<PAGE>

                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-QSB


QUARTERLY  REPORT UNDER  SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
1934

         For the quarterly period ended           June 30, 2001
                                        ----------------------------------------



                         SALEM COMMUNITY BANKSHARES, INC.
--------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

         Virginia                                         31-1736845
---------------------------                      ------------------------------
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                       Identification No.)

220 East Main Street
Salem, Virginia                                               24153
------------------------------------                   ------------------
(Address of principal executive offices)                   (Zip Code)

(Issuer's telephone number, including area code) (540) 387-0223
                                                 ---------------


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

                           Yes      X                No
                               -------------             --------------

State the number of shares  outstanding  of each of the issuer's class of common
equity, as of the latest practicable date.

           Class                                 Outstanding at August 10, 2001
---------------------------                      ------------------------------
COMMON STOCK, NO PAR VALUE                                  1,497,356

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One):  Yes       No  X
                                                               -----    -----


                         (This report contains 19 pages)
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY

                                   FORM 10-QSB

                                      INDEX


PART I      FINANCIAL INFORMATION                                         PAGE
                                                                          ----

          Item 1.  Financial Statements                                    3

         Consolidated Balance Sheets as of June 30, 2001
            and December 31, 2000.                                         4

         Consolidated Statements of Income and Comprehensive Income,
            Three Months Ended June 30, 2001 and 2000.                     5

         Consolidated Statements of Income and Comprehensive Income,
            Six Months Ended June 30, 2001 and 2000.                       6

         Consolidated Statements of Changes In Stockholders'
            Equity, Six Months Ended June 30, 2001 and 2000                7

         Consolidated Statements of Cash Flows,
            Six Months Ended June, 2001 and 2000.                          8

         Notes to Consolidated Financial Statements.                    9  -  12

         Item 2.  Management's Discussion And Analysis
                    of Financial Condition and Results of Operations   13  -  17


PART II    OTHER INFORMATION

         Item 1.  Legal Proceedings                                        18

         Item 2.  Changes In Securities and Use of Proceeds                18

         Item 3.  Defaults Upon Senior Securities                          18

         Item 4.  Submission of Matters to a Vote of Security
                    Holders                                                18

         Item 5.  Other Information                                        18

         Item 6.  Exhibits And Reports On Form 8-K                         18

SIGNATURES                                                                 19



                                        2
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY

                          PART I FINANCIAL INFORMATION


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

The following is the  unaudited  consolidated  balance sheet of Salem  Community
Bankshares,  Inc. and  subsidiary  (the  Company) as of June 30,  2001,  and the
related unaudited consolidated statements of income and comprehensive income for
the  three-month  and six-month  periods  ended June 30, 2001 and 2000,  and the
unaudited  consolidated  statements of changes in stockholders' equity, and cash
flows, for the six-month  periods ended June 30, 2001 and 2000. The consolidated
balance  sheet  presented  as of  December  31, 2000 has been  derived  from the
consolidated   financial   statements   that  have  been  audited  by  Company's
independent auditors.


                                        3
<PAGE>

<TABLE>
                              SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                                        CONSOLIDATED BALANCE SHEETS
                              (In thousands, except shares and per share data)
<CAPTION>

                                                                           6/30/01                    12/31/00
ASSETS                                                                   (Unaudited)                 (Audited)
------                                                               ------------------       ----------------------
<S>                                                                   <C>                           <C>
Cash and due from banks                                                       $  9,565                        8,283
Federal funds sold and securities purchased
     under resale agreements                                                    18,600                       12,310
Securities:
     Available-for-sale, at fair value                                          13,181                        9,019
     Held-to-maturity, at amortized cost
     (fair value of $38,644 at June 30, 2001
     and $38,634 at December 31, 2000)                                          38,605                       39,434
Mortgage loans held for sale                                                     2,261                          139
Loans, less unearned income                                                    152,610                      139,577
Less allowance for loan losses                                                  -1,608                       -1,529
                                                                     ------------------       ----------------------
     Loans, net                                                                151,002                      138,048
                                                                     ------------------       ----------------------
Bank premises and equipment, net                                                 2,007                        2,107
Accrued interest receivable                                                      1,681                        1,805
Foreclosed properties                                                               92                          160
Other assets                                                                     2,085                        1,077
                                                                     ------------------       ----------------------
     Total assets                                                             $239,079                      212,382
                                                                     ==================       ======================

LIABILITIES AND STOCKHOLDERS' EQUITY

Noninterest-bearing demand deposits                                             22,667                       21,680
Interest-bearing demand deposits                                                53,476                       41,429
Savings deposits                                                                 6,210                        6,170
Time deposits                                                                  125,071                      111,704
                                                                     ------------------       ----------------------
     Total deposits                                                            207,424                      180,983
Federal Home Loan Bank long-term debt                                           10,000                       10,000
Accrued interest payable                                                         1,345                        1,486
Other liabilities                                                                  488                          154
                                                                     ------------------       ----------------------
     Total liabilities                                                         219,257                      192,623
                                                                     ------------------       ----------------------

