |   |   |   |
| Net income before income tax benefit and undistributed subsidiary net income |   |   | 1,095 |   |   |   | 1,465 |   |
|                                                                         |   |   |   |   |   |   |   |   |
| Income tax benefit                                                           |   |   | 367 |   |   |   | 228 |   |
|                                                                         |   |   |   |   |   |   |   |   |
| Income before undistributed subsidiary net income                            |   |   | 1,462 |   |   |   | 1,693 |   |
|                                                                         |   |   |   |   |   |   |   |   |
| Undistributed subsidiary net income                                          |   |   | 130 |   |   |   | 1,663 |   |
|                                                                         |   |   |   |   |   |   |   |   |
| Net Income                                                                   |   | $ | 1,592 |   |   | $ | 3,356 |   |
|                                                                         |   |   |   |   |   |   |   |   |
| Retained earnings, beginning of period                                       |   | $ | 36,963 |   |   | $ | 35,157 |   |
| Dividends paid in cash                                                       |   |   | (1,390 | ) |   |   | (1,550 | ) |
| Net income                                                                   |   |   | 1,592 |   |   |   | 3,356 |   |
| Retained earnings, end of period                                             |   | $ | 37,165 |   |   | $ | 36,963 |   |

----

| Statements of Cash Flows                             |   |
|------------------------------------------------------|--------|
| (in thousands of dollars)                            |   |
|                                                 |   | Years Ended December 31, |   |
|                                                 |   | 2010 |   |   | 2009 |   |
| Cash Flows From Operating Activities                 |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |
| Net Income                                           |   | $ | 1,592 |   |   | $ | 3,356 |   |
|                                                 |   |   |   |   |   |   |   |   |
| Adjustments to net income                            |   |   |   |   |   |   |   |   |
| Depreciation                                         |   |   | 13 |   |   |   | 2 |   |
| Undistributed subsidiary income                      |   |   | (130 | ) |   |   | (1,663 | ) |
| Gain on sale of fixed assets                         |   |   | 0 |   |   |   | 0 |   |
| Deferred tax benefit                                 |   |   | 0 |   |   |   | 2 |   |
| Increase (decrease) in payables                      |   |   | 46 |   |   |   | (65 | ) |
| (Increase) decrease in receivables from subsidiaries |   |   | (267 | ) |   |   | 0 |   |
| (Increase) decrease in receivables                   |   |   | 545 |   |   |   | (198 | ) |
| (Increase) decrease in other assets                  |   |   | (12 | ) |   |   | 26 |   |
|                                                 |   |   |   |   |   |   |   |   |
| Net Cash Provided by Operating Activities            |   |   | 1,787 |   |   |   | 1,460 |   |
|                                                 |   |   |   |   |   |   |   |   |
| Cash Flows From Investing Activities                 |   |   |   |   |   |   |   |   |
| Net advances from (payments to) subsidiaries         |   |   | (641 | ) |   |   | 284 |   |
| Purchase of fixed assets                             |   |   | 0 |   |   |   | (62 | ) |
|                                                 |   |   |   |   |   |   |   |   |
| Net Cash Provided by Investing Activities            |   |   | (641 | ) |   |   | 222 |   |
|                                                 |   |   |   |   |   |   |   |   |
| Cash Flows From Financing Activities                 |   |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |   |
| Dividends paid in cash                               |   |   | (1,390 | ) |   |   | (1,550 | ) |
|                                                 |   |   |   |   |   |   |   |   |
| Net Cash Used in Financing Activities                |   |   | (1,390 | ) |   |   | (1,550 | ) |
|                                                 |   |   |   |   |   |   |   |   |
| Net Increase in Cash                                 |   |   | (244 | ) |   |   | 132 |   |
|                                                 |   |   |   |   |   |   |   |   |
| Cash, beginning of year                              |   |   | 314 |   |   |   | 182 |   |
|                                                 |   |   |   |   |   |   |   |   |
| Cash, end of year                                    |   | $ | 70 |   |   | $ | 314 |   |

