EXHIBIT 13

LOGO



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LOGO

Front Row:Carroll E. Shelton, John P. Erb, Robert H. Gilliam Jr., Thomas F. Hall
and James E. Burton, IV

Back Row:James P. Kent, Jr., R.B. Hancock, Jr., John L. Waller, A. Willard
Arthur,

Michael E. Watson and William F. Overacre

BOARD OF DIRECTORS



|                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. Willard Arthur Retired Chairman and Secretary Marvin V. Templeton & Sons, Inc.  James E. Burton, IV President Marvin V. Templeton & Sons, Inc.  John P. Erb Assistant Superintendent Campbell County Schools  Robert H. Gilliam, Jr. President & CEO First National Bank Pinnacle Bankshares Corporation  Thomas F. Hall President George E. Jones & Sons, Inc.  R. B. Hancock, Jr. President & Owner R.B.H., Inc. |  | James P. Kent, Jr. Partner Kent & Kent, P.C.  William F. Overacre Broker/Owner RE/MAX
1st Olympic, REALTORS  Carroll E.
Shelton Senior Vice President First National Bank Pinnacle Bankshares Corporation  John L. Waller Owner & Operator Waller Farms, Inc.  Michael E.
Watson Controller Flippin, Bruce & Porter, Inc.

Front Cover: Our new
Rustburg branch.



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PINNACLE BANKSHARES CORPORATION

AND SUBSIDIARY

Table of Contents



|                                                                                      |  |           
|------------------------------------------------------------------------------------- |  | ----------
|                                                                                      |  | Page      
|                                                                                      | 
|Office Locations                                                                      |  | 2         
|                                                                                      | 
|Officers and Managers                                                                 |  | 3         
|                                                                                      | 
|Presidents Letter                                                                    |  | 4         
|                                                                                      | 
|Selected Consolidated Financial Information                                           |  | 6         
|                                                                                      | 
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 7         
|                                                                                      | 
|Consolidated Balance Sheets                                                           |  | 27        
|                                                                                      | 
|Consolidated Statements of Income                                                     |  | 28        
|                                                                                      | 
|Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income   |  | 29        
|                                                                                      | 
|Consolidated Statements of Cash Flows                                                 |  | 30        
|                                                                                      | 
|Notes to Consolidated Financial Statements                                            |  | 32        
|                                                                                      | 
|Managements Report on Internal Control Over Financial Reporting                      |  | 58        
|                                                                                      | 
|Report of Independent Registered Public Accounting Firm                               |  | 59        
|                                                                                      | 
|Shareholder Information                                                               |  | 62 and IBC



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PINNACLE BANKSHARES CORPORATION

AND SUBSIDIARY

First National Bank Office Locations

ALTAVISTA

MAIN OFFICE

622 Broad Street

Altavista, Virginia 24517

Telephone: (434) 369-3000

VISTA OFFICE

1301 N. Main Street

Altavista, Virginia 24517

Telephone: (434) 369-3001

LYNCHBURG

AIRPORT OFFICE

14580 Wards Road

Lynchburg, Virginia 24502

Telephone: (434) 237-3788

TIMBERLAKE OFFICE

20865 Timberlake Road

Lynchburg, Virginia 24502

Telephone: (434) 237-7936

OLD FOREST ROAD OFFICE

3309 Old Forest Road

Lynchburg, Virginia 24501

Telephone: (434) 385-4432

FOREST

FOREST OFFICE

14417 Forest Road

Forest, Virginia 24551

Telephone: (434) 534-0451

AMHERST

AMHERST OFFICE

130 South Main Street

Amherst, Virginia 24521

Telephone: (434) 946-7814

RUSTBURG

RUSTBURG OFFICE

1033 Village Highway

Rustburg, Virginia 24588

Telephone: (434) 332-1742

SMITH MOUNTAIN LAKE

LOAN PRODUCTION OFFICE

74 Scruggs Road, Suite 102

Moneta, Virginia 24121

Telephone: (540) 719-0193



2



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PINNACLE BANKSHARES CORPORATION

AND SUBSIDIARY



|                                             |  |                                                                           
|-------------------------------------------- |  | --------------------------------------------------------------------------
|Officers of Pinnacle Bankshares Corporation  |  |                                                                           
|                                             | 
|Robert H. Gilliam, Jr.                       |  | President, Chief Executive Officer                                        
|Carroll E. Shelton                           |  | Senior Vice President                                                     
|Bryan M. Lemley                              |  | Secretary, Treasurer & Chief Financial Officer                            
|                                             | 
|Officers and Managers of First National Bank |  |                                                                           
|                                             | 
|Robert H. Gilliam, Jr.                       |  | President, Chief Executive Officer & Trust Officer                        
|Aubrey H. Hall, III                          |  | Executive Vice President & Chief Lending Officer                          
|Carroll E. Shelton                           |  | Senior Vice President & Chief Credit Officer                              
|Lucy H. Johnson                              |  | Senior Vice President & Data Processing Manager                           
|Bryan M. Lemley                              |  | Vice President, Cashier & Chief Financial Officer                         
|William J. Sydnor, II                        |  | Vice President & Branch Administration Officer                            
|Judith A. Clements                           |  | Vice President & Director of Human Resources                              
|Pamela R. Adams                              |  | Vice President & Loan Operations Manager                                  
|Thomas R. Burnett, Jr.                       |  | Vice President & Commercial Lending Officer                               
|James M. Minear                              |  | Vice President & Commercial Real Estate Lending Officer                   
|Tracie A. Robinson                           |  | Vice President & Mortgage Production Manager                              
|Bianca K. Allison                            |  | Vice President & Mortgage Loan Officer                                    
|Tony J. Bowling                              |  | Vice President & Network Administrator                                    
|Daniel R. Wheeler                            |  | Vice President & Branch Manager (Airport)                                 
|Shawn D. Stone                               |  | Vice President & Branch Manager (Main)                                    
|John E. Tucker                               |  | Assistant Vice President & Investment Consultant                          
|Albert N. Fariss                             |  | Assistant Vice President, Facilities/Purchasing Manager & Security Officer
|Tarry R. Pribble                             |  | Assistant Vice President & Collection and Recovery Manager                
|Vicki G. Greer                               |  | Assistant Vice President & Financial Analyst                              
|Marian E. Marshall                           |  | Assistant Vice President & Branch Manager (Old Forest)                    
|Vivian S. Brown                              |  | Assistant Vice President & Branch Manager (Forest)                        
|Nancy J. Holt                                |  | Assistant Vice President & Branch Manager (Vista)                         
|Janet H. Whitehead                           |  | Assistant Vice President & Branch Manager (Timberlake)                    
|M. Amanda Ramsey                             |  | Assistant Vice President & Branch Manager (Amherst)                       
|Charlene A. Thompson                         |  | Assistant Vice President & Branch Manager (Rustburg)                      
|Christine A. Hunt                            |  | Internal Auditor                                                          
|Anita M. Jones                               |  | Loan Production Officer                                                   
|Dianna C. Hamlett                            |  | Compliance Officer & Bank Secrecy Act Officer                             
|Lisa M. Landrum                              |  | Dealer Finance Loan Officer                                               
|Lauren R. Michael                            |  | Training Officer                                                          
|Barbara H. Caldwell                          |  | Assistant Branch Manager and Loan Officer (Main)                          
|Arin L. Brown                                |  | Retail Business Development Officer (Main)                                
|Doris N. Trent                               |  | Retail Business Development Officer (Vista)                               
|Andria C. Smith                              |  | Retail Business Development Officer (Main)                                
|Courtney M. Woody                            |  | Retail Business Development Officer (Timberlake)                          
|Cathy C. Simms                               |  | Retail Business Development Officer (Airport)                             
|Melissa L. Collins                           |  | Retail Business Development Officer (Forest)                              
|Melissa T. Campbell                          |  | Retail Business Development Officer (Old Forest)                          
|Cynthia I. Gibson                            |  | Bookkeeping Manager                                                       
|Jennifer L. Edgell                           |  | Investment Consultant                                                     



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LOGO

TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:

Resilience and preservation are operative words to describe the year 2009 for Pinnacle Bankshares, as First National Bank began its second century in business. Efforts of management in 2009 centered
around controlling and minimizing the adverse effects on our Company of one of the deepest recessions in our history, a recession that began in late 2007 and one that has dealt a severe blow to the financial services industry. Although the recession
has now officially ended, our economy is only slightly above the bottom of a deep trough and the climb out of the trough will be a gradual, lengthy process.

Growth of our Company was intentionally slowed in 2009. Our loan portfolio declined for the year as we focused on reducing the risk in the portfolio and complying with regulatory guidelines regarding
concentrations in certain types of credit. Furthermore, we bid less aggressively for deposits in 2009 as we sought to minimize the negative impact of a compressed net interest margin. An overall objective in the growth slowing process has been to
maintain our well capitalized position and grow our capital ratios. At the end of the day, the strength of our Company will be measured largely by the level of our capital.

A byproduct of slower growth in 2009 has been improvement in our liquidity position. Throughout a large part of 2008, in a time of more robust growth, we were borrowing money for liquidity purposes to
fund the growth. During 2009 our liquidity position has strengthened and we have added minimal risk securities to our investment portfolio in the process. Our improved liquidity position will enable us to be readily responsive to sound lending
opportunities provided us in a stronger economy.

The footprint of our Region 2000 franchise was filled in further in 2009 through the opening
in February of a new branch in Rustburg, the county seat of Campbell County. Rustburg presents an attractive opportunity in that there is not another community banking option for the businesses and consumers in that area and we are pleased with the
reception provided us in this market.

Expansion and growth of the Company in recent years have resulted in an increase in noninterest
expense. A key to future performance will be a leveling off of noninterest expense whereby we can begin to leverage our investment in facilities and people. Illustrative of progress in this direction in 2009 is a reduction in staffing through normal
attrition from 120 employees on payroll at the beginning of the year to 110 employees on payroll at the end of the year. Future expansion will be predicated upon identification of a compelling business case for additional offices in an improved
economy.

Margin compaction has had a significant impact on our profitability over the last two years. Our net interest margin has declined
from 4.02% for 2007 to 3.60% for 2008 to 3.23% for 2009. In an attempt to quantify the impact of the rate environment on our performance, suffice it to say that our earnings have been reduced by more than $1,000,000 in each of the last two years
through the decline in net interest income. It is difficult to conceive that our yield on earning assets can decline further. An uptick in interest rates, if and when that may occur, should bode well for future earnings.



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We continue our aggressive posture, which began in 2008, toward dealing with credit quality issues. Although
there have been some exceptions, our primary position has been to accept losses, clean our balance sheet and move on, rather than retain tainted assets on our books in the hope that market values will improve anytime soon. Our provision for loan
losses was $2,881,000 in 2008 and $1,530,000 in 2009. Even though asset quality measurements have stabilized as of the end of the 2009, we will continue to encounter and have to deal with nonperforming loans, including the recognition of losses, as
long as the weak economy persists.

In addition to addressing our own problems, we are having to fund the problems of the overall commercial
banking industry. There were 140 bank failures in 2009 and another 20 banks have failed in the first seven weeks of 2010. These failures have obviously reduced the level of Federal Deposit Insurance Corporation (FDIC) reserves used to pay insured
depositors when failures occur. The banking industry itself, not the taxpayer, pays to maintain FDIC reserves. FDIC premiums and assessments expensed by First National Bank amounted to $621,000 in 2009, compared with $77,000 in 2008. This is the
single largest line item expense increase impacting our performance for 2009.

In spite of the challenges we are facing, we take some measure
of satisfaction in reporting a net profit for 2009 of $351,000, when many of our peers are posting losses. 2009 net income is 15% ahead of net income for 2008.

Total assets grew 3% to $332,210,000 as of December 31, 2009. Net loans outstanding decreased 5% to $265,904,000, while total deposits rose 5% to $302,119,000 at year-end 2009.

Stockholders equity ended 2009 at $25,851,000, a 4% increase over 2008. First National Bank continues to be well-capitalized according to
all regulatory standards. We are pleased that our capital levels are strong without our having accepted U.S. Treasury Department TARP funds.

From a shareholder perspective, there is a strong likelihood that the single most significant event of 2009 was suspension of the cash dividend in the second quarter, a decision made in the interest of aforementioned capital preservation.
Reinstatement of some level of dividend payment in 2010 is the top priority for your board and management. Net income progress will be carefully monitored to determine the time at which earnings have recovered sufficiently to warrant resumption of
some level of dividend.

Your support through these challenging times has never been more important nor more appreciated. We cherish our rich
heritage and our continued strength and stability. We hope you will be able to join us for our Annual Meeting of Shareholders to be held at 11:30 a.m., Tuesday, April 13, 2010 in the Fellowship Hall of Altavista Presbyterian Church, 707 Broad
Street, Altavista, Virginia, where we will share more of the Pinnacle Bankshares story.



LOGORobert H. Gilliam, Jr.President and Chief Executive Officer


February 23, 2010



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PINNACLE BANKSHARES CORPORATION

AND SUBSIDIARY

Selected Consolidated Financial Information

(In thousands, except ratios, share and per share data)



|                                                                          |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | --------- | - | ---- | --------- | - | ---- | --------- | - | ---- | --------- | -
|                                                                          |  | Years ended December 31, |          
|                                                                          |  | 2009                     |           |   | 2008 |           |   | 2007 |           |   | 2006 |           |   | 2005 |          
|Income Statement Data:                                                    |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Net interest income                                                       |  | $                        | 10,004    |   |      | 10,209    |   |      | 10,181    |   |      | 9,192     |   |      | 7,983     |  
|Provision for loan losses                                                 |  |                          | 1,530     |   |      | 2,881     |   |      | 462       |   |      | 339       |   |      | 230       |  
|Noninterest income                                                        |  |                          | 3,148     |   |      | 2,896     |   |      | 2,632     |   |      | 2,500     |   |      | 2,396     |  
|Noninterest expenses                                                      |  |                          | 11,171    |   |      | 9,846     |   |      | 8,524     |   |      | 7,825     |   |      | 7,166     |  
|Income tax expense                                                        |  |                          | 100       |   |      | 72        |   |      | 1,227     |   |      | 1,116     |   |      | 876       |  
|Net income                                                                |  |                          | 351       |   |      | 306       |   |      | 2,600     |   |      | 2,412     |   |      | 2,107     |  
|Per Share Data:                                                           |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Basic net income                                                          |  | $                        | 0.24      |   |      | 0.21      |   |      | 1.76      |   |      | 1.65      |   |      | 1.44      |  
|Diluted net income                                                        |  |                          | 0.24      |   |      | 0.21      |   |      | 1.75      |   |      | 1.64      |   |      | 1.43      |  
|Cash dividends                                                            |  |                          | 0.10      |   |      | 0.60      |   |      | 0.60      |   |      | 0.55      |   |      | 0.49      |  
|Book value                                                                |  |                          | 17.41     |   |      | 16.78     |   |      | 17.95     |   |      | 16.66     |   |      | 15.91     |  
|Weighted-Average Shares Outstanding:                                      |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Basic                                                                     |  |                          | 1,485,089 |   |      | 1,485,089 |   |      | 1,479,689 |   |      | 1,459,007 |   |      | 1,458,615 |  
|Diluted                                                                   |  |                          | 1,485,089 |   |      | 1,488,213 |   |      | 1,489,377 |   |      | 1,471,806 |   |      | 1,476,288 |  
|Balance Sheet Data:                                                       |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Assets                                                                    |  | $                        | 332,210   |   |      | 321,243   |   |      | 279,913   |   |      | 256,421   |   |      | 233,490   |  
|Loans, net                                                                |  |                          | 265,904   |   |      | 279,199   |   |      | 232,752   |   |      | 207,861   |   |      | 181,268   |  
|Securities                                                                |  |                          | 20,156    |   |      | 13,931    |   |      | 19,635    |   |      | 24,866    |   |      | 29,261    |  
|Cash and cash equivalents                                                 |  |                          | 32,060    |   |      | 15,926    |   |      | 18,344    |   |      | 14,586    |   |      | 13,814    |  
|Deposits                                                                  |  |                          | 302,119   |   |      | 287,233   |   |      | 251,866   |   |      | 230,817   |   |      | 209,246   |  
|Stockholders equity                                                      |  |                          | 25,851    |   |      | 24,919    |   |      | 26,816    |   |      | 24,492    |   |      | 23,212    |  
|Performance Ratios:                                                       |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Return on average assets                                                  |  |                          | 0.11      | % |      | 0.10      | % |      | 0.97      | % |      | 1.00      | % |      | 0.94      | %
|Return on average equity                                                  |  |                          | 1.40      | % |      | 1.14      | % |      | 10.17     | % |      | 10.10     | % |      | 9.29      | %
|Dividend payout                                                           |  |                          | 41.88     | % |      | 291.50    | % |      | 34.12     | % |      | 33.25     | % |      | 33.93     | %
|Asset Quality Ratios:                                                     |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Allowance for loan losses to total loans, net of unearned income and fees |  |                          | 1.38      | % |      | 1.40      | % |      | 0.73      | % |      | 0.84      | % |      | 0.83      | %
|Net charge-offs to average loans, net of unearned income and fees         |  |                          | 0.65      | % |      | 0.24      | % |      | 0.23      | % |      | 0.04      | % |      | 0.13      | %
|Capital Ratios:                                                           |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Leverage                                                                  |  |                          | 8.04      | % |      | 8.28      | % |      | 9.54      | % |      | 9.80      | % |      | 9.88      | %
|Risk-based:                                                               |  |                          |           |   |      |           |   |      |           |   |      |           |   |      |           |  
|Tier 1 capital                                                            |  |                          | 9.50      | % |      | 9.20      | % |      | 10.55     | % |      | 9.92      | % |      | 10.54     | %
|Total capital                                                             |  |                          | 10.75     | % |      | 10.45     | % |      | 11.24     | % |      | 10.64     | % |      | 11.23     | %
|Average equity to average assets                                          |  |                          | 7.69      | % |      | 9.14      | % |      | 9.45      | % |      | 9.91      | % |      | 10.07     | %