Stockholders' equity:
         Common stock and surplus, no par value.  Authorized
         10,000,000 shares; issued and outstanding 1,497,356 shares
         in 2001 and 1,596,873 shares in 2000.                                  15,715                       17,079
     Retained earnings                                                           4,100                        2,766
     Accumulated other comprehensive gain (loss)                                     7                          -86
                                                                     ------------------       ----------------------
      Total stockholders' equity                                                19,822                       19,759
                                                                     ------------------       ----------------------
Commitments and contingent liabilities
      Total liabilities and stockholders' equity                              $239,079                      212,382
                                                                     ==================       ======================

See accompanying notes to unaudited consolidated financial statements.
</TABLE>

                                        4
<PAGE>

<TABLE>
                            SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                                              (Unaudited)
                                 (In thousands, except per share data)
<CAPTION>
Three Months Ended June 30, 2001 and 2000
                                                                                2001             2000
                                                                                ----             ----
<S>                                                                           <C>              <C>
Interest income:
     Interest and fees on loans                                               $3,634           $3,071
     Interest on federal funds sold and securities
        purchased under resale agreements                                        159               66
     Interest on deposits with banks                                              31                8
     Interest on securities - taxable                                            758              793
     Interest on securities - nontaxable                                          41               58
                                                                       --------------       ----------
        Total interest income                                                  4,623            3,996
                                                                       --------------       ----------
Interest expense:
     Interest on certificates of deposit
     of $100 or more                                                             398              258
     Interest on other deposits                                                1,810            1,599
     Interest on federal funds purchased and securities sold
     under repurchase agreements                                                   -                6
     Interest on Federal Home Loan Bank borrowings                               171                -
                                                                       --------------       ----------
        Total interest expense                                                 2,379            1,863
                                                                       --------------       ----------
        Net interest income                                                    2,244            2,133
Provision for loan losses                                                        200               67
                                                                       --------------       ----------
        Net interest income after provision
          for loan losses                                                      2,044            2,066
                                                                       --------------       ----------
Noninterest income:
     Service charges on deposit accounts                                         178              144
     Other service charges, commissions and fees                                  97               69
     Other income                                                                  3               13
     Realized securities gains, net                                                8                -
                                                                       --------------       ----------
        Total noninterest income                                                 286              226
                                                                       --------------       ----------
Noninterest expense:
     Salaries and employee benefits                                              819              713
     Occupancy expense of bank premises                                           82               75
     Furniture, fixtures and equipment                                           133              124
     Stationery, printing and supplies                                            39               38
     Write-downs and gains and losses, net, on foreclosed properties             -11               28
     Other expenses                                                              334              444
                                                                       --------------       ----------
        Total noninterest expense                                              1,396            1,422
                                                                       --------------       ----------
        Income before income tax expense                                         934              870
Income tax expense                                                               304              281
                                                                       --------------       ----------
        Net income                                                               630              589
Other comprehensive income (loss), net of income tax expense (benefit):
      Net unrealized gains (losses) on available-for-sale securities              17              (41)
                                                                       --------------       ----------
      Comprehensive income                                                    $  647           $  548
                                                                       ==============       ==========
Net income per share
    Basic net income per share                                                $ 0.41           $ 0.37
                                                                       ==============       ==========
    Diluted net income per share                                              $ 0.40           $ 0.37
                                                                       ==============       ==========

See accompanying notes to unaudited consolidated financial statements.
</TABLE>

                                        5
<PAGE>

<TABLE>

                                     SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                                CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                                                       (Unaudited)
                                          (In thousands, except per share data)
<CAPTION>
Six Months Ended June 30, 2001 and 2000
                                                                                     2001                           2000
                                                                                     ----                           ----
<S>                                                                                <C>                             <C>
Interest income:
     Interest and fees on loans                                                    $7,104                          5,881
     Interest on federal funds sold and securities
        purchased under resale agreements                                             351                             72
     Interest on deposits with banks                                                   70                             10
     Interest on securities - taxable                                               1,497                          1,589
     Interest on securities - nontaxable                                               89                            116
                                                                       -------------------                  -------------
        Total interest income                                                       9,111                          7,668
                                                                       -------------------                  -------------
Interest expense:
     Interest on time certificates of deposit
     of $100,000 or more                                                              750                            495
     Interest on other deposits                                                     3,663                          3,067
     Interest on federal funds purchased and securities sold
     under repurchase agreements                                                        -                             11
     Interest on Federal Home Loan Bank borrowings                                    340                              -
                                                                       -------------------                  -------------
        Total interest expense                                                      4,753                          3,573
                                                                       -------------------                  -------------
        Net interest income                                                         4,358                          4,095
Provision for loan losses                                                             255                            144
                                                                       -------------------                  -------------
        Net interest income after provision
          for loan losses                                                           4,103                          3,951
                                                                       -------------------                  -------------
Noninterest income:
     Service charges on deposit accounts                                              329                            270
     Other service charges, commissions and fees                                      193                            154
     Other income                                                                      23                             27
     Realized securities gains, net                                                     1                              -
                                                                       -------------------                  -------------
        Total noninterest income                                                      546                            451
                                                                       -------------------                  -------------
Noninterest expense:
     Salaries and employee benefits                                                 1,575                          1,403
     Occupancy expense of bank premises                                               162                            143
     Furniture, fixtures and equipment                                                257                            239
     Stationery, printing and supplies                                                 61                             69
     Write-downs and gains and losses, net, on foreclosed properties                  -11                             34
     Other expenses                                                                   624                            718
                                                                       -------------------                  -------------
        Total noninterest expense                                                   2,668                          2,606
                                                                       -------------------                  -------------
        Income before income tax expense                                            1,981                          1,796
Income tax expense                                                                    647                            580
                                                                       -------------------                  -------------
        Net income                                                                  1,334                          1,216
Other comprehensive income (loss), net of income tax expense (benefit):
      Net unrealized gains (losses) on available-for-sale securities                   93                            -53
                                                                       -------------------                  -------------
      Comprehensive income                                                         $1,427                          1,163
                                                                       ===================                  =============
Net income per share
    Basic net income per share                                                     $ 0.85                           0.77
                                                                       ===================                  =============
    Diluted net income per share                                                   $ 0.84                           0.76
                                                                       ===================                  =============