----

----

| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
|---------|--------------------------------------------------------------------------------------|

| Item 9A. | Controls and Procedures |
|----------|-------------------------|

| Item 9B. | Other Information |
|----------|-------------------|

----

| Item 10. | Directors, Executive Officers and Corporate Governance |
|----------|--------------------------------------------------------|

|   | · | “Compliance with Section 16(a) of the Securities Exchange Act” |
|--------|--------|----------------------------------------------------------------------------|

|   | · | “ELECTION OF DIRECTORS” |
|--------|--------|-------------------------------------|

|   | · | “INFORMATION CONCERNING DIRECTORS AND NOMINEES” |
|--------|--------|-------------------------------------------------------------|

|   | · | “REPORT OF THE AUDIT COMMITTEE” |
|--------|--------|---------------------------------------------|

| Item 11. | Executive Compensation |
|----------|------------------------|

| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
|----------|------------------------------------------------------------------------------------------------|

| Item 13. | Certain Relationships and Related Transactions and Director Independence |
|----------|--------------------------------------------------------------------------|

----

| Item 14. | Principal Accounting Fees and Services |
|----------|----------------------------------------|

| Item 15. | Exhibits, Financial Statements and Schedules |
|----------|----------------------------------------------|

| (a)(1) | Financial Statements: |
|--------|-----------------------|

| (a)(2) | Financial Statement Schedules: These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (a)(3) | Exhibits. The exhibits listed in the “Exhibits Index” on Page 65 of this Annual Report on Form 10-K included herein are filed herewith or are incorporated by reference from previous filings. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | See (a)(3) above |
|-----|------------------|

| (c) | See (a)(1) and (a)(2) above |
|-----|-----------------------------|

----

ures

| /s/ C.E. Porter                         |   | /s/ Jeffrey B. Reedy    |   |
|-----------------------------------------|--------|-------------------------|--------|
| C.E. Porter                             |   | Jeffrey B. Reedy        |   |
| President & Chief Executive Officer |   | Chief Financial Officer |   |
| Date:  March 30, 2011         |   | Date: March 30, 2011    |   |

| Name              | Signature             | Title                                   | Date           |
|-------------------|-----------------------|-----------------------------------------|----------------|
|              |                  |                                    |           |
| Leslie A. Barr    | /s/ Leslie A. Barr    | Director                                | March 30, 2011 |
|              |                  |                                    |           |
|              |                  | Director;                               |           |
| Alan L. Brill     | /s/ Alan L. Brill     | Secretary                               | March 30, 2011 |
|              |                  |                                    |           |
|              |                  |                                    |           |
| Jack H. Walters   | /s/ Jack H. Walters   | Director                                | March 30, 2011 |
|              |                  |                                    |           |
|              |                  |                                    |           |
| Gerald W. Smith   | /s/ Gerald W. Smith   | Director                                | March 30, 2011 |
|              |                  |                                    |           |
|              |                  |                                    |           |
| Morris M. Homan   | /s/ Morris M. Homan   | Director                                | March 30, 2011 |
|              |                  |                                    |           |
|              |                  |                                    |           |
| Kathy G. Kimble   | /s/ Kathy G. Kimble   | Director                                | March 30, 2011 |
|              |                  |                                    |           |
|              |                  |                                    |           |
| George L. Ford    | /s/ George L. Ford    | Director                                | March 30, 2011 |
|              |                  |                                    |           |
|              |                  | Director;                               |           |
| C.E. Porter       | /s/ C.E. Porter       | President & Chief Executive Officer | March 30, 2011 |
|              |                  |                                    |           |
|              |                  | Director;                               |           |
| John G. Van Meter | /s/ John G. Van Meter | Chairman of The Board of Directors      | March 30, 2011 |
|              |                  |                                    |           |
|              |                  |                                    |           |
| L. Keith Wolfe    | /s/ L. Keith Wolfe    | Director                                | March 30, 2011 |

----

| 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 |
| 14             |   | Code of Ethics. The HIGHLANDS BANKSHARES, INC. CODE OF BUSINESS CONDUCT AND ETHICS is hereby incorporated by reference filed as Exhibit 14.1 with Highlands Bankshares Inc.’s Report on Form 8-K filed January 14, 2008 |
| 21             |   | Subsidiaries of the Registrant (filed herewith) |
| 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. |

----