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Managements Discussion and Analysis

of Financial Condition and Results of Operations

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

Cautionary Statement Regarding
Forward-Looking Statements

The following discussion is qualified in its entirety by the more detailed information and the consolidated
financial statements and accompanying notes appearing elsewhere in this Annual Report. In addition to the historical information contained herein, this Annual Report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of management, are generally identifiable by use of words such as believe,
expect, intend, anticipate, estimate, project, may, will or similar expressions. Although we believe our plans, intentions and expectations reflected in these
forward-looking statements are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual
results, performance or achievements could differ materially from those contemplated. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates; declining
collateral values, especially in the real estate market; general economic conditions, including continued deterioration in general business and economic conditions and in the financial markets; deterioration in the value of securities held in our
investment securities portfolio; the legislative/regulatory climate, including the impact of any policies or programs implemented pursuant to the Emergency Economic Stabilization Act of 2008 (the EESA), the American Recovery and Reinvestment Act of
2009 (the ARRA) or other laws; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; the quality or composition of the loan and/or investment
portfolios; demand for loan products; deposit flows; competition; demand for financial services in our market area; and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking
statements contained herein. We base our forward-looking statements on managements beliefs and assumptions based on information available as of the date of this report. You should not place undue reliance on such statements, because the
assumptions, beliefs, expectations and projections about future events on which they are based may, and often do, differ materially from actual results. We undertake no obligation to update any forward-looking statement to reflect developments
occurring after the statement is made.

In addition, we have experienced increases in loan losses during the current economic climate.
Continued difficulties in significant portions of the global financial markets, particularly if it worsens, could further impact our performance, both directly by affecting our revenues and the value of our assets and liabilities, and indirectly by
affecting our counterparties and the economy generally. Dramatic declines in the residential and commercial real estate markets in recent years have resulted in significant write-downs of asset values by financial institutions in the United States.
Concerns about the stability of the U.S. financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business activity, and increased market volatility.
There can be no assurance that the EESA, the ARRA or other actions taken by the Federal government will stabilize the U.S. financial system or alleviate the industry or economic factors that may adversely affect our business. In addition, our
business and financial performance could be impacted as the financial industry restructures in the current environment, both by changes in the creditworthiness and performance of our counterparties and by changes in the competitive landscape.

Company Overview

Pinnacle
Bankshares Corporation, a Virginia corporation (Bankshares), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bankshares is headquartered in Altavista, Virginia. Bankshares
conducts all of its business activities through the branch offices of its wholly owned subsidiary bank, First National Bank (the Bank). Bankshares exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and of such other
subsidiaries as it may acquire or establish.

First National Bank currently maintains a total of nine offices to serve its customers. The Main
Office and Vista Branch are located in the Town of Altavista, the Airport Branch and Timberlake Branch in Campbell County, the



7



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Old Forest Road Branch in the City of Lynchburg, the Forest Branch in Bedford County, the Amherst Branch in the Town of Amherst, the Rustburg Branch in the Town of Rustburg and a Loan Production
Office in Franklin County at Smith Mountain Lake. The Bank also maintains an administrative and training facility in the Wyndhurst section of the City of Lynchburg.

A total of one-hundred ten full and part-time staff members serve the Banks customers.

With an emphasis on personal service, the Bank today offers a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, merchant bankcard processing,
residential and commercial mortgages, home equity loans, consumer installment loans, agricultural loans, investment loans, small business loans, commercial lines of credit and letters of credit. The Bank also offers a full range of investment,
insurance and annuity products through its association with Infinex Investments, Inc. and Bankers Insurance, LLC. The Bank has two wholly-owned subsidiaries: FNB Property Corp., which holds title to Bank premises real estate; and First
Properties, Inc., which holds title to other real estate owned from foreclosures.

The following discussion supplements and provides
information about the major components of the results of operations and financial condition, liquidity and capital resources of Bankshares and its subsidiary (collectively the Company). This discussion and analysis should be read in conjunction with
the Companys consolidated financial statements and accompanying notes.

Executive Summary

The Company serves a trade area consisting primarily of Campbell County, northern Pittsylvania County, eastern Bedford County, northern Franklin County,
Amherst County and the city of Lynchburg from nine facilities located within the area. In February 2009, the Company opened the Rustburg facility located on Village Highway in the Rustburg Marketplace Shopping Center. This opening will further
increase our presence in Campbell County. The Company operates in a well-diversified industrial economic region that does not depend upon one or a few types of commerce.

The Company earns revenues on the interest margin between the interest it charges on loans it extends to customers and interest received on the Companys securities portfolio net of the interest it
pays on deposits to customers. The Company also earns revenues on service charges on deposit and loan products, gains on securities that are called or sold, fees from origination of mortgages, and other noninterest income items including but not
limited to overdraft fees, commissions from investment, insurance and annuity sales, safe deposit box rentals, and automated teller machine surcharges. In 2009, net income was adversely affected by decreases in net interest margin and increases in
noninterest expense due to the overall growth of the Company. The Companys revenue generating activities and related expenses are outlined in the consolidated statements of income and consolidated statements of changes in stockholders
equity and comprehensive income and accompanying notes and in Results of Operations below.

The Company generates cash through its
operating, investing and financing activities. The generation of cash flows is outlined more fully in the consolidated statements of cash flows and accompanying notes and in Liquidity and Asset/Liability Management below.

The Companys balance sheet experienced a decline in its loan portfolio and growth in its deposit portfolio in 2009. The overall growth of the Company
is outlined in the consolidated balance sheets and accompanying notes and the Investment Portfolio, Loan Portfolio, Bank Premises and Equipment, Deposits and Capital Resources discussions
below.

The Company expects minimal loan portfolio growth in 2010, as we continue to monitor our capital ratios. The Company will look to
promote community banking in our newer Amherst and Rustburg locations by building relationships with businesses and individuals within each market. While growing, the Company continues to leverage efficiencies from our reporting and imaging systems.
The Company is also striving to make our customers lives more convenient by offering innovative products and services and providing many channels to bank with us including Internet banking, Internet bill pay, telephone banking, mobile banking,
remote deposit capture, debit cards and real-time ATMs. The Company will continue to identify and install convenient products and services in 2010 with the goal to better enhance the customers experience with the Company.



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Overview of 2009 and 2008

Total assets at December 31, 2009 were $332,210, up 3.41% from $321,243 at December 31, 2008. The principal components of the Companys assets at the end of the year were $32,060 in cash
and cash equivalents, $20,156 in securities and $265,904 in net loans. During the year ended December 31, 2009, gross loans decreased 4.80% or $13,608. The Companys lending activities are a principal source of income. Loans decreased in
2009 as the Company experienced lower demand for credit and employed tighter credit standards.

Total liabilities at December 31, 2009
were $306,359, up 3.39% from $296,324 at December 31, 2008, with the increase reflective of an increase in total deposits of $14,886 or 5.18%. Noninterest-bearing demand deposits increased $4,545 or 16.39% and represented 10.68% of total
deposits at December 31, 2009, compared to 9.65% at December 31, 2008. Savings and NOW accounts increased $15,613 or 17.78% and represented 34.24% of total deposits at December 31, 2009, compared to 30.58% at December 31, 2008.
Time deposits decreased $5,272 or 3.07% at December 31, 2009 and represented 55.08% of total deposits at December 31, 2009, compared to 59.77% at December 31, 2008. The Companys deposits are provided by individuals and
businesses located within the communities served. The Company had no brokered deposits as of December 31, 2009 and December 31, 2008.

Total stockholders equity at December 31, 2009 was $25,851, including $21,306 in retained earnings. At December 31, 2008, stockholders equity totaled $24,919, including $21,102 in retained earnings. The increase in
stockholders equity resulted mainly from an after tax unrealized gain of $660 incurred by the Companys retirement plan. This unrealized gain is recognized in accumulated other comprehensive net loss.

The Company had net income of $351 for the year ended December 31, 2009, compared to net income of $306 for the year ended December 31, 2008, an
increase of 14.71%. The Companys net income increased primarily due to a decrease in provision for loan loss expense of $1,351 in 2009 compared to 2008. This was partially offset by a decrease in net interest income due to lower margins and
lower loan volume. It was also partially offset by an increase in noninterest expense due to the effect of the overall growth of the company on personnel expenses and fixed assets. Management expects some improvement in net income although this
could be adversely affected by numerous factors including asset quality. We do expect improvement in our net interest margin in 2010. We expect decreases in noninterest expense, as we anticipate lower personnel and occupancy expense, and some
decreases in noninterest income as we expect fewer overdraft and mortgage loan fees.

Profitability as measured by the Companys return
on average assets (ROA) was 0.11% in 2009, compared to 0.10% in 2008. Return on average equity (ROE), was 1.40% for 2009, compared to 1.14% for 2008.

Overview of 2008 and 2007

Total assets at December 31, 2008 were $321,243, up 14.77% from $279,913 at December 31,
2007. The principal components of the Companys assets at the end of the year were $15,926 in cash and cash equivalents, $13,931 in securities and $279,199 in net loans. During the year ended December 31, 2008, gross loans increased 20.76%
or $48,721. The Companys lending activities are a principal source of income. Loan growth increased in 2008 as the Company experienced strong growth in loans secured by real estate. The Company also added two new lenders which accounted for
approximately $24,000 in new loans. The Company also opened a new facility in Amherst which accounted for an additional $4,000 in new loans.

Total liabilities at December 31, 2008 were $296,324, up 17.08% from $253,097 at December 31, 2007, with the increase reflective of an increase in total deposits of $35,367 or 14.04%. Noninterest-bearing demand deposits increased
$487 or 1.79% and represented 9.65% of total deposits at December 31, 2008, compared to 10.82% at December 31, 2007. Savings and NOW accounts increased $12,962 or 17.31% and represented 30.58% of total deposits at December 31, 2008,
compared to 29.73% at December 31, 2007. Time deposits increased $21,918 or 14.64% at December 31, 2008 and represented 59.77% of total deposits at December 31, 2008, compared to 59.45% at December 31, 2007.



9



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Total stockholders equity at December 31, 2008 was $24,919 compared to $26,816 at
December 31, 2007.

The Company had net income of $306 for the year ended December 31, 2008, compared to net income of $2,600 for
the year ended December 31, 2007, a decrease of 88.23%. The Companys net income decreased primarily due to an increase in provision for loan loss expense of $2,419 in 2008 compared to 2007 as classified and nonperforming loans increased
in the second half of 2008. The decrease in net income was also due to the increase in noninterest expense due to the effect of the overall growth of the Company on personnel expenses and fixed assets. 2008 net income was also affected by the 400
basis point decrease in the prime and federal fund rates during 2008 as interest-earning assets repriced faster than interest-bearing liabilities.

Profitability as measured by the Companys ROA was 0.10% in 2008, compared to 0.97% in 2007. Another key indicator of performance, the ROE, was 1.14% for 2008, compared to 10.17% for 2007.

Results of Operations

Net Interest
Income. Net interest income represents the principal source of earnings for the Company. Net interest income is the amount by which interest and fees generated from loans, securities and other interest-earning assets exceed the interest
expense associated with funding those assets. Changes in the amounts and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.
Changes in the interest rate environment and the Companys cost of funds also affect net interest income.

The net interest spread
decreased to 2.85% for the year ended December 31, 2009 from 3.11% for the year ended December 31, 2008. Net interest income was $10,004 ($10,097 on a tax-equivalent basis) for the year ended December 31, 2009, compared to $10,209
($10,325 on a tax-equivalent basis) for the year ended December 31, 2008, and is attributable to interest income from loans, federal funds sold and securities exceeding the cost associated with interest paid on deposits and other borrowings. In
2009, our loans repriced at lower rates more rapidly than did our deposits in the declining rate environment, causing our interest rate spread to decrease. The Banks yield on interest-earning assets for the year ended December 31, 2009
was ninety-four basis points lower than the year ended December 31, 2008 due to higher yielding assets being replaced by lower yielding ones in 2009 and repricing of existing assets. The Banks cost of funds rate on interest-bearing
liabilities in 2009 was sixty-eight basis points lower compared to 2008.

The net interest spread decreased to 3.11% for the year ended
December 31, 2008 from 3.44% for the year ended December 31, 2007. Net interest income was $10,209 ($10,325 on a tax-equivalent basis) for the year ended December 31, 2008, compared to $10,181 ($10,345 on a tax-equivalent basis) for
the year ended December 31, 2007, and is attributable to interest income from loans, federal funds sold and securities exceeding the cost associated with interest paid on deposits and other borrowings. In 2008, our loans repriced at lower rates
more rapidly than did our deposits in the declining rate environment, causing our interest rate spread to decrease. The Companys yield on interest-earning assets for the year ended December 31, 2008 was seventy basis points lower than the
year ended December 31, 2007 due to higher yielding assets being replaced by lower yielding ones in 2008 and repricing of existing assets. The Companys cost of funds rate on interest-bearing liabilities in 2008 was thirty seven basis
points lower compared to 2007.

In an effort to stimulate economic activity, the Federal Reserve has pushed interest rates to exceptionally
low levels. As a result, the Companys net interest margins declined from 2007 to 2008, and again from 2008 to 2009 as our interest-earning assets repriced faster than our interest-bearing liabilities. The Company attempts to conserve net
interest margin by product pricing strategies, such as attracting deposits with longer maturities when rates are relatively low and attracting deposits with shorter maturities when rates are relatively high, all depending on our funding needs. Many
economic forecasts of interest rates predict that interest rates will continue to remain at historically low levels for much of 2010. The Company expects its net interest margin to improve slightly in 2010 as we expect interest-bearing liabilities
to reprice slightly faster than interest-earning assets. While there is



10



---

no guarantee of how rates may change in 2010, the Company will price products that are competitive in the market, allow for growth and strive to maintain the net interest margin as much as
possible. The Company also continues to strive to find new sources of noninterest income to combat the effects of volatility in the interest rate environment.