See accompanying notes to unaudited consolidated financial statements.
</TABLE>

                                        6
<PAGE>

<TABLE>
                                     SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                                CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                       (Unaudited)
                                     (In thousands, except shares and per share data)

Six Months Ended June 30, 2001 and 2000
<CAPTION>
                                                                                            Accumulated
                                                              Common                           Other
                                                               Stock       Retained        Comprehensive
                                                            and Surplus    Earnings           Gain (Loss)         Total
                                                            -------------------------------------------------------------
<S>                                                              <C>            <C>              <C>              <C>
Balances at December 31, 1999                                    $16,077        1,970           -210              17,837
Net income                                                             -        1,216              -               1,216
Change in net unrealized
  losses on available-for-sale
   securities, net of income tax benefit                               -            -            (53)                (53)
                                                            -------------------------------------------------------------
Balances at June 30, 2000                                        $16,077        3,186           (263)             19,000
                                                                  ======       ======           ====              ======

Balances at December 31, 2000                                    $17,079        2,766            (86)             19,759
Net income                                                             -        1,334              -               1,334
Issuance of common stock (82 shares)                                   1            -              -                   1
Purchase of common stock outstanding (99,599 shares)              -1,365            _              -              (1,365)
Change in net unrealized
   losses on available-for-
   sale securities, net of income tax expense                          -            -             93                  93
                                                            -------------------------------------------------------------
Balances at June 30, 2001                                        $15,715        4,100              7              19,822
                                                                  ======       ======           ====              ======
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

                                        7
<PAGE>

<TABLE>
                            SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (Unaudited)
                                            (In thousands)
<CAPTION>
Six Months Ended June, 2001 and 2000
(In thousands)                                                               2001                2000
                                                                             ----                ----
<S>                                                                         <C>                 <C>
Cash flows from operating activities:
     Net income                                                             1,334               1,216
     Adjustments to reconcile net income to net cash
        provided by (used in) operating activities:
        Provision for loan losses                                             255                 144
        Depreciation and amortization of bank premises
          and equipment                                                       163                 149
        Gain on calls of securities                                            -1                   -
        Amortization of premiums and accretion
          of discounts, net                                                    -6                   3
        Write-downs and (gains) and losses on sales
          of foreclosed properties, net                                       (11)                 34
        (Increase) decrease in:
           Mortage loans held for sale                                     (2,122)                106
           Accrued interest receivable                                        124                 (40)
           Other assets                                                    (1,056)               (561)
      Increase (decrease) in:
          Accrued interest payable                                           (141)                 (5)
          Other liabilities                                                   335                   9
                                                                     -------------       -------------
          Net cash provided by (used in) operating activities              (1,126)              1,055
                                                                     -------------       -------------

Cash flows from investing activities:
     Net increase in federal funds sold and
        securities purchased under resale agreements                       (6,290)            (13,900)
     Proceeds from maturities and calls of securities                       5,815                 543
     Purchase of securities                                                (9,000)                  -
     Net increase in loans made to customers                              (13,331)            (15,527)
     Recoveries on loans previously charged off                                30                  32
     Proceeds from sales of foreclosed properties                             171                 117
     Purchases of bank premises and equipment                                 (63)               (130)
                                                                     -------------       -------------
        Net cash used in investing activities                             (22,668)            (28,865)
                                                                     -------------       -------------

Cash flows from financing activities:
     Net increase in time deposits                                         13,367               9,643
     Net increase in demand and savings deposits                           13,074              14,036
     Purchase of common stock outstanding                                  (1,365)                  -
     Net decrease in federal funds purchased and securities
       sold under resale agreements                                             -                (145)
      Proceeds from notes payable from Federal Home Loan Bank                   -               5,900
     Principal payments on capital lease obligations                            -                 (26)
                                                                     -------------       -------------
        Net cash provided by financing activities                          25,076              29,408
                                                                     -------------       -------------

Net increase in cash and due from banks                                     1,282               1,598
Cash and due from banks at beginning of period                              8,283               8,959
                                                                     -------------       -------------

Cash and due from banks at end of period                                    9,565             $10,557
                                                                     =============       =============

For the  six-month  periods  ended  June 30,  2001 and 2000,  the  Company  paid
interest expense of $4,894 and $3,578,  respectively.  For the six-month periods
ended June 30, 2001 and 2000, the Company paid income taxes of $670 and $915.

See accompanying notes to unaudited consolidated financial statements.
</TABLE>

                                        8
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                     Six Months Ended June 30, 2001 and 2000
                                   (Unaudited)
                (In thousands, except shares and per share data)
(1)    General
The consolidated  financial  statements  include the accounts of Salem Community
Bankshares,  Inc. and its wholly-owned  subsidiary,  Salem Bank and Trust,  N.A.
(the Bank),  (collectively the Company).  All material intercompany accounts and
transactions have been eliminated. The consolidated financial statements conform
to accounting  principles generally accepted in the United States of America and
to  general  banking  industry  practices.  In  the  opinion  of  the  Company's
management, the accompanying unaudited consolidated financial statements contain
all adjustments of a normal  recurring  nature,  necessary to present fairly the
financial  position as of June 30, 2001 and the results of  operations  and cash
flows for the three-month and six-month periods ended June 30, 2001 and 2000.

These interim period consolidated financial statements and financial information
should be read in conjunction  with the  consolidated  financial  statements and
notes thereto  included in Salem Community  Bankshares,  Inc. 2000 Annual Report
and additional information supplied in the 2000 Form 10-KSB.

The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year ending December 31, 2001.

(2)    Securities
The amortized costs,  gross unrealized  holding gains,  gross unrealized holding
losses and approximate fair values for  available-for-sale  and held-to-maturity
securities by major security type are as follows:

<TABLE>
<CAPTION>
                                                                         June 30, 2001
                                            --------------------------------------------------------------------
                                                                 Gross               Gross
                                                               Unrealized          Unrealized
                                            Amortized           Holding              Holding               Fair
                                              Costs              Gains               Losses               Values
                                            --------------------------------------------------------------------
Available-for-sale
------------------
<S>                                         <C>                   <C>                                    <C>
U.S. Government agencies
    and corporations                        $10,988               23                  -                  11,011
Mortgage-backed securities                    1,119                -            (     12)                 1,107
Other securities                              1,063                -                  -                   1,063
                                            -------               --            ---------                ------
            Totals                          $13,170               23            (     12)                13,181
                                            =======               ==            ========                 ======



Held-to-maturity
----------------
U.S. Government agencies
   and corporations                         $35,299                -            (     37)                35,262
Mortgage-backed securities                      210                3                   -                    213
Obligations of state and
   political subdivisions                     3,096               73                   -                  3,169
                                            -------               --            ---------                ------
         Totals                             $38,605               76            (     37)                38,644
                                            =======               ==            ========                 ======
</TABLE>

As of June 30, 2001, securities with amoritized costs of $30,064 were pledged to
secure public deposits and for other purposes required by law.


                                        9
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                     Six Months Ended June 30, 2001 and 2000
                                   (Unaudited)
                (In thousands, except shares and per share data)

(3)      Loans
<TABLE>

A summary of loans outstanding is as follows:
                                                     June 31, 2001        December 31, 2000
                                                     -------------        -----------------
<S>                                                  <C>                         <C>
Commercial                                           $    13,276                 13,527
Consumer, principally installment                         40,331                 34,520
Real estate - mortgage                                    83,088                 76,481
Real estate - construction                                17,094                 16,285
                                                        ---------             ---------

     Total loans                                         153,789                140,813
Less unearned income                                     ( 1,179)              (  1,236)
                                                        --------              ---------

     Total loans, less unearned income               $   152,610                139,577
                                                        ========              =========

(4)     Nonperforming Assets, Impaired Loans and Allowance for Loan Losses

Nonperforming assets consist of the following:
<CAPTION>
                                                     June 30, 2001              December 31, 2000
                                                     -------------              -----------------
<S>                                                  <C>                         <C>
Nonaccrual loans                                     $         595                $        583
Foreclosed properties                                           92                         160
                                                     -------------                ------------

     Total nonperforming assets                      $         687                $        743
                                                     =============                ============
</TABLE>

There were no commitments to lend additional funds to customers whose loans were
classified as nonperforming at June 30, 2001. Included in nonaccrual loans as of
June 30, 2001 is a  restructured  loan,  restructed  during 2000,  approximating
$307.

The following  table shows the pro forma interest that would have been earned on
nonaccrual  loans if they had been  current in  accordance  with their  original
terms and the recorded  interest that was earned and included in income on these
loans:

                                                     Six Months Ended June 30,
                                                     -------------------------
                                                      2001              2000
                                                      ----              ----

Pro forma interest on nonaccrual loans               $  26                33
                                                     =====             =====

Recorded interest on nonaccrual loans                $   7                29
                                                     =====             =====
At June 30, 2001, the recorded  investment in loans that have been identified as
impaired loans, in accordance with Statement 114 and which includes  nonaccrual,
restructured  and certain  watch list loans,  totaled  $694. Of this amount $236
related to loans with no valuation  allowance,  and $458 related to loans with a
corresponding valuation allowance of $90.