The following table presents the major categories of interest-earning assets, interest-bearing liabilities and stockholders equity with corresponding average balances, related interest income or
interest expense and resulting yield and rates for the periods indicated.

ANALYSIS OF NET INTEREST INCOME



|                              |                   |                          |         |                        |  |                 |      |      |                   |  |         |                        |  |                 |  |      |                   |  |         |                        |  |                 |  |      |  
|----------------------------- | ----------------- | ------------------------ | ------- | ---------------------- |  | --------------- | ---- | ---- | ----------------- |  | ------- | ---------------------- |  | --------------- |  | ---- | ----------------- |  | ------- | ---------------------- |  | --------------- |  | ---- | -
|Assets                        |                   | Years ended December 31, |        
|                              | 2009              |                          |         | 2008                   |  |                 | 2007 |     
|                              | Averagebalance(1) |                          |         | Interestincome/expense |  | Rateearned/paid |      |      | Averagebalance(1) |  |         | Interestincome/expense |  | Rateearned/paid |  |      | Averagebalance(1) |  |         | Interestincome/expense |  | Rateearned/paid | 
|Interest-earning assets:      |                   |                          |         |                        |  |                 |      |      |                   |  |         |                        |  |                 |  |      |                   |  |         |                        |  |                 |  |      |  
|Loans (2)(3)                  |                   | $                        | 274,710 |                        |  | 16,622          |      | 6.05 | %                 |  | 263,924 |                        |  | 17,615          |  | 6.67 | %                 |  | 222,412 |                        |  | 16,748          |  | 7.53 | %
|Investment securities:        |                   |                          |         |                        |  |                 |      |      |                   |  |         |                        |  |                 |  |      |                   |  |         |                        |  |                 |  |      |  
|Taxable                       |                   |                          | 11,351  |                        |  | 470             |      | 4.14 | %                 |  | 13,041  |                        |  | 622             |  | 4.77 | %                 |  | 17,178  |                        |  | 831             |  | 4.84 | %
|Tax-exempt (4)                |                   |                          | 4,046   |                        |  | 273             |      | 6.75 | %                 |  | 4,910   |                        |  | 324             |  | 6.60 | %                 |  | 5,910   |                        |  | 386             |  | 6.53 | %
|Interest-earning deposits     |                   |                          | 16,907  |                        |  | 33              |      | 0.20 | %                 |  | 261     |                        |  | 6               |  | 2.30 | %                 |  | 87      |                        |  | 4               |  | 4.60 | %
|Federal funds sold            |                   |                          | 5,564   |                        |  | 11              |      | 0.20 | %                 |  | 4,689   |                        |  | 104             |  | 2.22 | %                 |  | 11,496  |                        |  | 554             |  | 4.82 | %
|                              |                   |                          |         |                        |  |                 |      |      |                   |  |         |                        |  |                 |  |      |                   |  |         |                        |  |                 |  |      |  
|                              |                   |                          |         |                        |  |                 |      |      |                  
|Total interest-earning assets |                   |                          | 312,578 |                        |  | 17,409          |      | 5.57 | %                 |  | 286,825 |                        |  | 18,671          |  | 6.51 | %                 |  | 257,083 |                        |  | 18,523          |  | 7.21 | %
|                              |                   |                          |         |                        |  |                 |      |      |                  
|Other assets:                 |                   |                          |         |                        |  |                 |      |      |                   |  |         |                        |  |                 |  |      |                   |  |         |                        |  |                 |  |      |  
|Allowance for loan losses     |                   |                          | (3,766  | )                      |  |                 |      |      |                   |  | (1,912  | )                      |  |                 |  |      |                   |  | (1,802  | )                      |  |                 |  |      |  
|Cash and due from banks       |                   |                          | 2,123   |                        |  |                 |      |      |                   |  | 5,171   |                        |  |                 |  |      |                   |  | 5,132   |                        |  |                 |  |      |  
|Other assets, net             |                   |                          | 13,749  |                        |  |                 |      |      |                   |  | 8,618   |                        |  |                 |  |      |                   |  | 7,792   |                        |  |                 |  |      |  
|                              |                   |                          |         |                        |  |                 |      |      |                   |  |         |                        |  |                 |  |      |                   |  |         |                        |  |                 |  |      |  
|                              |                   |                          |         |                        |  |                 |      |      |                  
|Total assets                  |                   | $                        | 324,684 |                        |  |                 |      |      |                   |  | 298,702 |                        |  |                 |  |      |                   |  | 268,205 |                        |  |                 |  |      |  
|                              |                   |                          |         |                        |  |                 |      |      |                   |  |         |                        |  |                 |  |      |                   |  |         |                        |  |                 |  |      |  



|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|------------------------------------ | ----------------- | ------------------------ | ---------------------- | ---- | --------------- |  | ---- | ----------------- |  | ---------------------- |  | --------------- |  | ---- | ----------------- |  | ---------------------- |  | --------------- |  | ---- | -
|Liabilities and Stockholders equity |                   | Years ended December 31, |                       
|                                     | 2009              |                          |                        | 2008 |                 |  | 2007 |                  
|                                     | Averagebalance(1) |                          | Interestincome/expense |      | Rateearned/paid |  |      | Averagebalance(1) |  | Interestincome/expense |  | Rateearned/paid |  |      | Averagebalance(1) |  | Interestincome/expense |  | Rateearned/paid | 
|Interest-bearing liabilities:        |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|Savings and NOW                      |                   | $                        | 97,233                 |      | 1,264           |  | 1.30 | %                 |  | 79,298                 |  | 1,170           |  | 1.48 | %                 |  | 73,171                 |  | 1,403           |  | 1.92 | %
|Time                                 |                   |                          | 171,293                |      | 6,044           |  | 3.53 | %                 |  | 160,613                |  | 7,055           |  | 4.39 | %                 |  | 143,769                |  | 6,771           |  | 4.71 | %
|Other borrowings                     |                   |                          | 740                    |      | 4               |  | 0.54 | %                 |  | 5,150                  |  | 110             |  | 2.14 | %                 |  | 60                     |  | 4               |  | 6.67 | %
|Federal funds purchased              |                   |                          |                       |      |                |  |     |                   |  | 408                    |  | 11              |  | 2.70 | %                 |  |                       |  |                |  |     |  
|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|                                     |                   |                          | 269,266                |      | 7,312           |  | 2.72 | %                 |  | 245,469                |  | 8,346           |  | 3.40 | %                 |  | 217,000                |  | 8,178           |  | 3.77 | %
|                                     |                   |                          |                        |      |                 |  |      |                   | 
|Noninterest-bearing liabilities:     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|Demand deposits                      |                   |                          | 25,883                 |      |                 |  |      |                   |  | 25,169                 |  |                 |  |      |                   |  | 24,631                 |  |                 |  |      |  
|Other liabilities                    |                   |                          | 4,580                  |      |                 |  |      |                   |  | 774                    |  |                 |  |      |                   |  | 1,240                  |  |                 |  |      |  
|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|                                     |                   |                          | 299,729                |      |                 |  |      |                   |  | 271,412                |  |                 |  |      |                   |  | 242,871                |  |                 |  |      |  
|Stockholders equity                 |                   |                          | 24,955                 |      |                 |  |      |                   |  | 27,290                 |  |                 |  |      |                   |  | 25,334                 |  |                 |  |      |  
|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|                                     |                   |                          |                        |      |                 |  |      |                   | 
|                                     |                   |                          | 324,684                |      |                 |  |      |                   |  | 298,702                |  |                 |  |      |                   |  | 268,205                |  |                 |  |      |  
|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|Net interest income                  |                   |                          |                        |      | 10,097          |  |      |                   |  |                        |  | 10,325          |  |      |                   |  |                        |  | 10,345          |  |      |  
|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|Net interest margin (5)              |                   |                          |                        |      |                 |  | 3.23 | %                 |  |                        |  |                 |  | 3.60 | %                 |  |                        |  |                 |  | 4.02 | %
|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  
|Net interest spread (6)              |                   |                          |                        |      |                 |  | 2.85 | %                 |  |                        |  |                 |  | 3.11 | %                 |  |                        |  |                 |  | 3.44 | %
|                                     |                   |                          |                        |      |                 |  |      |                   |  |                        |  |                 |  |      |                   |  |                        |  |                 |  |      |  



|(1) | Averages are daily averages.
|--- | ----------------------------

|(2) | Loan interest income includes amortization of loan fees of $67 in 2009, amortization of loan fees of $24 in 2008 and amortization of loan fees of $23 in 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | For the purpose of these computations, non-accrual loans are included in average loans.
|--- | ---------------------------------------------------------------------------------------

|(4) | Tax-exempt income from investment securities is presented on a tax-equivalent basis assuming a 34% U.S. Federal tax rate for 2009, 2008 and 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The net interest margin is calculated by dividing net interest income by average total interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------------

|(6) | The net interest spread is calculated by subtracting the interest rate paid on interest-bearing liabilities from the interest rate earned on interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



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As discussed above, the Companys net interest income is affected by the change in the amounts and mix
of interest-earning assets and interest-bearing liabilities, referred to as volume change, as well as by changes in yields earned on interest-earning assets and rates paid on deposits and other borrowed funds, referred to as rate
change. The following table presents, for the periods indicated, a summary of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities and the amounts of change
attributable to variations in volumes and rates.



|                                                     |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|---------------------------------------------------- | ---------------------------------------- | ------------------------ | --- | ---------------------------------------- |  | ------ | --- |  | ------ | ------ |  | ----- | ---- |  | ------ | --- |  | ---- | -
|                                                     |                                          | Years ended December 31, |    
|                                                     | 2009 compared to 2008Increase (decrease) |                          |     | 2008 compared to 2007Increase (decrease) | 
|                                                     | Volume                                   |                          |     | Rate                                     |  |        | Net |  |        | Volume |  |       | Rate |  |        | Net | 
|Interest earned on interest-earning assets:          |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|Loans (1)                                            |                                          | $                        | 772 |                                          |  | (1,765 | )   |  | (993   | )      |  | 2,217 |      |  | (1,350 | )   |  | 867  |  
|Investment securities:                               |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|Taxable                                              |                                          |                          | (75 | )                                        |  | (77    | )   |  | (152   | )      |  | (197  | )    |  | (12    | )   |  | (209 | )
|Tax-exempt (2)                                       |                                          |                          | (58 | )                                        |  | 7      |     |  | (51    | )      |  | (66   | )    |  | 4      |     |  | (62  | )
|Interest-earning deposits                            |                                          |                          | 27  |                                          |  |       |     |  | 27     |        |  | 1     |      |  | 1      |     |  | 2    |  
|Federal funds sold                                   |                                          |                          | 24  |                                          |  | (117   | )   |  | (93    | )      |  | (235  | )    |  | (215   | )   |  | (450 | )
|                                                     |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|Total interest earned on interest-earning assets     |                                          |                          | 690 |                                          |  | (1,952 | )   |  | (1,262 | )      |  | 1,720 |      |  | (1,572 | )   |  | 148  |  
|                                                     |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|Interest paid on interest-bearing liabilities:       |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|Savings and NOW                                      |                                          |                          | 198 |                                          |  | (104   | )   |  | 94     |        |  | 132   |      |  | (365   | )   |  | (233 | )
|Time                                                 |                                          |                          | 516 |                                          |  | (1,527 | )   |  | (1,011 | )      |  | 669   |      |  | (385   | )   |  | 284  |  
|Federal funds purchased                              |                                          |                          | (11 | )                                        |  |       |     |  | (11    | )      |  | 11    |      |  |       |     |  | 11   |  
|Other borrowings                                     |                                          |                          | (57 | )                                        |  | (49    | )   |  | (106   | )      |  | 107   |      |  | (1     | )   |  | 106  |  
|                                                     |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|Total interest paid on interest- bearing liabilities |                                          |                          | 646 |                                          |  | (1,680 | )   |  | (1,034 | )      |  | 919   |      |  | (751   | )   |  | 168  |  
|                                                     |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  
|Change in net interest income                        |                                          | $                        | 44  |                                          |  | (272   | )   |  | (228   | )      |  | 801   |      |  | (821   | )   |  | (20  | )
|                                                     |                                          |                          |     |                                          |  |        |     |  |        |        |  |       |      |  |        |     |  |      |  



|(1) | Non-accrual loans are included in the average loan totals used in the calculation of this table.
|--- | ------------------------------------------------------------------------------------------------

|(2) | Tax-exempt income from investment securities is presented on a tax equivalent basis assuming a 34% U.S. Federal tax rate.
|--- | -------------------------------------------------------------------------------------------------------------------------

Provision for Loan Losses. The provision for loan losses is based upon the Companys evaluation of the quality of the loan portfolio,
total outstanding and committed loans, previous loan losses and current and anticipated economic conditions. The amount of the provision for loan losses is a charge against earnings. Actual loan losses are charges against the allowance for loan
losses.

The Companys allowance for loan losses is maintained at a level deemed adequate to provide for known and inherent losses in the
loan portfolio. No assurance can be given that unforeseen adverse economic conditions or other circumstances will not result in increased provisions in the future, or that the allowance for loan losses will be adequate for actual losses.
Additionally, regulatory examiners may require the Company to recognize additions to the allowance based upon their judgment about information available to them at the time of their examinations.

The provisions for loan losses for the years ended December 31, 2009, 2008 and 2007 were $1,530, $2,881 and $462, respectively. The provision for loan
losses increased substantially in 2008 as management recognized weaknesses in the loan portfolio due to declining economic conditions, declining collateral values and an increased risk of some customers ability to service their loans due to
job losses. While the provision for loan losses decreased 46.9% from 2008 to 2009, the provision for loan losses for 2009 was still substantially higher than 2007, due to continuing pressures on loan performance in 2009. The Company saw an increase
in its loans past due over 30 days as a percentage of its total loan portfolio from 1.70% at the end of 2008 to 2.01% at the end of 2009. Within 2009, the Company saw improvement in loans past due over 30 days, with such loans declining from 2.40%
at June 30, 2009 to 2.01% at year end. Also, the Companys nonperforming loans increased from $2,912 on December 31, 2008 to $4,017 on December 31, 2009 but improved greatly from the end of the first quarter of 2009 when
nonperforming loans totaled $6,804. The Company expects to continue to see weaknesses in its loan portfolio in 2010 and is working to minimize its losses from non-accrual and past due loans. See Allowance for Loan Losses for further
discussion.



12



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Noninterest Income. Total noninterest income for the year ended December 31, 2009
increased $252 or 8.70% to $3,148 from $2,896 in 2008. The Companys principal source of noninterest income is service charges and fees on deposit accounts, particularly transaction accounts, fees on sales of mortgage loans, and commissions and
fees from investment, insurance, annuity and other bank products. The increase in 2009 is primarily attributable to an increase in the volume of mortgage loan sales. Mortgage loan fees increased $286 for the year ended December 31, 2009,
compared to 2008.

Total noninterest income for the year ended December 31, 2008 increased $264 or 10.03% to $2,896 from $2,632 in 2007.
The Companys principal source of noninterest income is service charges and fees on deposit accounts, particularly transaction accounts, fees on sales of mortgage loans, and commissions and fees from investment, insurance, annuity and other
bank products. The increase in 2008 is primarily attributable to an increase in service charges on deposits and loan accounts and mortgage loan fees. Service charges on deposit accounts increased $81 and service charges on loan accounts increased
$111 and mortgage loan fees increased $57 for the year ended December 31, 2008, compared to 2007.

Noninterest Expense.
Total noninterest expense for the year ended December 31, 2009 increased $1,325 or 13.46% to $11,171 from $9,846 in 2008. The increase in noninterest expense is attributable a $544 increase in FDIC premiums, and increase in commissions paid on
mortgage loan and investment sales and an increase in fixed asset costs due to the growth of the Company. A $135 increase in the cost of foreclosures led to an increase in other expenses.

Total noninterest expense for the year ended December 31, 2008 increased $1,322 or 15.51% to $9,846 from $8,524 in 2007. The increase in noninterest
expense is attributable to the effect of overall growth of the Company on personnel expenses and fixed asset costs as the Company added key personnel at our Smith Mountain Lake loan production office and our new Rustburg facility. The Company has
added eight new branches and a loan production facility to its operations since June 1999. Other expenses that contributed to the increase in other expense was a $28 increase in telephone expense, a $57 increase in loan fees paid, a $30 increase in
training and education and a $18 increase in indirect loan chargebacks.

Income Tax Expense. Applicable income taxes on 2009
earnings amounted to $100, resulting in an effective tax rate of 22.17% compared to $72, or 19.05% in 2008. The effective tax rate for 2009 is a function of the higher net income earned and the effects of interest earned on tax-exempt securities.

Applicable income taxes on 2008 earnings amounted to $72, resulting in an effective tax rate of 19.05% compared to $1,227, or 32.06% in 2007.
The effective tax rate for 2008 is a function of the lower net income earned and the effects of interest earned on tax-exempt loans.

Liquidity and Asset/Liability Management

Effective asset/liability management includes maintaining adequate liquidity and
minimizing the impact of future interest rate changes on net interest income. The responsibility for monitoring the Companys liquidity and the sensitivity of its interest-earning assets and interest-bearing liabilities lies with the Investment
Committee of the Bank which meets at least quarterly to review liquidity and the adequacy of funding sources.

Cash Flows. The
Company derives cash flows from its operating, investing and financing activities. Cash flows of the Company are primarily used to fund loans and purchase securities and are provided by the deposits and borrowings of the Company.

The Companys operating activities for the year ended December 31, 2009 resulted in net cash provided from operating activities of $766 compared
to net cash provided from operating activities of $2,968 in 2008. The decrease is primarily attributable to the cash paid for noninterest expenses of $10,589. This was $902 higher than 2008 due to higher personnel expenses, fixed asset costs and
FDIC insurance premiums in 2009. Offsetting this was cash received for income taxes totaled $353 in 2009 compared to cash paid of $1,087 in 2008. Also offsetting this was cash received from net interest income of $9,754, which was $555 lower than
the net interest received in 2008 as a result of a decrease in loan volume and interest received. Cash received from noninterest income in 2009 was $2,675 lower than the noninterest income amount received in 2008. Management expects



13



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any future potential decreases in the Companys cash provided by operating activities to be offset through changes in deposit pricing strategies and continued focus on improving the
efficiency of the Companys operations.

The Companys cash flows from investing activities for the year ended December 31,
2009 resulted in net cash provided of $4,629, compared to net cash used in investing activities of $45,864 in 2008. The increase is primarily attributable to an $11,080 decrease in cash used to make loans to customers as the Company decreased its
gross loans by 4.80% from 2008 to 2009 as compared to a 20.76% increase from 2007 to 2008. The Company experienced more paydowns, maturities and sales of available-for-sale mortgage-backed securities in 2009. The Company expects a lower volume of
paydowns in available-for-sale mortgage-backed securities in 2010 due to fewer mortgage-backed securities in the investment portfolio.

Net
cash provided by financing activities for the year ended December 31, 2009 was $10,739, compared to net cash provided by financing activities of $40,478 in 2008. The decrease in net cash provided is primarily attributable to a decrease in time
deposits from 2008 to 2009 compared to 2007 to 2008. The Company also repaid a note payable to the Federal Home Loan Bank. The Company had success in attracting demand, savings and NOW deposits in 2009.

The Companys operating activities for the year ended December 31, 2008 resulted in net cash provided from operating activities of $2,968,
compared to net cash provided from operating activities of $3,773 in 2007. The decrease is primarily attributable to the cash paid for noninterest expenses of $9,687. This was $1,940 higher than 2007 due to higher personnel expenses and fixed asset
costs in 2008. Also, the Companys cash paid for income taxes totaled $1,087 in 2008 compared to $1,019 in 2007. Partially offsetting this was cash received from net interest income of $10,309, which was $125 higher than the net interest
received in 2007 as a result of an increase in loan volume and interest received of $387 and cash received from noninterest income in 2008 that was $1,081 higher than the noninterest income amount received in 2007.

The Companys cash flows from investing activities for the year ended December 31, 2008 resulted in net cash used of $45,864, compared to net cash
used in investing activities of $20,332 in 2007. The increase is primarily attributable to a $24,209 increase in cash used to make loans to customers as the Company increased its gross loans by 20.76% from 2007 to 2008 as compared to 11.83% from
2006 to 2007. The Company experienced fewer paydowns and maturities of available-for-sale mortgage-backed securities.

Net cash provided by
financing activities for the year ended December 31, 2008 was $40,478, compared to net cash provided by financing activities of $20,317 in 2007. The increase in net cash provided is primarily attributable to the higher net increase in deposits
from 2007 to 2008 compared to 2006 to 2007. The Company had success in attracting all different types of deposits to fund the growth in the loan portfolio.

Liquidity. Liquidity measures the ability of the Company to meet its maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and
to provide for customers credit needs. Liquidity represents an institutions ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from
alternative funding sources.

The Companys liquidity is provided by cash and due from banks, federal funds sold, investments
available-for-sale, managing investment maturities, interest-earning deposits in other financial institutions and loan repayments. The Companys ratio of liquid assets to deposits and short-term borrowings was 16.37% as of December 31,
2009 as compared to 9.16% as of December 31, 2008. The Company sells excess funds as overnight federal funds sold to provide an immediate source of liquidity. Federal funds sold at December 31, 2009 was $2,008 as compared to $9,178 at
December 31, 2008. The decrease in federal funds sold in 2009 was primarily related to retaining excess funds in our Federal Reserve account which began paying interest in 2009. Cash and due from banks of $30,052, which includes funds in our
Federal Reserve account, as of December 31, 2009 was $23,304 higher when compared to December 31, 2008 due to the lack of loan demand. The Company expects to deploy some of this cash into securities in 2010 as we expect loan growth to be
minimal in 2010.



14



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The level of deposits may fluctuate significantly due to seasonal business cycles of depository customers.
Levels of deposits are also affected by convenience of branch locations and ATMs to the customer, the rates offered on interest-bearing deposits and the attractiveness of noninterest-bearing deposit offerings compared with the competition.
Similarly, the level of demand for loans may vary significantly and at any given time may increase or decrease substantially. However, unlike the level of deposits, management has more direct control over lending activities and maintains the level
of those activities according to the amounts of available funds. Loan demand may be affected by the overall health of the local economy, loan rates compared with the competition and other loan features offered by the Company.

As a result of the Companys management of liquid assets and its ability to generate liquidity through alternative funding sources, management believes
that the Company maintains overall liquidity that is sufficient to satisfy its depositors requirements and to meet customers credit needs. Additional sources of liquidity available to the Company include its capacity to borrow funds
through correspondent banks and the Federal Home Loan Bank. The total amount available for borrowing to the Company for liquidity purposes was $63,920 on December 31, 2009.

The Company obtains sources of funds through growth in deposits, scheduled payments and prepayments from the loan and investment portfolios and retained earnings growth, and may purchase or borrow funds
through the Federal Reserves discount window. The Company also has sources of liquidity through three correspondent banking relationships. The Company uses its funds to fund loan and investment growth. Excess funds are sold daily to other
institutions. The Company had one borrowing with the Federal Home Loan Bank during 2008 with a principal balance of $5,000 with a variable interest rate. Principal payments in the amount of $5,000 were made in 2009 leaving a principal balance of $0
on December 31, 2009. The Company also has a $5,000 holding company line of credit with a correspondent bank for bank capital purposes with an outstanding balance of $2,000 on December 31, 2009 as compared to $1,000 on December 31,
2008.

Contractual Obligations

The Company has entered into certain contractual obligations including long-term debt and operating leases. The table does not include deposit liabilities entered into in the ordinary course of banking. Operating Leases include leases of
our Amherst facility, Timberlake and Wyndhurst facilities. Also included are contractual leases for offsite ATMs and postage machinery. The following table summarizes the Companys contractual obligations as of December 31, 2009.



|                                   |  |            |  |   |      
|---------------------------------- |  | ---------- |  | - | -----
|Pinnacle Bankshares Line of Credit |  | 2011       |  | $ | 2,000
|                                   |  |            |  |   |      
|                                   |  |           
|Operating Leases                   |  |            |  |   |      
|                                   |  | 2010       |  | $ | 230  
|                                   |  | 2011       |  | $ | 150  
|                                   |  | 2012       |  | $ | 139  
|                                   |  | 2013       |  | $ | 141  
|                                   |  | 2014       |  | $ | 141  
|                                   |  | After 2014 |  | $ | 2,151
|                                   |  |            |  |   |      

Interest Rates

While no single measure can completely identify the impact of changes in interest rates on net interest income, one gauge of interest rate sensitivity is to
measure, over a variety of time periods, the differences in the amounts of the Companys rate-sensitive assets and rate-sensitive liabilities. These differences or gaps provide an indication of the extent to which net interest
income may be affected by future changes in interest rates. A positive gap exists when rate-sensitive assets exceed rate-sensitive liabilities and indicates that a greater volume of assets than liabilities will reprice during a given
period. This mismatch may enhance earnings in a rising interest rate environment and may inhibit earnings in a declining interest rate environment. Conversely, when rate-sensitive liabilities exceed rate-sensitive assets, referred to as a
negative gap, it indicates that a greater volume of liabilities than assets will reprice during the period. In this case, a rising interest rate environment may inhibit earnings and a declining interest rate environment may enhance
earnings. The cumulative one-year gap as of December 31, 2009 was $(25,459), representing 7.66% of total assets. This negative gap falls within the parameters set by the Company.



15



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The following table illustrates the Companys interest rate sensitivity gap position at
December 31, 2009.



|                                         |  |        |         |   |           |        |           |        |            |       
|---------------------------------------- |  | ------ | ------- | - | --------- | ------ | --------- | ------ | ---------- | ------
|                                         |  | 1 year |         |   | 1-3 years |        | 3-5 years |        | 5-15 years
|ASSET/(LIABILITY):                       |  |        |         |   |           |        |           |        |            |       
|Cumulative interest rate sensitivity gap |  | $      | (25,459 | ) |           | 39,205 |           | 21,221 |            | 43,930

As of December 31, 2009, the
Company was liability-sensitive in periods up to one year and was asset-sensitive beyond one year. The foregoing table does not necessarily indicate the impact of general interest rate movements on the Companys net interest yield, because the
repricing of various categories of assets and liabilities is discretionary and is subject to competition and other pressures. As a result, various assets and liabilities indicated as repricing within the same period may reprice at different times
and at different rate levels. Management attempts to mitigate the impact of changing interest rates in several ways, one of which is to manage its interest rate-sensitivity gap. In addition to managing its asset/liability position, the Company has
taken steps to mitigate the impact of changing interest rates by generating noninterest income through service charges, and offering products that are not interest rate-sensitive.

Effects of Inflation

The effect of changing prices on financial institutions is typically
different from other industries as the Companys assets and liabilities are monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes is directly related to price level
indices. Impacts of inflation on interest rates, loan demand and deposits are not reflected in the consolidated financial statements.

Investment Portfolio

The Companys investment portfolio is used primarily for investment income and secondarily for
liquidity purposes. The Company invests funds not used for capital expenditures or lending purposes in securities of the U.S. Government and its agencies, mortgage-backed securities, and taxable and tax-exempt municipal bonds, corporate securities
or certificates of deposit. Obligations of the U.S. Government and its agencies include treasury notes and callable or noncallable agency bonds. The mortgage-backed securities include mortgage-backed security pools that are diverse as to interest
rates. The Company has not invested in derivatives.

Investment securities available-for-sale as of December 31, 2009 totaled $19,105, an
increase of $7,679 or 67.21% from $11,426 as of December 31, 2008. Investment securities held-to-maturity decreased to $1,051 as of December 31, 2009 from $2,505 as of December 31, 2008, a decrease of $1,454 or 58.04%. Securities
increased in 2009 as funds from loan payoffs, security maturities, calls and pay downs were used to buy additional bonds and kept as cash as loan demand diminished and credit standards were tightened in 2009.

The following table presents the composition of the Companys investment portfolios as of the dates indicated.



|                                                                                      |               |              |           |  |               |  |           |  |               |  |           |  |       
|------------------------------------------------------------------------------------- | ------------- | ------------ | --------- |  | ------------- |  | --------- |  | ------------- |  | --------- |  | ------
|Available-for-Sale                                                                    |               | December 31,
|                                                                                      | 2009          |              | 2008      |  | 2007         
|                                                                                      | Amortizedcost |              | Fairvalue |  | Amortizedcost |  | Fairvalue |  | Amortizedcost |  | Fairvalue
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |               | $            | 11,532    |  | 11,580        |  | 2,031     |  | 2,040         |  | 2,647     |  | 2,657 
|Obligations of states and political subdivisions                                      |               |              | 4,728     |  | 4,839         |  | 4,891     |  | 4,973         |  | 6,142     |  | 6,178 
|Corporate securities                                                                  |               |              | 1,000     |  | 1,003         |  | 999       |  | 974           |  | 2,498     |  | 2,474 
|Mortgage-backed securities  government                                               |               |              | 1,514     |  | 1,573         |  | 3,339     |  | 3,389         |  | 4,132     |  | 4,101 
|Other securities                                                                      |               |              | 110       |  | 110           |  | 50        |  | 50            |  | 50        |  | 50    
|                                                                                      |               |              |           |  |               |  |           |  |               |  |           |  |       
|Total available-for-sale                                                              |               | $            | 18,884    |  | 19,105        |  | 11,310    |  | 11,426        |  | 15,469    |  | 15,460
|                                                                                      |               |              |           |  |               |  |           |  |               |  |           |  |       



16



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|                                                 |               |              |           |  |               |  |           |  |               |  |           |  |      
|------------------------------------------------ | ------------- | ------------ | --------- |  | ------------- |  | --------- |  | ------------- |  | --------- |  | -----
|Held-to-Maturity                                 |               | December 31,
|                                                 | 2009          |              | 2008      |  | 2007         
|                                                 | Amortizedcost |              | Fairvalue |  | Amortizedcost |  | Fairvalue |  | Amortizedcost |  | Fairvalue
|Obligations of states and political subdivisions |               | $            | 1,051     |  | 1,078         |  | 2,505     |  | 2,575         |  | 4,175     |  | 4,213
|                                                 |               |              |           |  |               |  |           |  |               |  |           |  |      
|Total held-to-maturity                           |               | $            | 1,051     |  | 1,078         |  | 2,505     |  | 2,575         |  | 4,175     |  | 4,213
|                                                 |               |              |           |  |               |  |           |  |               |  |           |  |      

The following table presents the maturity distribution based on fair
values and amortized costs of the investment portfolios as of the dates indicated.