                                       10
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                     Six Months Ended June 30, 2001 and 2000
                                   (Unaudited)
                (In thousands, except shares and per share data)

A summary of the activity in the allowance for loan losses follows:

                                             Six Months Ended June 30,
                                             -------------------------
                                                2001            2000
                                                ----            ----
Balances, beginning of period                $  1,529           1,404
Provision for loan losses                         255             144
Loans charged off                               ( 206)          ( 141)
Loan recoveries                                    30              32
                                             --------         -------

Balances, end of period                      $  1,608           1,439
                                             ========         =======


(5)    Time Deposits and Other Deposits

Included in time deposits are certificates of deposit and other time deposits of
$100 or more in the aggregate amount of $30,975 at June 30, 2001.

(6)    Net Income Per Share

Net income per share  excludes  dilution  and is  computed  by  dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Net income per share-assuming  dilution reflects the
potential  dilution that could occur if  securities or other  contracts to issue
common  stock were  exercised  or vested  into  common  stock or resulted in the
issuance  of common  stock that they shared in the  earnings of the entity.  The
following is a  reconciliation  of the  numerators and  denominators  of the net
income per share and net income per share - assuming  dilution  computations for
the periods indicated:
<TABLE>
<CAPTION>
                                            Net Income                     Shares      Per Share
Three Months Ended June 30, 2001            (Numerator)                (Denominator)     Amount
--------------------------------            -----------                -------------    ----------

<S>                                              <C>                      <C>            <C>
Basic net income per share                       $630                     1,554,902      $   .41
                                                                                         ----------
Effect of dilutive stock options                   -                          9,099
                                             -----------                -------------    ----------

Diluted net income per share                     $630                     1,564,001      $   .40
                                             -----------                -------------    ----------

                                            Net Income                     Shares       Per Share
Three Months Ended June 30, 2000            (Numerator)                (Denominator)      Amount
--------------------------------            -----------                -------------    ----------

Basic net income per share                       $589                     1,587,110      $   .37
                                                                                         ----------
Effect of dilutive stock options                    -                        13,544
                                             -----------                -------------

Diluted net income per share                     $589                     1,600,654      $   .37
                                             -----------                -------------    ----------
</TABLE>



                                       11
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                     Six Months Ended June 30, 2001 and 2000
                                   (Unaudited)
                (In thousands, except shares and per share data)
<TABLE>
<CAPTION>
                                            Net Income                     Shares       Per Share
Six Months Ended June 30, 2001              (Numerator)                (Denominator)      Amount
------------------------------              -----------                -------------    -----------
<S>                                            <C>                        <C>            <C>
Basic net income per share                     $1,334                     1,575,906      $   .85
Effect of dilutive stock options                    -                         7,964      ==========
                                             -----------                -------------

Diluted net income per share                    1,334                     1,583,870      $   .84
                                             -----------                =============    ==========

Six Months Ended June 30, 2000

Basic net income per share                     $1,216                     1,587,110      $   .77
Effect of dilutive stock options                    -                        14,067      ==========
                                             -----------                -------------

Diluted net income per share                   $1,216                     1,601,177      $   .76
                                             -----------                =============    ==========
</TABLE>

(7)  Repurchase of  Common Stock

On May 25,  2001,  the Company  repurchased  99,599  shares of its common  stock
outstanding  at a total  cost of  $1,365.  This  repurchase  of  stock  has been
recorded in the unaudited  consolidated  financial  statements as a reduction of
common stock and surplus.

(8)  Pending Merger

On July 31, 2001,  the  Company's  Board of  Directors  approved an agreement to
merge  the  Company  into  FNB  Corporation,  headquartered  in  Christiansburg,
Virginia.  Under the terms of the  agreement,  shareholders  of the Company will
receive  consideration  valued at $26.49 for each share of common stock,  in the
form of cash, stock of FNB Corporation,  or a combination of both. The merger is
subject to approval by  shareholders  of the Company and FNB Corporation as well
as regulatory authorities. The transaction is anticipated to close in the fourth
quarter of 2001.


                                       12
<PAGE>

Item 2.  Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

(Amounts in thousands, except per share data and ratios)

The following is a discussion of the factors  which  significantly  affected the
financial  condition and results of operations  of Salem  Community  Bankshares,
Inc.  and  subsidiary  at June 30, 2001 and for the  three-month  and  six-month
periods ended June 30, 2001. This discussion  should be read in conjunction with
the unaudited  consolidated financial statements and notes presented herein, and
with the Bank's audited consolidated  financial statements and notes thereto for
the year ended December 31, 2000.

This Quarterly Report on Form 10-QSB contains forward-looking  statements within
the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities  Exchange Act of 1934.  The  Company's  actual  results  could differ
materially from those set forth in the forward-looking statements.

On May 31, 2000,  shareholders approved the proposed  reorganization of the Bank
into  a  holding  company  structure.  On  September  11,  2000,  this  proposed
reorganization was completed with 1,535,986 shares of Salem Bank and Trust, N.A.
common stock being exchanged one-for-one for 1,535,986 shares of Salem Community
Bankshares,  Inc.  common stock.  As a result of this  reorganization,  the Bank
became a wholly-owned subsidiary of Salem Community Bankshares, Inc.

PENDING MERGER

On July 31, 2001,  the  Company's  Board of  Directors  approved an agreement to
merge  the  Company  into  FNB  Corporation,  headquartered  in  Christiansburg,
Virginia.  Under the terms of the  agreement,  shareholders  of the Company will
receive  consideration  valued at $26.49 for each share of common stock,  in the
form of cash, stock of FNB Corporation,  or a combination of both. The merger is
subject to approval by  shareholders  of the Company and FNB Corporation as well
as regulatory authorities. The transaction is anticipated to close in the fourth
quarter of 2001.

BALANCE SHEET

Total assets of the Company at June 30, 2001  exceeded  total assets at December
31, 2000 by $26,697 or 12.6  percent.  This  increase  was due  primarily  to an
increase of $6,290 in federal funds sold and securities  purchased  under resale
agreements  and loan portfolio  growth.  The increase in fed funds sold resulted
from the Company not investing in long-term security products during the current
national environment of declining interest rates. Loans, net of unearned at June
30, 2001  compared to  December  31, 2000 showed an increase of $13,033,  or 9.3
percent. Higher loan volumes resulted from increased customer demand, especially
in indirect dealer loan products.

Total deposits increased by $26,441, or 14.6 percent, due mostly to increases in
time and interest-bearing  demand deposits.  Time deposits increased $13,367, or
12.0 percent,  and  interest-bearing  demand deposits  increased $12,047 or 29.1
percent due to the Company  offering more  attractive  depository  products than
area competition and a build-up of municipal deposits.

ALLOWANCE FOR LOAN LOSSES, NONPERFORMING ASSETS AND IMPAIRED LOANS

The provision  for loan losses was $255 for the six-month  period ended June 30,
2001  compared  to $144 for the same period in 2000,  an  increase of $111.  The
provision  for loan losses was $200 for the  three-month  period  ended June 30,
2001,  compared  to $67 for the same period in 2000,  an  increase of $133.  The
Company  considers  the  allowance  to be  adequate  based on the  current  loan
portfolio.  An ongoing  evaluation  of the  allowance for loan losses is made to
ensure that the  allowance  for loan losses is at a  sufficient  level to absorb
estimated losses in the Bank's loan portfolio. As of June 30, 2001, the ratio of
the allowance for loan losses to loans, net of unearned income was 1.05 percent.
While  management  uses available  information to recognize loan losses,  future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions.  In  addition,  regulatory  agencies,  as an integral  part of their
examination  process,  periodically review the Bank's allowance for loan losses.
The agencies may require the Bank to recognize  additions to the allowance based
on their judgments about information available at the time of their examination.

                                       13
<PAGE>

Foreclosed  properties  decreased  to $92 at June 31, 2001 from $160 at December
31, 2000.  This  decrease  resulted  from the net sale of  properties as well as
increased efforts by management to minimize the amount of such properties held.

Nonaccrual  loans were $595 and $583 at June 30, 2001 and at December  31, 2000,
respectively.   Loans  are  generally  placed  in  nonaccrual  status  when  the
collection  of principal  and  interest is 90 days or more past due,  unless the
obligation is both well-secured and in the process of collection. Impaired loans
approximated $694 at June 30, 2001 and $707 at December 31, 2000.

See note 4 to the Company's unaudited  consolidated  financial  statements for a
summary of the changes in the Bank's  allowance for loan losses and a summary of
nonperforming assets.


CAPITAL RESOURCES

Stockholders'  equity  increased by $63 or 0.3  percent,  as of June 30, 2001 to
$19,822  compared to  stockholders'  equity of $19,759 at December 31, 2000. The
increase  was due to net  earnings  which  were  retained  but  offset  with the
repurchase of 99,599 shares of the Company's  common stock for $1,365 during the
current quarter.  Stockholders'  equity at June 30, 2001 also has been increased
by $7 which  represents  the  excess of the fair  values  of  available-for-sale
securities over their amortized costs, net of taxes, held by the Bank. This sole
component of comprehensive  income has been recorded as a separate  component of
stockholders' equity and will continue to be subject to change in future periods
due to fluctuations in market value, sales,  purchases,  maturities and calls of
securities classified as available-for-sale.

The Bank is in  compliance  with  minimum Tier 1 and total  capital  ratios of 4
percent and 8 percent, respectively, at June 30, 2001 and December 31, 2000. The
Bank's  leverage  ratios at June 30,  2001 and  December  31,  2000 were also in
excess of the 3 percent minimum.

There are no material  commitments for capital expenditures as of June 30, 2001.
In addition,  there are no expected material changes in the mix or relative cost
of capital resources.