INVESTMENT PORTFOLIO  MATURITY
DISTRIBUTION



|                                                      |  |                   |        |           |        |       |      |  
|----------------------------------------------------- |  | ----------------- | ------ | --------- | ------ | ----- | ---- | -
|                                                      |  | December 31, 2009 |       
|Available-for-Sale                                    |  | AmortizedCost     |        | FairValue |        | Yield |     
|U.S. Treasury securities and obligations of U.S.      |  |                   |        |           |        |       |      |  
|Government corporations:                              |  |                   |        |           |        |       |      |  
|Within one year                                       |  | $                 |        |           |        |       |      |  
|After one but within five years                       |  |                   | 6,122  |           | 6,114  |       | 3.22 | %
|After five years through ten years                    |  |                   | 5,410  |           | 5,466  |       | 4.46 | %
|Obligations of states and political subdivisions (1): |  |                   |        |           |        |       |      |  
|Within one year                                       |  |                   | 465    |           | 468    |       | 5.64 | %
|After one but within five years                       |  |                   | 3,046  |           | 3,169  |       | 5.65 | %
|After five years through ten years                    |  |                   | 230    |           | 226    |       | 7.00 | %
|After ten years                                       |  |                   | 987    |           | 976    |       | 5.16 | %
|Corporate securities:                                 |  |                   |        |           |        |       |      |  
|After one but within five years                       |  |                   | 1,000  |           | 1,003  |       | 4.23 | %
|Mortgage-backed securities  government               |  |                   | 1,514  |           | 1,573  |       | 4.48 | %
|Other securities (2)                                  |  |                   | 110    |           | 110    |       |     |  
|                                                      |  |                   |        |           |        |       |      |  
|Total available-for-sale                              |  | $                 | 18,884 |           | 19,105 |       |      |  
|                                                      |  |                   |        |           |        |       |      |  
|Held-to-Maturity                                      |  |                   |        |           |        |       |      |  
|Obligations of states and political subdivisions (1): |  |                   |        |           |        |       |      |  
|Within one year                                       |  |                   | 250    |           | 256    |       | 4.61 | %
|After one but within five years                       |  |                   | 801    |           | 822    |       | 4.85 | %
|                                                      |  |                   |        |           |        |       |      |  
|Total held-to-maturity                                |  | $                 | 1,051  |           | 1,078  |       |      |  
|                                                      |  |                   |        |           |        |       |      |  



|(1) | Obligations of states and political subdivisions include yields of taxexempt securities presented on a tax-equivalent basis assuming a 34% U.S. Federal tax rate.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Equity securities are assumed to have a life greater than ten years.
|--- | --------------------------------------------------------------------

Loan Portfolio

The Companys net loans were $265,904 as of December 31, 2009, a
decrease of $13,295 or 4.76% from $279,199 as of December 31, 2008. This decrease resulted primarily from decreased volume of real estate loan originations during 2009. The Companys ratio of net loans to total deposits was 88.01% as of
December 31, 2009 compared to 97.20% as of December 31, 2008.

Typically, the Company maintains a ratio of loans to deposits of
between 80% and 100%. The loan portfolio primarily consists of commercial, real estate (including real estate term loans, construction loans and other loans secured by real estate), and loans to individuals for household, family and other consumer
expenditures. However, the Company adjusts its mix of lending and the terms of its loan programs according to market conditions and other factors. The Companys loans are typically made to businesses and individuals located within the
Companys market area, most of whom have account relationships with the Bank. There is no concentration of



17



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loans exceeding 10% of total loans that is not disclosed in the categories presented below. The Company has not made any loans to any foreign entities including governments, banks, businesses or
individuals. Commercial and construction loans in the Companys portfolio are primarily variable rate loans and have little interest rate risk.

The Company had no option adjustable rate mortgages, subprime loans or loans with teaser rates and similar products as of December 31, 2009. Junior lien mortgages totaled of $26,055 as of December 31, 2009 with a specific
allowance for loan loss calculation of $368. The Company had interest only loans totaling $1,365 as of December 31, 2009. Residential mortgage loans with a loan to collateral value ratio exceeding 100% were $1,830 as of December 31, 2009.

The following table presents the composition of the Companys loan portfolio as of the dates indicated.

LOAN PORTFOLIO



|                                                                           |  |              |         |   |      |         |   |      |         |   |      |         |   |      |         |  
|-------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | ------- | - | ---- | ------- | - | ---- | ------- | - | ---- | ------- | -
|                                                                           |  | December 31, |        
|                                                                           |  | 2009         |         |   | 2008 |         |   | 2007 |         |   | 2006 |         |   | 2005 |        
|Real estate loans:                                                         |  |              |         |   |      |         |   |      |         |   |      |         |   |      |         |  
|Residential real estate                                                    |  | $            | 116,259 |   |      | 117,806 |   |      | 75,579  |   |      | 68,540  |   |      | 55,936  |  
|Commercial real estate                                                     |  |              | 81,219  |   |      | 86,915  |   |      | 92,102  |   |      | 72,797  |   |      | 53,039  |  
|Loans to individuals for household, family and other consumer expenditures |  |              | 50,097  |   |      | 54,329  |   |      | 46,834  |   |      | 46,360  |   |      | 44,369  |  
|Commercial and industrial loans                                            |  |              | 21,589  |   |      | 23,820  |   |      | 19,909  |   |      | 21,694  |   |      | 28,659  |  
|All other loans                                                            |  |              | 612     |   |      | 514     |   |      | 240     |   |      | 454     |   |      | 935     |  
|                                                                           |  |              |         |   |      |         |   |      |         |   |      |         |   |      |         |  
|                                                                           |  |              |         |   |     
|Total loans, gross                                                         |  |              | 269,776 |   |      | 283,384 |   |      | 234,664 |   |      | 209,845 |   |      | 182,938 |  
|                                                                           |  |              |         |   |     
|Less unearned income and fees                                              |  |              | (149    | ) |      | (216    | ) |      | (192    | ) |      | (214    | ) |      | (162    | )
|                                                                           |  |              |         |   |      |         |   |      |         |   |      |         |   |      |         |  
|                                                                           |  |              |         |   |     
|Loans, net of unearned income and fees                                     |  |              | 269,627 |   |      | 283,168 |   |      | 234,472 |   |      | 209,631 |   |      | 182,776 |  
|                                                                           |  |              |         |   |     
|Less allowance for loan losses                                             |  |              | (3,723  | ) |      | (3,969  | ) |      | (1,720  | ) |      | (1,770  | ) |      | (1,508  | )
|                                                                           |  |              |         |   |      |         |   |      |         |   |      |         |   |      |         |  
|Loans, net                                                                 |  | $            | 265,904 |   |      | 279,199 |   |      | 232,752 |   |      | 207,861 |   |      | 181,268 |  
|                                                                           |  |              |         |   |      |         |   |      |         |   |      |         |   |      |         |  

Commercial Loans. Commercial and industrial loans accounted for 8.00% of the Companys loan portfolio as
of December 31, 2009 compared to 8.41% as of December 31, 2008. Such loans are generally made to provide operating lines of credit, to finance the purchase of inventory or equipment, and for other business purposes. Commercial loans are
primarily made at rates that adjust with changes in the prevailing prime interest rate, are generally made for a maximum term of five years (unless they are term loans), and generally require interest payments to be made monthly. The
creditworthiness of these borrowers is reviewed, analyzed and evaluated on a periodic basis. Most commercial loans are collateralized with business assets such as accounts receivable, inventory and equipment. Even with substantial collateralization
such as all of the assets of the business and personal guarantees, commercial lending involves considerable risk of loss in the event of a business downturn or failure of the business.

Real Estate Loans. Real estate loans accounted for 73.20% of the Companys loan portfolio as of December 31, 2009 compared to 72.24% as of December 31, 2008. The Company makes
commercial real estate term loans that are typically secured by a first deed of trust.

As of December 31, 2009, 58.87% of the real
estate loans were secured by 1-4 family residential properties. Of these 1-4 family residential property loans, 8.29% were construction loans, 30.31% were home equity lines of credit, 55.75% were closed end loans secured by a first deed of trust and
5.65% were closed end loans secured by a second deed of trust.

As of December 31, 2009, 41.13% of the real estate
loans were secured by commercial real estate. Of the total commercial real estate loans as of December 31, 2009, 31.05% were acquisition and development loans, 9.68% were secured by farmland, 44.93% were secured by owner occupied commercial
real estate and 14.34% were secured by non-owner occupied commercial real estate typically 1stand 2nddeeds of trust.

Real estate lending involves risk elements when there is lack of timely payment and/or a decline in the value of the
collateral. While both commercial and residential real estate values in the Companys market declined in 2008, values have stabilized in 2009. The Company is still, however, seeing evidence of some borrowers being



18



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strained in their ability to service loans. This has resulted in a higher number of loan impairments in 2009 and may result in future impairments in 2010. The Company continuously monitors the
local real estate market for signs of weakness that could decrease collateral values.

Installment Loans. Installment loans are
represented by loans to individuals for household, family and other consumer expenditures with typical collateral such as automobile titles. Installment loans accounted for 18.57% of the Companys loan portfolio as of December 31, 2009
compared to 19.17% as of December 31, 2008.

Loan Maturity and Interest Rate Sensitivity. The following table presents loan
portfolio information related to maturity distribution of commercial and industrial loans and real estate construction loans based on scheduled repayments at December 31, 2009.



|                                |  |                    |        |                      |       |                     |     |       |       
|------------------------------- |  | ------------------ | ------ | -------------------- | ----- | ------------------- | --- | ----- | ------
|                                |  | Due withinone year |        | Due one tofive years |       | Due afterfive years |     | Total
|Commercial and industrial loans |  | $                  | 17,819 |                      | 2,963 |                     | 807 |       | 21,589
|Real estate  construction      |  |                    | 9,640  |                      |      |                     |    |       | 9,640 

The following table presents the
interest rate sensitivity of commercial and industrial loans and real estate construction loans maturing after one year or longer as of December 31, 2009.

INTEREST RATE SENSITIVITY



|                              |  |   |      
|----------------------------- |  | - | -----
|Fixed interest rates          |  | $ | 3,768
|Variable interest rates       |  |   | 2    
|                              |  |   |      
|Total maturing after one year |  | $ | 3,770
|                              |  |   |      

Restructured Loans. The Company had no restructured
loans at December 31, 2009 and 2008.

Nonperforming Assets. Interest on loans is normally accrued from the date a
disbursement is made and recognized as income as it is earned. Generally, the Company reviews any loan on which payment has not been made for 90 days for potential nonaccrual. The loan is examined and the collateral is reviewed to determine loss
potential. If the loan is placed on nonaccrual status, any prior accrued interest that remains unpaid is reversed. Loans on nonaccrual status amounted to $2,619, $2,292 and $634 as of December 31, 2009, 2008 and 2007, respectively. Interest
income 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 included in income on these loans was not significant for 2009, 2008 or 2007. There were no
commitments to lend additional funds to customers whose loans were on nonaccrual status at December 31, 2009. Three foreclosed properties totaling $461 were on hand as of December 31, 2009 compared to $300 as of December 31, 2008 and
$0 as of 2007.

The current recession which began in the second half of 2008 has led to an increase in the Companys nonperforming assets
when compared to 2007 levels. Some commercial borrowers have struggled to service their loans due to the difficult business climate, lower revenues, tightening of credit markets and difficulties in moving their product. Some noncommercial borrowers
have experienced job losses and other economic challenges, as well. We expect nonperforming assets to maintain current levels in 2010 as the recession continues. The Company will continue to monitor the situation and take steps necessary to mitigate
losses in its loan portfolio, such as increased early monitoring of its portfolio to identify problem credits and continued counseling of customers to discuss options available to them.

The following tables present information with respect to the Companys nonperforming assets and nonaccruing loans 90 days or more past due by type as
of the dates indicated.



19



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NONPERFORMING ASSETS



|                               |  |              |       |      |       |      |    
|------------------------------ |  | ------------ | ----- | ---- | ----- | ---- | ---
|                               |  | December 31,
|                               |  | 2009         |       | 2008 |       | 2007
|Nonaccrual loans               |  | $            | 2,619 |      | 2,292 |      | 634
|Loans 90 days or more past due |  |              | 1,398 |      | 620   |      | 156
|Foreclosed properties          |  |              | 461   |      | 300   |      |   
|                               |  |              |       |      |       |      |    
|Total nonperforming assets     |  | $            | 4,478 |      | 3,212 |      | 790
|                               |  |              |       |      |       |      |    

Nonperforming assets totaled $4,478 or 1.35% of total assets as of
December 31, 2009, compared to $3,212 or 1.00% as of December 31, 2008 and $790 or 0.28% as of December 31, 2007. The following table presents the balance of accruing loans 90 days or more past due by type as of the dates indicated.

ACCRUING LOANS 90 DAYS OR MORE

PAST DUE BY TYPE



|                                              |  |              |       |      |     |      |    
|--------------------------------------------- |  | ------------ | ----- | ---- | --- | ---- | ---
|                                              |  | December 31,
|                                              |  | 2009         |       | 2008 |     | 2007
|Loans 90 days or more past due by type:       |  |              |       |      |     |      |    
|Real estate loans                             |  | $            | 1,283 |      | 546 |      | 149
|Loans to individuals                          |  |              | 84    |      | 41  |      | 7  
|Commercial loans                              |  |              | 31    |      | 33  |      |   
|                                              |  |              |       |      |     |      |    
|Total accruing loans 90 days or more past due |  | $            | 1,398 |      | 620 |      | 156
|                                              |  |              |       |      |     |      |    

Allowance for Loan Losses. The Company maintains an
allowance for loan losses which it considers adequate to cover the risk of losses in the loan portfolio. The allowance is based upon managements ongoing evaluation of the quality of the loan portfolio, total outstanding and committed loans,
previous charges against the allowance and current and anticipated economic conditions. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to
calculate the allowance. The Companys management believes that as of December 31, 2009, 2008 and 2007, the allowance was adequate. The amount of the provision for loan losses is a charge against earnings. Actual loan losses are charged
against the allowance for loan losses.

Management evaluates the reasonableness of the allowance for loan losses on a monthly basis and
adjusts the provision as deemed necessary using regulatory approved methodology. Management uses historical loss data by loan type as well as current economic factors in its calculation of allowance for loan loss. Management also uses qualitative
factors such as changes in lending policies and procedures, changes in national and local economies, changes in the nature and volume of the loan portfolio, changes in experience of lenders and the loan department, changes in volume and severity of
past due and classified loans, changes in quality of the Banks loan review system, the existence and effect of concentrations of credit and external factors such as competition and regulation in its allowance for loan loss calculation. Each
qualitative factor is evaluated and applied to each type of loan in the Companys portfolio and a percentage of each loan is reserved as allowance. A percentage of each loan is also reserved according to the loan types historical loss
data. Larger percentages of allowance are taken as the risk for a loan is determined to be greater. As of December 31, 2009, the allowance for loan losses totaled $3,723 or 1.38% of total loans, net of unearned income and fees, compared to
$3,969 or 1.40% of total loans, net of unearned income and fees, as of December 31, 2008. The provision for loan losses for the years ended December 31, 2009 and 2008 was $1,530 and $2,881, respectively. Net charge-offs for the Company
were $1,776 and $632 for the years ended December 31, 2009 and 2008, respectively. The ratio of net loan charge-offs during the period to average loans outstanding for the period was 0.65% and 0.24% for the years ended December 31, 2009
and 2008, respectively.

As of December 31, 2008, the allowance for loan losses totaled $3,969 or 1.40% of total loans, net of unearned
income and fees compared to $1,720 or 0.73% of total loans, net of unearned income and fees as of December 31, 2007. The provision for loan losses for the years ended December 31, 2008 and 2007 was $2,881 and $462, respectively. Net
charge-offs for the Company were $632 and $512 for the years ended December 31, 2008 and 2007, respectively. The ratio of net loan charge-offs during the period to average loans outstanding for the period was 0.24% and 0.23% for the years ended
December 31, 2008 and 2007, respectively.



20



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At the end of 2008 the Company deemed it prudent to make a special provision in excess of $2,000 to the
allowance for loan losses, over and beyond the regular monthly loss provision, after reviewing nonperforming and potential problem loans, the general economic climate and declining collateral values.