NET INTEREST INCOME

The  principal  source of  earnings  for the Bank is net  interest  income.  Net
interest  income  is  the  net  amount  of  interest  earned  on  the  Company's
interest-bearing  assets  less the  amount  of  interest  paid on the  Company's
deposits and other interest-bearing  liabilities. Net interest income before the
provision  for loan  losses was $4,358  for the six months  ended June 30,  2001
compared with $4,095 for the six months ended June 30, 2000, an increase of $263
or 6.4 percent.  Net interest  income  before the  provision for loan losses was
$2,244 for the three  months  ended June 30, 2001  compared  with $2,133 for the
three  months ended June 30,  2000,  an increase of $111 or 5.2  percent.  Total
interest income  increased from $7,668 for the six months ended June 30, 2000 to
$9,111 for the same period in 2001, a 18.8 percent  increase.  This increase was
mostly due to increased  interest and fees on loans which resulted from a larger
loan portfolio.  Interest expense increased from $3,573 for the six months ended
June 30, 2000 to $4,753 for the same period in 2001,  a 33.0  percent  increase.
Interest  expense  increased from $1,863 for three months ended June 30, 2000 to
$2,379 for the same period in 2001, a 27.7 percent increase.  These increases in
interest expense were due mainly to an increase in  interest-bearing  demand and
time deposits volumes.

NONINTEREST INCOME

Noninterest income consists of earnings generated primarily from service charges
on deposit accounts, securities gains and other service charges, commissions and
fees.  The Company's  noninterest  income  increased from $451 for the first six
months in 2000 to $546 for the same period in 2001, an increase of 21.1 percent.
The Company's  noninterest  income increased from $226 for the second quarter in
2000 to $286 for the same  period in 2001,  an increase  of 26.6  percent.  This
trend  resulted  from  increases in service  charges on deposit  accounts  which
resulted from a greater volume of deposits and fewer such fees and charges being
waived by management.  In addition,  noninterest  income also increased due to a
greater level of fees being collected on mortgage loans held-for-sale.

                                       14
<PAGE>

NONINTEREST EXPENSE

The Company's noninterest expense increased from $2,606 for the first six months
in 2000 to $2,668 for the same  period in 2001,  or 2.4  percent  increase.  The
Company's  noninterest  expense  decrease from $1,422 for the second  quarter in
2000 to  $1,396  or 1.8  percent  for the  same  period  in  2001.  These  minor
fluctuations were attributable to various noninterest expense accounts.

INCOME TAXES

The reported  income tax expense for the six months ended June 30, 2001 was $647
(effective  tax rate of 32.7 percent)  compared to $580  (effective  tax rate of
32.3 percent) for the same period in 2000.  The reported  income tax expense for
the  three  months  ended  June 30,  2001 was $304  (effective  tax rate of 32.5
percent)  compared to $281  (effective  tax rate of 32.3  percent)  for the same
period in 2000.  This  increase  in income tax expense was due to an increase in
net taxable income.

NET  INCOME

Net income for the six months ended June 30, 2001 was $1,334  compared to $1,216
for the same period in 2000.  This  increase of $118,  or 9.7  percent,  was due
primarily  to the increase in net interest  income.  The Company  achieved a .60
percent return on average assets, or 1.20 percent  annualized,  during the first
six months of 2001,  compared  to a .63  percent,  or 1.26  percent  annualized,
return on average  assets for the same period in 2000.  Net income for the three
months  ended June 30,  2001 was $630  compared  to $589 for the same  period in
2000.

LIQUIDITY

Liquidity  is the  ability  to  generate  adequate  cash flow to meet  financial
commitments  and to fund customers'  demands for funds,  either in terms of loan
requests or deposit  withdrawals.  Liquidity  may be provided by both assets and
liabilities.  Asset liquidity is derived from sources such as readily marketable
investments,  principal  and interest  payments on loans,  and cash and due from
banks.  Liability  liquidity  is  provided by the core  deposit  growth from the
Bank's strong,  stable customer base.  Management  believes the liquidity of the
Bank remains adequate, as sufficient assets are maintained on a short-term basis
to meet the liquidity demands  anticipated.  Secondary sources of funds are also
available  should  the  need  arise.  Management  is not  aware  of any  trends,
commitments  or events  that will  result  in or that are  reasonably  likely to
result in a material increase or decrease in liquidity.

Net cash used in  operating  activities  of $1,126 for the six months ended June
30, 2001 was primarily  attributable  to an increase in the mortgage  loans held
for sale category which fluctuates based upon loan demand and the timing of loan
sales in the secondary market.  Net cash flows provided by financing  activities
for the six months ended June 30, 2001 was $25,076 and resulted  from  increased
deposits,  offset by the $1,365  repurchase of the Company's common stock.  Cash
flows used in investing  activities  of $22,668 were used  primarily to fund the
net  increase  in loans  of  $13,331  and the  purchase  of  federal  funds  and
securities sold of $6,290 and $9,000, respectively for the six months ended June
30, 2001.

REPURCHASE OF COMMON STOCK

On May 25,  2001,  the Company  repurchased  99,599  shares of its common  stock
outstanding  at a total  cost of  $1,365.  This  repurchase  of  stock  has been
recorded in the unaudited  consolidated  financial  statements as a reduction of
common stock and surplus.

                                       15
<PAGE>

GENERAL
-------

IMPACT OF INFLATION AND CHANGING PRICES

The  consolidated  financial  statements and related notes presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.