The following table presents charged off loans, provisions for loan losses, recoveries on loans previously charged off, allowance adjustments and the amount
of the allowance for the years indicated.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES



|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|-------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | ----- | - | ---- | ----- | - | ---- | ----- | - | ---- | ----- | -
|                                                                           |  | December 31, |       
|                                                                           |  | 2009         |        |   | 2008 |       |   | 2007 |       |   | 2006 |       |   | 2005 |      
|Balance at beginning of year                                               |  | $            | 3,969  |   |      | 1,720 |   |      | 1,770 |   |      | 1,508 |   |      | 1,502 |  
|Loan charge-offs:                                                          |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Real estate loans  residential                                            |  |              |       |   |      |      |   |      |      |   |      |      |   |      |      |  
|Real estate loans  commercial                                             |  |              | (1,252 | ) |      | (252  | ) |      | (223  | ) |      |      |   |      |      |  
|Commercial and industrial loans                                            |  |              | (112   | ) |      | (200  | ) |      | (137  | ) |      |      |   |      | (66   | )
|Loans to individuals for household, family and other consumer expenditures |  |              | (693   | ) |      | (353  | ) |      | (286  | ) |      | (206  | ) |      | (314  | )
|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Total loan charge-offs                                                     |  |              | (2,057 | ) |      | (805  | ) |      | (646  | ) |      | (206  | ) |      | (380  | )
|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Loan recoveries:                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Real estate loans  commercial                                             |  |              | 80     |   |      | 33    |   |      |      |   |      |      |   |      |      |  
|Commercial and industrial loans                                            |  |              | 37     |   |      | 25    |   |      |      |   |      |      |   |      |      |  
|Loans to individuals for household, family and other consumer expenditures |  |              | 164    |   |      | 115   |   |      | 134   |   |      | 129   |   |      | 156   |  
|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Total recoveries                                                           |  |              | 281    |   |      | 173   |   |      | 134   |   |      | 129   |   |      | 156   |  
|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Net loan charge-offs                                                       |  |              | (1,776 | ) |      | (632  | ) |      | (512  | ) |      | (77   | ) |      | (224  | )
|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Provisions for loan losses                                                 |  |              | 1,530  |   |      | 2,881 |   |      | 462   |   |      | 339   |   |      | 230   |  
|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  
|Balance at end of year                                                     |  | $            | 3,723  |   |      | 3,969 |   |      | 1,720 |   |      | 1,770 |   |      | 1,508 |  
|                                                                           |  |              |        |   |      |       |   |      |       |   |      |       |   |      |       |  

The following table presents net charge offs to average loans net unearned income and fees.



|                                                                  |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|----------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                  |  | 2009 |   |  | 2008 |   |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Net charge-offs to average loans, net of unearned income and fees |  | 0.65 | % |  | 0.24 | % |  | 0.23 | % |  | 0.04 | % |  | 0.13 | %

The primary risk elements
considered by management with respect to each installment and conventional real estate loan are lack of timely payment and the value of the collateral. The primary risk elements with respect to real estate construction loans are fluctuations in real
estate values in the Companys market areas, inaccurate estimates of construction costs, fluctuations in interest rates, the availability of conventional financing, the demand for housing in the Companys market area and general economic
conditions. The primary risk elements with respect to commercial loans are the financial condition of the borrower, general economic conditions in the Companys market area, the sufficiency of collateral, the timeliness of payment and, with
respect to adjustable rate loans, interest rate fluctuations. Management has a policy of requesting and reviewing annual financial statements from its commercial loan customers and periodically reviews the existence of collateral and its value at
least annually. Management also has a reporting system that monitors all past due loans and has adopted policies to pursue its creditors rights in order to preserve the Companys position. Management also recognizes the real estate values
are declining in its market and is diligently monitoring appraisal values at least annually.

Loans are charged against the allowance when, in
managements opinion, they are deemed uncollectible, although the Company continues to aggressively pursue collection. The Company considers a number of factors to determine the need for and timing of charge-offs including the following:
whenever any commercial loan becomes past due for 120 days for any scheduled principal or interest payment and collection is considered



21



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uncollectible; whenever foreclosure on real estate collateral or liquidation of other collateral does not result in full payment of the obligation and the deficiency or some portion thereof is
deemed uncollectible, the uncollectible portion is charged-off; whenever any installment loan becomes past due for 120 days and collection is considered unlikely; whenever any repossessed vehicle remains unsold for 60 days after repossession;
whenever a bankruptcy notice is received on any installment loan and review of the facts results in an assessment that all or most of the balance will not be collected, the loan will be placed in non-accrual status; whenever a bankruptcy notice is
received on a small, unsecured, revolving installment account; and whenever any other small, unsecured, revolving installment account becomes past due for 180 days.

Although management believes that the allowance for loan losses is adequate to absorb losses as they arise, there can be no assurance that (i) the Company will not sustain losses in any given period
which could be substantial in relation to the size of the allowance for loan losses, (ii) the Companys level of nonperforming loans will not increase, (iii) the Company will not be required to make significant additional provisions
to its allowance for loan losses, or (iv) the level of net charge-offs will not increase and possibly exceed applicable reserves.

The
following table presents the allocation of the allowance for loan losses as of the dates indicated. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any category of loans.



|                                                                            |                         |                   |                                               |  |                   |                         |  |                                               |  |        |                         |  |                                               |                   |        |                         |  |                                               |  |        |                         |  |                                               |  |        |  
|--------------------------------------------------------------------------- | ----------------------- | ----------------- | --------------------------------------------- |  | ----------------- | ----------------------- |  | --------------------------------------------- |  | ------ | ----------------------- |  | --------------------------------------------- | ----------------- | ------ | ----------------------- |  | --------------------------------------------- |  | ------ | ----------------------- |  | --------------------------------------------- |  | ------ | -
|                                                                            |                         | December 31, 2009 |                                               |  | December 31, 2008 |                         |  | December 31, 2007                             |  |        | December 31, 2006       |  |                                               | December 31, 2005 |       
|                                                                            | Allowancefor loanlosses |                   | Percent ofloans in eachcategory tototal loans |  |                   | Allowancefor loanlosses |  | Percent ofloans in eachcategory tototal loans |  |        | Allowancefor loanlosses |  | Percent ofloans in eachcategory tototal loans |                   |        | Allowancefor loanlosses |  | Percent ofloans in eachcategory tototal loans |  |        | Allowancefor loanlosses |  | Percent ofloans in eachcategory tototal loans | 
|Real estate loans:                                                          |                         |                   |                                               |  |                   |                         |  |                                               |  |        |                         |  |                                               |                   |        |                         |  |                                               |  |        |                         |  |                                               |  |        |  
|Residential                                                                 |                         | $                 | 2,179                                         |  | 43.10             | %                       |  | 1,530                                         |  | 41.57  | %                       |  | 57                                            |                   | 32.21  | %                       |  | 17                                            |  | 24.72  | %                       |  | 75                                            |  | 30.58  | %
|Commercial                                                                  |                         |                   | 1,042                                         |  | 30.11             | %                       |  | 1,231                                         |  | 30.67  | %                       |  | 970                                           |                   | 39.25  | %                       |  | 282                                           |  | 36.75  | %                       |  | 173                                           |  | 28.99  | %
|Loans to individuals for households, family and other consumer expenditures |                         |                   | 293                                           |  | 18.57             | %                       |  | 635                                           |  | 19.17  | %                       |  | 416                                           |                   | 19.96  | %                       |  | 502                                           |  | 22.09  | %                       |  | 417                                           |  | 24.25  | %
|Commercial and industrial loans                                             |                         |                   | 209                                           |  | 8.00              | %                       |  | 573                                           |  | 8.41   | %                       |  | 226                                           |                   | 8.48   | %                       |  | 509                                           |  | 16.22  | %                       |  | 730                                           |  | 15.66  | %
|All other loans                                                             |                         |                   |                                              |  | 0.22              | %                       |  |                                              |  | 0.18   | %                       |  |                                              |                   | 0.10   | %                       |  |                                              |  | 0.22   | %                       |  |                                              |  | 0.52   | %
|Unallocated                                                                 |                         |                   |                                              |  |                  |                         |  |                                              |  |       |                         |  | 51                                            |                   |       |                         |  | 460                                           |  |       |                         |  | 113                                           |  |       |  
|                                                                            |                         |                   |                                               |  |                   |                         |  |                                               |  |        |                         |  |                                               |                   |        |                         |  |                                               |  |        |                         |  |                                               |  |        |  
|Totals                                                                      |                         | $                 | 3,723                                         |  | 100.00            | %                       |  | 3,969                                         |  | 100.00 | %                       |  | 1,720                                         |                   | 100.00 | %                       |  | 1,770                                         |  | 100.00 | %                       |  | 1,508                                         |  | 100.00 | %
|                                                                            |                         |                   |                                               |  |                   |                         |  |                                               |  |        |                         |  |                                               |                   |        |                         |  |                                               |  |        |                         |  |                                               |  |        |  

While consumer related charge-offs represent a majority of total charge-offs over the last three years, they are of a low
dollar amount on an individual loan basis. Commercial loans on the other hand, though few in terms of the number of charge-offs over the past three years, have the potential to greatly impact the allowance if a particular loan defaults. The
Banks loan review team uses the principles of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) topic Receivables, when determining the allocation of allowance for loan losses between loan
categories. The determination of a loan categorys allowance is based on the probability of a loans default and the probability of loss in the event of a default.

Credit Risk Management

The risk of nonpayment of loans is an inherent aspect of commercial
banking. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and various types of loans. The Company strives to minimize its credit risk exposure by its credit
underwriting standards and loan policies and procedures. Management continually evaluates the credit risks of its loans and believes it has provided adequately for the credit risks associated with these loans. The Company has implemented and expects
to continue to implement and update new policies and procedures to maintain its credit risk management systems.



22



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Bank Premises and Equipment

Bank premises and equipment increased 8.76% in 2009 compared to an increase of 27.32% in 2008 due to fixed assets additions associated with the new Rustburg facility partially offset by depreciation in
2008. The Company is leasing the Timberlake and Amherst branch facilities and the Smith Mountain Lake loan production office. In early 2008, the Company began leasing a building in the Wyndhurst section of Lynchburg for administrative and training
purposes.

Deposits

Average
deposits were $294,409 for the year ended December 31, 2009, an increase of $29,327 or 11.06% from $265,081 of average deposits for the year ended December 31, 2008. As of December 31, 2009, total deposits were $302,119 representing
an increase of $14,886 or 5.18% from $287,233 in total deposits as of December 31, 2008. The change in deposits during 2009 was primarily due to changes in previously existing accounts and new accounts opened as a result of relationship
changes, new locations, pricing and the continued success of our KaChing! Rewards checking product in 2009.

For the year ended
December 31, 2009, average noninterest-bearing demand deposits were $25,883 or 8.79% of average deposits. For the year ended December 31, 2008, average noninterest-bearing demand deposits were $25,169 or 9.49% of average deposits. Average
interest-bearing deposits were $268,526 for the year ended December 31, 2009, representing an increase of $28,614 or 11.92% over the $239,912 in average interest-bearing deposits for the year ended December 31, 2008.

The levels of noninterest-bearing demand deposits (including retail accounts) are influenced by such factors as customer service, service charges and the
availability of banking services. No assurance can be given that the Company will be able to maintain its current level of noninterest-bearing deposits. Competition from other banks and thrift institutions as well as money market funds, some of
which offer interest rates substantially higher than the Company, makes it difficult for the Company to maintain the current level of noninterest-bearing deposits. Management continually works to implement pricing and marketing strategies designed
to control the cost of interest-bearing deposits and to maintain a stable deposit mix.

The following table presents the Companys
average deposits and the average rate paid for each category of deposits for the periods indicated.

AVERAGE DEPOSIT
INFORMATION



|                                    |                             |                             |                 |  |                             |                             |  |                             |  |      |                             |  |                 |  |      |  
|----------------------------------- | --------------------------- | --------------------------- | --------------- |  | --------------------------- | --------------------------- |  | --------------------------- |  | ---- | --------------------------- |  | --------------- |  | ---- | -
|                                    |                             | Year endedDecember 31, 2009 |                 |  | Year endedDecember 31, 2008 |                             |  | Year endedDecember 31, 2007 | 
|                                    | Averageamount ofdeposits(1) |                             | Averageratepaid |  |                             | Averageamount ofdeposits(1) |  | Averageratepaid             |  |      | Averageamount ofdeposits(1) |  | Averageratepaid | 
|Noninterest-bearing demand deposits |                             | $                           | 25,883          |  | N/A                         |                             |  | 25,169                      |  | N/A  |                             |  | 24,631          |  | N/A  |  
|Interest-bearing demand deposits    |                             |                             | 42,875          |  | 0.80                        | %                           |  | 43,731                      |  | 1.38 | %                           |  | 43,056          |  | 2.47 | %
|Savings and NOW deposits            |                             |                             | 54,358          |  | 1.70                        | %                           |  | 35,568                      |  | 1.59 | %                           |  | 30,115          |  | 1.13 | %
|Time deposits:                      |                             |                             |                 |  |                             |                             |  |                             |  |      |                             |  |                 |  |      |  
|Under $100,000                      |                             |                             | 118,286         |  | 3.48                        | %                           |  | 118,298                     |  | 4.43 | %                           |  | 104,532         |  | 4.99 | %
|$100,000 and over                   |                             |                             | 53,007          |  | 3.64                        | %                           |  | 42,315                      |  | 4.27 | %                           |  | 39,237          |  | 3.96 | %
|                                    |                             |                             |                 |  |                             |                             |  |                             |  |      |                             |  |                 |  |      |  
|Total average time deposits         |                             |                             | 171,293         |  |                             |                             |  | 160,613                     |  |      |                             |  | 143,769         |  |      |  
|                                    |                             |                             |                 |  |                             |                             |  |                             |  |      |                             |  |                 |  |      |  
|Total average deposits              |                             | $                           | 294,409         |  |                             |                             |  | 265,081                     |  |      |                             |  | 241,571         |  |      |  
|                                    |                             |                             |                 |  |                             |                             |  |                             |  |      |                             |  |                 |  |      |  



|(1) | Averages are daily averages.
|--- | ----------------------------



23



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The following table presents the maturity schedule of time certificates of deposit of $100,000 and over and
other time deposits of $100,000 and over as of December 31, 2009.

TIME DEPOSITS OF $100,000 AND OVER



|                                         |  |                        |        |                    |        |       |       
|---------------------------------------- |  | ---------------------- | ------ | ------------------ | ------ | ----- | ------
|                                         |  | Certificatesof deposit |        | Other timedeposits |        | Total
|Three months or less                     |  | $                      | 6,548  |                    | 772    |       | 7,320 
|Over three through six months            |  |                        | 3,065  |                    | 104    |       | 3,169 
|Over six through 12 months               |  |                        | 12,632 |                    | 2,291  |       | 14,923
|Over 12 months                           |  |                        | 13,051 |                    | 13,531 |       | 26,582
|                                         |  |                        |        |                    |        |       |       
|Total time deposits of $100,000 and over |  | $                      | 35,296 |                    | 16,698 |       | 51,994
|                                         |  |                        |        |                    |        |       |       

Financial Ratios

The following table presents certain financial ratios for the periods indicated.

RETURN ON EQUITY AND ASSETS



|                                 |  |                          |   |  |        |   |  |       |  
|-------------------------------- |  | ------------------------ | - |  | ------ | - |  | ----- | -
|                                 |  | Years ended December 31, |  
|                                 |  | 2009                     |   |  | 2008   |   |  | 2007  |  
|Return on average assets         |  | 0.11                     | % |  | 0.10   | % |  | 0.97  | %
|Return on average equity         |  | 1.40                     | % |  | 1.14   | % |  | 10.17 | %
|Dividend payout ratio            |  | 41.88                    | % |  | 291.50 | % |  | 34.12 | %
|Average equity to average assets |  | 7.69                     | % |  | 9.14   | % |  | 9.45  | %

Capital Resources

The Companys financial position at December 31, 2009 reflects liquidity and capital levels currently adequate to fund
anticipated future business expansion. Capital ratios are in excess of required regulatory minimums for a well-capitalized institution. The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity,
earnings performance, and changing competitive conditions and economic forces. The adequacy of the Companys capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate
level of capital to support anticipated asset growth and to absorb potential losses.