Unlike many industrial companies,  substantially all of the assets and virtually
all of the  liabilities  of the  Company are  monetary  in nature.  As a result,
interest rates have a more significant impact on the Company's  performance than
the general level of inflation.  Over short periods of time,  interest rates may
not  necessarily  move  in the  same  direction  or in  the  same  magnitude  as
inflation.

DERIVATIVES

The Company does not use  derivatives or other  off-balance  sheet  transactions
such as future contracts, forward obligations, interest rate swaps, or options.

FUTURE ACCOUNTING CONSIDERATIONS

SFAS No. 133

In June 1998, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging  Activities.  Statement  133  establishes  accounting  and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts, and for hedging activities. The adoption of SFAS No
133, as amended, as of January 1, 2001, did not have any effect on the financial
position, results of operations or liquidity of the Company.

SFAS No. 141 and SFAS No. 142

On July 20, 2001, the FASB issued SFAS No. 141, Business Combinations,  and SFAS
No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141 requires the use of
the purchase method of accounting for all business combinations.  The use of the
pooling-of-interests  method is prohibited for business  combinations  initiated
after June 30, 2000. SFAS No. 142 requires that goodwill and certain  intangible
assets  would no longer be  amortized,  but  rather be tested for impairment
annually or whenever an event occurs indicating that the asset may be impaired.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
Management is currently evaluating the impact of SFAS No. 142 on the financial
position, results of operations and liquidity of the Company, but no significant
effect is expected.

SAB No. 102

On July 6, 2001,  the  Securities  and  Exchange  Commission  (SEC) issued Staff
Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance  Methodology and
Documentation   Issues.   The  guidance   contained  in  the  SAB  is  effective
immediately.  This SAB  expresses  the  views  of the SEC  staff  regarding  the
registrant's  development,   documentation,  and  application  of  a  systematic
methodology for determining the allowance for loan and lease losses, as required
by SEC Financial Reporting Release (FRR) No. 28. The guidance in the SAB focuses
on the documentation  the SEC staff normally expects  registrants to prepare and
maintain in support of the allowance for loan and lease losses.



                                       16
<PAGE>

Concurrent with the SEC's issuance of SAB No. 102, the federal banking  agencies
(the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the
Federal  Reserve  System) (FRB),  the Office of the  Comptroller of the Currency
(OCC),  and the Office of Thrift  Supervision  (OTS)  represented by the Federal
Financial   Institutions   Examination  Council  issued  an  interagency  policy
statement  entitled  Allowance  for  Loan and  Lease  Losses  Methodologies  and
Documentation for Banks and Savings Institutions (Policy Statement). The SAB and
Policy Statement were the result of an agreement between the SEC and the federal
banking  agencies in March 1999 to provide  guidance on  allowance  for loan and
lease methodologies and supporting documentation.

The  guidance  contained  in the  SAB  does  not  prescribe  specific  allowance
estimation methodologies registrants should employ in estimating their allowance
for loan and lease  losses,  but  rather  emphasizes  the need for a  systematic
methodolgy  that is properly  designed and  implemented  by  registrants.  It is
expected  that the SEC staff will  utilize the  guidance  this SAB to  challenge
registrants  and  their  auditors  regarding  the  allowance  for loan and lease
losses.


                                       17
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY

                                     PART II

                                OTHER INFORMATION


Items 1 - 3. None for the quarter ended June 30, 2001.
------------

Item 4.  Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------

The Annual Shareholders Meeting for Salem Community Bankshares, Inc. was held on
April 24, 2001.

The only matter  voted on by the  shareholders  was the election of the board of
directors. The results are as follows:

Of the 1,596,955 shares of stock outstanding,  1,392,753 were voted. The results
were:

Name of Director                  Votes Cast "For"         Votes Cast "Against"
----------------              ---------------------        --------------------

Dr. Eugene M. Bane, Jr.            1,392,074                        679
Truman R. Dorton                   1,386,440                      6,313
Morris A. Elam                     1,385,812                      6,941
H. Morgan Griffith                 1,388,236                      4,517
Rose M. Hagen                      1,379,225                     13,528
Carlos B. Hart                     1,384,718                      8,035
Dr. Walter A. Hunt                 1,385,812                      6,941
Gladys C. O'Brien                  1,386,440                      6,313
Clark Owen, Jr.                    1,385,545                      8,208
Carl E. Tarpley, Jr.               1,390,179                      2,574

64 shareholders attended the meeting in person, all of which were represented by
proxy and a total of 367 eligible shareholders voted by proxy. Three guests were
present.

Item 5. None for the quarter ended June 30, 2001.
-------

Item 6.  Exhibits and Reports on Form 8-K.
------------------------------------------

     (a)  Exhibits required by Item 601 of Regulation S-B:

            None.

     (b) Reports on Form 8-K filed during the six months ended June 30, 2001.

            None.



                                       18
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                  Salem Community Bankshares, Inc.


Date:    August 13, 2001          By: /s/ Clark Owen, Jr.
         ---------------          --------------------------------------------
                                  Clark Owen, Jr., President and
                                  Chief Executive Officer

Date:    August 13, 2001          By: /s/ Gill R. Roseberry
         ---------------          --------------------------------------------
                                  Gill R. Roseberry, Corporate Secretary and
                                  Chief Financial Officer







                                       19