The primary indicators relied on by bank regulators in
measuring the capital position are the Tier 1 capital, total risk-based capital and leverage ratios. Tier 1 capital consists generally of common and qualifying preferred stockholders equity less goodwill. Total capital generally consists of
Tier 1 capital, qualifying subordinated debt and a portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk-weighted assets. The Companys Tier 1 capital ratio was 9.50% at December 31, 2009
and 9.20% at December 31, 2008. The total capital ratio was 10.75% at December 31, 2009 and 10.45% at December 31, 2008.

These
ratios exceed the mandated minimum requirements of 4% and 8%, respectively. As of December 31, 2009 and 2008, the Company met all regulatory capital ratio requirements and was considered well capitalized in accordance with the
Federal Deposit Insurance Corporation Improvement Act.

Stockholders equity was $25,851 at December 31, 2009 compared to $24,919 at
December 31, 2008.

The leverage ratio consists of Tier 1 capital divided by quarterly average assets. At December 31, 2009, the
Companys leverage ratio was 8.04% compared to 8.28% at December 31, 2008. Each of these exceeds the required minimum leverage ratio of 4%. The dividend payout ratio was 41.88% and 291.50% in 2009 and 2008, respectively, with the decline
due to the decrease in net income over the same period. The Company paid dividends of $0.10 per share in 2009 and $0.60 per share in 2008. The Company suspended its dividend in the second quarter of 2009 to conserve capital.



24



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Off-Balance Sheet Arrangements

The Company did not use any financial derivatives during 2009 and 2008. However, the Company has off-balance sheet arrangements that may have a material effect on the results of operations in the future.
The Company, in the normal course of business, may at times be a party to financial instruments such as standby letters of credit. Standby letters of credit as of December 31, 2009 equaled $1,203 compared with $427 as of December 31, 2008.
Other commitments include commitments to lend money. Not all of these commitments will be acted upon; therefore, the cash requirements will likely be significantly less than the commitments themselves. As of December 31, 2009, the Company had
unused loan commitments of $47,515 including $24,457 in unused commitments with an original maturity exceeding one year compared with $47,365 including $24,739 in unused commitments with an original maturity exceeding one year as of
December 31, 2008. See Note 9 of the Notes to Consolidated Financial Statements.

Critical Accounting Policies

The reporting policies of the Company are in accordance with U.S. generally accepted accounting principles (GAAP). Certain critical accounting policies
affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Companys single most critical accounting policy relates to the Companys allowance for loan losses, which reflects
the estimated losses resulting from the inability of the Companys borrowers to make required loan payments. If the financial condition of the Companys borrowers were to deteriorate, resulting in an impairment of their ability to make
payments, the Companys estimates would be updated, and additional provisions for loan losses may be required. Further discussion of the estimates used in determining the allowance for loan losses is contained in the discussion on
Allowance for Loan Losses on page 21 and Loans and Allowance for Loan Losses in Note 1 of the Notes to Consolidated Financial Statements.

Impact of Recently Issued Accounting Standards

In January 2010, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements, to amend existing guidance in FASB Accounting Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures, to expand and clarify existing disclosures regarding recurring and nonrecurring fair value measurements. The amended guidance in ASC820 is effective for interim and annual reporting periods beginning
after December 15, 2009. The Company is evaluating the impact the amended guidance in ASU 2010-06 will have on its consolidated financial statements.

In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), to amend the existing guidance in ASC 820 for measuring
the fair value of investments in certain entities that do not have a quoted market price but calculate net asset value (NAV) per share or its equivalent. As a practical expedient, the amendments in ASU 2009-12 permit, but do not require,
a reporting entity to measure the fair value of an investment in an investee within the scope of the amendments in the ASU based on the investees NAV per share or its equivalent. The amended guidance in ASC 820 is effective for interim and
annual periods ending after December 15, 2009. The amended guidance in ASU 2009-12 had no impact on the Companys consolidated financial statements.

In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value, to amend ASC 820 to clarify how entities should estimate the fair value of liabilities. ASC 820, as amended,
includes clarifying guidance for circumstances in which a quoted price in an active market is not available, the effect of the existence of liability transfer restrictions, and the effect of quoted prices for the identical liability, including when
the identical liability is traded as an asset. The amended guidance in ASC820 on measuring liabilities at fair value is effective for the first interim or annual reporting period beginning after August 26, 2009. The Company is evaluating the
impact the amended guidance in ASU 2009-05 will have on its consolidated financial statements.

In June 2009, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification  and the Hierarchy of Generally Accepted Accounting Principles. This Statement was incorporated into ASC 105 and became the
source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in



25



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conformity with GAAP. Rules and interpretative releases of the Securities and Exchange Commission (SEC) under authority of federal securities law are also sources of authoritative
GAAP for SEC registrants. ASC 105 became effective for the quarterly period ended September 30, 2009, and adoption had no impact on the Companys financial condition or results of operations.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. This
Statement was incorporated into ASC 860 and removes the concept of qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not
transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The Statement is
effective for annual reporting periods beginning after November 15, 2009 and interim and annual reporting periods thereafter. The Company is evaluating the impact that SFAS No. 166 will have on its consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This Statement was incorporated into ASC 855 and establishes
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 became effective for the quarterly period ended June 30,
2009, and adoption had no impact on the Companys financial condition or results of operations. In connection with the adoption of ASC 855, the Company evaluated all subsequent events through February 24, 2010 and has disclosed all
material subsequent events in Note 17 (Subsequent Events).

In April 2009, the FASB issued Staff Position (FSP) FAS 157-4,
Determining the Fair Value of a Financial Asset When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP was incorporated into ASC 820 and
provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also provides guidance on identifying circumstances that indicate the transaction is not
orderly. Provisions of this FSP incorporated into ASC 820 became effective for the quarterly period ended June 30, 2009, and adoption had no impact on the Companys financial condition or results of operations.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP was
incorporated into ASC 320 and amends the other-than-temporary impairments on debt and equity securities in the financial statements. The FSP did not amend existing recognition and measurement guidance related to other-than-temporary impairments of
equity securities. Provisions of this FSP incorporated into ASC 320 became effective for the quarterly period ended June 30, 2009, and adoption had no impact on the Companys financial condition or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement
No. 133. This Statement was incorporated into ASC 815 and is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial condition, financial performance, and cash flows. Provisions of this Statement incorporated into ASC 815 became effective for the quarterly period ended March 31, 2009, and adoption had no impact on the
Companys financial condition or results of operations.

In December 2007, the FASB issued SFAS no. 141 (revised 2007), Business
Combinations. This Statement was incorporated into ASC 805 and applies to all transaction or other events in which one entity obtains control over another. ASC 805 defines the acquirer as the entity that obtains control over one or more
businesses and defines the acquisition date as the date the acquirer achieves control. ASC 805 requires the acquirer to recognize assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their respective fair values as
of the acquisition date. The revised standard changes the treatment of acquisition-related costs, restructuring costs related to an acquisition that the acquirer expects but is not obligated to incur, contingent consideration associated with the
purchase price and pre-acquisition contingencies associated with acquired assets and liabilities. Effective January 1, 2009, the Company adopted the provisions of the Statement which were incorporated into ASC 805 and will apply them to any
business combination which occurs after that date.



26



---

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

(In thousands of dollars, except share data)



|                                                                                                                  |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                  |  | 2009 |         |   | 2008 |  
|Assets                                                                                                            |  |      |         |   |      |   |         |  
|Cash and cash equivalents (note 2):                                                                               |  |      |         |   |      |   |         |  
|Cash and due from banks                                                                                           |  | $    | 30,052  |   |      | $ | 6,748   |  
|Federal funds sold                                                                                                |  |      | 2,008   |   |      |   | 9,178   |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Total cash and cash equivalents                                                                                   |  |      | 32,060  |   |      |   | 15,926  |  
|                                                                                                                  |  |     
|Securities (note 3):                                                                                              |  |      |         |   |      |   |         |  
|Available-for-sale, at fair value                                                                                 |  |      | 19,105  |   |      |   | 11,426  |  
|Held-to-maturity, at amortized cost                                                                               |  |      | 1,051   |   |      |   | 2,505   |  
|Federal Reserve Bank stock, at cost (note 1(c))                                                                   |  |      | 105     |   |      |   | 75      |  
|Federal Home Loan Bank stock, at cost (note 1(c))                                                                 |  |      | 579     |   |      |   | 728     |  
|Loans, net (notes 4, 9 and 11)                                                                                    |  |      | 265,904 |   |      |   | 279,199 |  
|Bank premises and equipment, net (note 5)                                                                         |  |      | 7,228   |   |      |   | 6,646   |  
|Accrued interest receivable                                                                                       |  |      | 1,190   |   |      |   | 1,215   |  
|Prepaid FDIC Insurance                                                                                            |  |      | 1,842   |   |      |   |        |  
|Other assets (notes 7 and 8)                                                                                      |  |      | 3,146   |   |      |   | 3,523   |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Total assets                                                                                                      |  | $    | 332,210 |   |      | $ | 321,243 |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Liabilities and Stockholders Equity                                                                              |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Liabilities:                                                                                                      |  |      |         |   |      |   |         |  
|Deposits (note 6):                                                                                                |  |      |         |   |      |   |         |  
|Demand                                                                                                            |  | $    | 32,276  |   |      | $ | 27,731  |  
|Savings and NOW accounts                                                                                          |  |      | 103,445 |   |      |   | 87,832  |  
|Time                                                                                                              |  |      | 166,398 |   |      |   | 171,670 |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|Total deposits                                                                                                    |  |      | 302,119 |   |      |   | 287,233 |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Note payable to Federal Home Loan Bank (note 1(d))                                                                |  |      |        |   |      |   | 5,000   |  
|Note payable under line of credit (note 1 (d))                                                                    |  |      | 2,000   |   |      |   | 1,000   |  
|Accrued interest payable                                                                                          |  |      | 613     |   |      |   | 872     |  
|Other liabilities (note 7)                                                                                        |  |      | 1,627   |   |      |   | 2,219   |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Total liabilities                                                                                                 |  |      | 306,359 |   |      |   | 296,324 |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Stockholders equity (notes 7, 12 and 15):                                                                        |  |      |         |   |      |   |         |  
|Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,485,089 shares in 2009 and 2008 |  |      | 4,455   |   |      |   | 4,455   |  
|Capital surplus                                                                                                   |  |      | 787     |   |      |   | 787     |  
|Retained earnings                                                                                                 |  |      | 21,306  |   |      |   | 21,102  |  
|Accumulated other comprehensive loss, net                                                                         |  |      | (697    | ) |      |   | (1,425  | )
|                                                                                                                  |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                        |  |      | 25,851  |   |      |   | 24,919  |  
|                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Commitments, contingencies and other matters (notes 9, 10 and 12)                                                 |  |      |         |   |      |   |         |  
|                                                                                                                  |  |     
|Total liabilities and stockholders equity                                                                        |  | $    | 332,210 |   |      | $ | 321,243 |  
|                                                                                                                  |  |      |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



27



---

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2009, 2008 and 2007

(In thousands of dollars, except
per share data)



|                                                    |  |      |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | 2009 |        | 2008 |   | 2007  
|Interest income:                                    |  |      |        |      |   |        |  |   |       
|Interest and fees on loans                          |  | $    | 16,622 |      | $ | 17,615 |  | $ | 16,748
|Interest on securities:                             |  |      |        |      |   |        |  |   |       
|U.S. Government agencies                            |  |      | 287    |      |   | 310    |  |   | 379   
|Corporate                                           |  |      | 42     |      |   | 66     |  |   | 150   
|States and political subdivisions (taxable)         |  |      | 133    |      |   | 203    |  |   | 235   
|States and political subdivisions (tax-exempt)      |  |      | 180    |      |   | 214    |  |   | 255   
|Other                                               |  |      | 41     |      |   | 43     |  |   | 38    
|Interest on federal funds sold                      |  |      | 11     |      |   | 104    |  |   | 554   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Total interest income                               |  |      | 17,316 |      |   | 18,555 |  |   | 18,359
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Interest expense:                                   |  |      |        |      |   |        |  |   |       
|Interest on deposits:                               |  |      |        |      |   |        |  |   |       
|Savings and NOW accounts                            |  |      | 1,264  |      |   | 1,170  |  |   | 1,403 
|Time - under $100,000                               |  |      | 4,115  |      |   | 5,246  |  |   | 5,220 
|Time - $100,000 and over                            |  |      | 1,929  |      |   | 1,809  |  |   | 1,551 
|Other interest expense                              |  |      | 4      |      |   | 121    |  |   | 4     
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Total interest expense                              |  |      | 7,312  |      |   | 8,346  |  |   | 8,178 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Net interest income                                 |  |      | 10,004 |      |   | 10,209 |  |   | 10,181
|                                                    |  |      |       
|Provision for loan losses (note 4)                  |  |      | 1,530  |      |   | 2,881  |  |   | 462   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Net interest income after provision for loan losses |  |      | 8,474  |      |   | 7,328  |  |   | 9,719 
|                                                    |  |      |       
|Noninterest income:                                 |  |      |        |      |   |        |  |   |       
|Service charges on deposit accounts                 |  |      | 1,516  |      |   | 1,493  |  |   | 1,412 
|Commissions and fees                                |  |      | 470    |      |   | 442    |  |   | 417   
|Mortgage loan fees                                  |  |      | 547    |      |   | 261    |  |   | 204   
|Service charges on loan accounts                    |  |      | 273    |      |   | 403    |  |   | 292   
|Other operating income                              |  |      | 342    |      |   | 297    |  |   | 307   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Total noninterest income                            |  |      | 3,148  |      |   | 2,896  |  |   | 2,632 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Noninterest expense:                                |  |      |        |      |   |        |  |   |       
|Salaries and employee benefits (note 7)             |  |      | 6,069  |      |   | 5,621  |  |   | 4,813 
|Occupancy expense                                   |  |      | 697    |      |   | 625    |  |   | 454   
|Furniture and equipment                             |  |      | 1,066  |      |   | 949    |  |   | 891   
|Office supplies and printing                        |  |      | 288    |      |   | 254    |  |   | 226   
|Federal deposit insurance premiums                  |  |      | 621    |      |   | 77     |  |   | 27    
|Capital stock tax                                   |  |      | 226    |      |   | 212    |  |   | 191   
|Advertising expense                                 |  |      | 116    |      |   | 142    |  |   | 115   
|Other operating expenses                            |  |      | 2,088  |      |   | 1,966  |  |   | 1,807 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Total noninterest expense                           |  |      | 11,171 |      |   | 9,846  |  |   | 8,524 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Income before income tax expense                    |  |      | 451    |      |   | 378    |  |   | 3,827 
|                                                    |  |      |       
|Income tax expense (note 8)                         |  |      | 100    |      |   | 72     |  |   | 1,227 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Net income                                          |  | $    | 351    |      | $ | 306    |  | $ | 2,600 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      |       
|Basic net income per share (note 1(n))              |  | $    | 0.24   |      | $ | 0.21   |  | $ | 1.76  
|Diluted net income per share (note1(n))             |  | $    | 0.24   |      | $ | 0.21   |  | $ | 1.75  

See accompanying notes to consolidated
financial statements.



28



---

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

Years ended December 31, 2009, 2008 and 2007

(In thousands, except share and per share data)



|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ------------ |  | -------------- | ----- | ---------------- | - | --- | ------------------------------------------ | - | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                                                                                    |  | Common Stock |  | CapitalSurplus |       | RetainedEarnings |   |     | AccumulatedOtherComprehensiveIncome (Loss) |   |        | Total | 
|                                                                                                    |  | Shares       |  | Par Value      |       |                  |   |    
|Balances, December 31, 2006                                                                         |  | 1,459,589    |  | $              | 4,379 |                  | $ | 605 |                                            | $ | 19,972 |       |  | $ | (464   | ) |  | $ | 24,492 |  
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Net income                                                                                          |  |             |  |                |      |                  |   |    |                                            |   | 2,600  |       |  |   |       |   |  |   | 2,600  |  
|Change in net unrealized gains on available-for-sale securities, net of deferred tax benefit of $55 |  |             |  |                |      |                  |   |    |                                            |   |       |       |  |   | 111    |   |  |   | 111    |  
|Adjustment to apply ASC topic,Compensation-Retirement Benefits, net of tax of $124                  |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   | 242    |   |  |   | 242    |  
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Comprehensive income                                                                                |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   | 2,953  |  
|Cash dividends declared by Bankshares ($0.60 per share)                                             |  |             |  |                |      |                  |   |    |                                            |   | (887   | )     |  |   |       |   |  |   | (887   | )
|Issuance of common stock, stock option exercise                                                     |  | 25,500       |  |                | 76    |                  |   | 179 |                                            |   |       |       |  |   |       |   |  |   | 255    |  
|Stock option expense                                                                                |  |              |  |                |       |                  |   | 3   |                                            |   |       |       |  |   |       |   |  |   | 3      |  
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Balances, December 31, 2007                                                                         |  | 1,485,089    |  | $              | 4,455 |                  | $ | 787 |                                            | $ | 21,685 |       |  | $ | (111   | ) |  | $ | 26,816 |  
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Net income                                                                                          |  |             |  |                |      |                  |   |    |                                            |   | 306    |       |  |   |       |   |  |   | 306    |  
|Change in net unrealized gains on available-for-sale securities, net of deferred tax benefit of $41 |  |             |  |                |      |                  |   |    |                                            |   |       |       |  |   | 83     |   |  |   | 83     |  
|Adjustment to apply ASC topic,Compensation-Retirement Benefits, net of tax of $719                  |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   | (1,397 | ) |  |   | (1,397 | )
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Comprehensive income (loss)                                                                         |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   | (1,008 | )
|Cash dividends declared by Bankshares ($0.60 per share)                                             |  |             |  |                |      |                  |   |    |                                            |   | (889   | )     |  |   |       |   |  |   | (889   | )
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Balances, December 31, 2008                                                                         |  | 1,485,089    |  | $              | 4,455 |                  | $ | 787 |                                            | $ | 21,102 |       |  | $ | (1,425 | ) |  | $ | 24,919 |  
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Net income                                                                                          |  |             |  |                |      |                  |   |    |                                            |   | 351    |       |  |   |       |   |  |   | 351    |  
|Change in net unrealized gains on available-for-sale securities, net of deferred tax benefit of $41 |  |             |  |                |      |                  |   |    |                                            |   |       |       |  |   | 68     |   |  |   | 68     |  
|Adjustment to apply ASC topic,Compensation-Retirement Benefits, net of tax of $340                  |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   | 660    |   |  |   | 660    |  
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Comprehensive income                                                                                |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   | 1,079  |  
|Cash dividends declared by Bankshares ($0.10 per share)                                             |  |             |  |                |      |                  |   |    |                                            |   | (147   | )     |  |   |       |   |  |   | (147   | )
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  
|Balances, December 31, 2009                                                                         |  | 1,485,089    |  | $              | 4,455 |                  | $ | 787 |                                            | $ | 21,306 |       |  | $ | (697   | ) |  | $ | 25,851 |  
|                                                                                                    |  |              |  |                |       |                  |   |     |                                            |   |        |       |  |   |        |   |  |   |        |  

See accompanying notes to consolidated financial statements.



29



---

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2009, 2008 and 2007

(In thousands of dollars)



|                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                       |  | 2009 |         |   | 2008 |   |         | 2007 | 
|Cash flows from operating activities:                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                             |  | $    | 351     |   |      | $ | 306     |      |  | $ | 2,600   |  
|                                                                                       |  |      |        
|Adjustments to reconcile net income to net cash provided by operating activities:      |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation of bank premises and equipment                                            |  |      | 514     |   |      |   | 426     |      |  |   | 413     |  
|Amortization of unearned fees, net                                                     |  |      | (67     | ) |      |   | (24     | )    |  |   | (23     | )
|Net amortization of premiums and discounts on securities                               |  |      | 51      |   |      |   |        |      |  |   | 7       |  
|Provision for loan losses                                                              |  |      | 1,530   |   |      |   | 2,881   |      |  |   | 462     |  
|Provision for deferred income taxes                                                    |  |      | (218    | ) |      |   | (562    | )    |  |   | (142    | )
|Net realized gain on securities                                                        |  |      | (33     | ) |      |   |         |      |  |   |         |  
|Accrual of stock option vesting                                                        |  |      |        |   |      |   |        |      |  |   | 3       |  
|Net decrease (increase) in:                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest receivable                                                            |  |      | 25      |   |      |   | 113     |      |  |   | (78     | )
|Prepaid FDIC insurance                                                                 |  |      | (1,842  | ) |      |   |        |      |  |   |        |  
|Other assets                                                                           |  |      | 646     |   |      |   | 84      |      |  |   | 70      |  
|Net increase (decrease) in:                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest payable                                                               |  |      | (259    | ) |      |   | 11      |      |  |   | 97      |  
|Other liabilities                                                                      |  |      | 68      |   |      |   | (267    | )    |  |   | 364     |  
|                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                       |  |      |        
|Net cash provided by operating activities                                              |  |      | 766     |   |      |   | 2,968   |      |  |   | 3,773   |  
|                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                       |  |      |        
|Cash flows from investing activities:                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Purchases of held-to-maturity securities                                               |  |      |        |   |      |   |        |      |  |   | (249    | )
|Purchases of available-for-sale securities                                             |  |      | (12,257 | ) |      |   | (1,010  | )    |  |   |        |  
|Proceeds from maturities and calls of held-to-maturity securities                      |  |      | 1,464   |   |      |   | 1,670   |      |  |   | 1,470   |  
|Proceeds from maturities and calls of available-for-sale securities                    |  |      | 2,835   |   |      |   | 4,379   |      |  |   | 3,387   |  
|Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities |  |      | 928     |   |      |   | 790     |      |  |   | 769     |  
|Proceeds from sales of available-for-sale mortgage-backed securities                   |  |      | 892     |   |      |   |        |      |  |   |        |  
|Sale (purchase) of Federal Home Loan Bank stock                                        |  |      | 149     |   |      |   | (252    | )    |  |   | 5       |  
|Purchase of Federal Reserve Stock                                                      |  |      | (30     | ) |      |   |        |      |  |   |        |  
|Collections on loan participations                                                     |  |      | 382     |   |      |   | 252     |      |  |   | 326     |  
|Net (increase) decrease in loans made to customers                                     |  |      | 11,080  |   |      |   | (50,014 | )    |  |   | (25,805 | )
|Recoveries on loans charged off                                                        |  |      | 282     |   |      |   | 173     |      |  |   | 134     |  
|Purchases of bank premises and equipment                                               |  |      | (1,096  | ) |      |   | (1,852  | )    |  |   | (369    | )
|                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                       |  |      |        
|Net cash provided by (used in) investing activities                                    |  |      | 4,629   |   |      |   | (45,864 | )    |  |   | (20,332 | )
|                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  

Continued



30



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PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                 |  | 2009 |        |   | 2008 |   |        | 2007 | 
|Cash flows from financing activities:                                            |  |      |        |   |      |   |        |      |  |   |        |  
|Net increase in demand, savings and NOW deposits                                 |  |      | 20,158 |   |      |   | 13,449 |      |  |   | 8,685  |  
|Net increase (decrease) in time deposits                                         |  |      | (5,272 | ) |      |   | 21,918 |      |  |   | 12,364 |  
|Borrowing (repayments) of note payable to Federal Home Loan Bank                 |  |      | (5,000 | ) |      |   | 5,000  |      |  |   | (100   | )
|Borrowing under line of credit                                                   |  |      | 1,000  |   |      |   | 1,000  |      |  |   |       |  
|Proceeds from issuance of common stock                                           |  |      |       |   |      |   |       |      |  |   | 255    |  
|Cash dividends paid                                                              |  |      | (147   | ) |      |   | (889   | )    |  |   | (887   | )
|                                                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                 |  |      |       
|Net cash provided by financing activities                                        |  |      | 10,739 |   |      |   | 40,478 |      |  |   | 20,317 |  
|                                                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                 |  |      |       
|Net increase (decrease) in cash and cash equivalents                             |  |      | 16,134 |   |      |   | (2,418 | )    |  |   | 3,758  |  
|                                                                                 |  |      |       
|Cash and cash equivalents, beginning of period                                   |  |      | 15,926 |   |      |   | 18,344 |      |  |   | 14,586 |  
|                                                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                 |  |      |       
|Cash and cash equivalents, end of period                                         |  | $    | 32,060 |   |      | $ | 15,926 |      |  | $ | 18,344 |  
|                                                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                 |  |      |       
|Supplemental disclosure of cash flows information Cash paid during the year for: |  |      |        |   |      |   |        |      |  |   |        |  
|Income taxes                                                                     |  | $    |       |   |      | $ | 1,086  |      |  | $ | 1,019  |  
|Interest                                                                         |  |      | 7,571  |   |      |   | 8,335  |      |  |   | 8,106  |  
|                                                                                 |  |      |       
|Supplemental schedule of noncash investing and financing activities:             |  |      |        |   |      |   |        |      |  |   |        |  
|Transfer of loans to repossessed properties                                      |  | $    | 73     |   |      | $ | 15     |      |  | $ | 59     |  
|Loans charged against the allowance for loan losses                              |  |      | 2,056  |   |      |   | 805    |      |  |   | 646    |  
|Unrealized gains (losses) on available-for-sale securities                       |  |      | 105    |   |      |   | 125    |      |  |   | 152    |  
|Defined benefit plan adjustment per ASC topicCompensation-Retirement Benefits    |  |      | 1,000  |   |      |   | (2,115 | )    |  |   | 366    |  

See accompanying notes to
consolidated financial statements.



31



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PINNACLE BANKSHARES CORPORATION

AND SUBSIDIARY

Notes to Consolidated Financial Statements

(In thousands, except ratios, share and per share data)



|(1) | Summary of Significant Accounting Policies and Practices
|--- | --------------------------------------------------------

Pinnacle Bankshares Corporation, a Virginia corporation (Bankshares), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bankshares
is headquartered in Altavista, Virginia. Bankshares conducts all of its business activities through the branch offices of its wholly owned subsidiary bank, First National Bank (the Bank). Bankshares exists primarily for the purpose of holding the
stock of its subsidiary, the Bank, and of such other subsidiaries as it may acquire or establish. The Company has a single reportable segment for purposes of segment reporting.

The accounting and reporting policies of Bankshares and its wholly owned subsidiary (collectively, the Company), conform to accounting
principles generally accepted in the United States of America and general practices within the banking industry. The following is a summary of the more significant accounting policies and practices:



| | (a) | Consolidation
| | --- | -------------

The
consolidated financial statements include the accounts of Bankshares and the Bank. All material intercompany balances and transactions have been eliminated.



| | (b) | Securities
| | --- | ----------

The
Company classifies its securities in three categories: (1) debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost;
(2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in net
income; and (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses
excluded from net income and reported in accumulated other comprehensive income, a separate component of stockholders equity, net of deferred taxes. Fair value is determined from quoted prices obtained and reviewed by management from FT
(Financial Times) Interactive Data in cooperation with a correspondent bank, the Companys thirdparty bond accountant. Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and accretion of discounts on a
basis, which approximates the level yield method. The Company does not maintain trading securities. Gains or losses on disposition are based on the net proceeds and adjusted carrying values of the securities called or sold, using the specific
identification method on a trade date basis. If a decline below cost in the market value of any available-for-sale or held-to-maturity security is deemed other than temporary, the decline is charged to net income resulting in the establishment of a
new cost basis for the security.



| | (c) | Required Investments
| | --- | --------------------

As a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB) of Atlanta, the Company is required to maintain certain minimum investments in the common stock of the FRB and FHLB, which are carried at cost. Required
levels of investment are based upon the Companys capital and a percentage of qualifying assets.

In addition, the Company
is eligible to borrow from the FHLB with borrowings collateralized by qualifying assets, primarily residential mortgage loans, and the Companys capital stock investment in the FHLB.



32



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| | (d) | Borrowings
| | --- | ----------

At
December 31, 2009, the Companys available borrowing limit with the FHLB was approximately $41,720. The Company had $0 and $5,000 in borrowings outstanding at December 31, 2009 and 2008, respectively. The $5,000 was a daily variable
rate note that matured in May of 2009.

Bankshares also has a $5,000 line of credit with a corresponding bank with $2,000
outstanding as of December 31, 2009 and $1,000 outstanding as of December 31, 2008 with a 5.00% interest rate that matures on December 31, 2011.



| | (e) | Loans and Allowance for Loan Losses
| | --- | -----------------------------------

Loans are stated at the amount of unpaid principal, reduced by unearned income and fees on loans, and an allowance for loan losses. Income is recognized over the terms of the loans using methods that
approximate the level yield method. The allowance for loan losses is a cumulative valuation allowance consisting of an annual provision for loan losses, plus any amounts recovered on loans previously charged off, minus loans charged off. The
provision for loan losses charged to operating expenses is the amount necessary in managements judgment to maintain the allowance for loan losses at a level it believes sufficient to cover losses in the collection of the Companys loans.
Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, delinquencies, current economic conditions, the risk characteristics of the various categories of loans and other pertinent
factors. Management uses historical loss data by loan type as well as current economic factors in its calculation of allowance for loan loss. Management also uses qualitative factors such as changes in lending policies and procedures, changes in
national and local economies, changes in the nature and volume of the loan portfolio, changes in experience of lenders and the loan department, changes in volume and severity of past due and classified loans, changes in quality of the Companys
loan review system, the existence and effect of concentrations of credit and external factors such as competition and regulation in its allowance for loan loss calculation. Each qualitative factor is evaluated and applied to each type of loan in the
Companys portfolio and a percentage of each loan is reserved as allowance. A percentage of each loan type is also reserved according to the loan types historical loss data. Larger percentages of allowance are taken as the risk for a loan
is determined to be greater. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is uncollectible. While management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in economic conditions. It is reasonably possible that managements estimate of loan losses and the related allowance may change materially in the near term. However,
the amount of change that is reasonably possible cannot be estimated. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations.

Loans are charged against the allowance when, in managements opinion, they are deemed uncollectible, although the Company continues to aggressively pursue collection. The Company considers a number
of factors to determine the need for and timing of charge-offs including the following: whenever any commercial loan becomes past due for 120 days for any scheduled principal or interest payment and collection is considered uncollectible; whenever
foreclosure on real estate collateral or liquidation of other collateral does not result in full payment of the obligation and the deficiency or some portion thereof is deemed uncollectible, the uncollectible portion shall be charged-off; whenever
any installment loan becomes past due for 120 days and collection is considered unlikely; whenever any repossessed vehicle remains unsold for 60 days after repossession; whenever a bankruptcy notice is received on any installment loan and review of
the facts results in an assessment that all or most of the balance will not be collected, the loan will be placed in non-accrual status; whenever a bankruptcy notice is received on a small, unsecured, revolving installment account; and whenever any
other small, unsecured, revolving installment account becomes past due for 180 days.



33



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Interest related to non-accrual loans is recognized on the cash basis. Loans are generally
placed in non-accrual status when the collection of principal and interest is 90 days or more past due, unless the obligation relates to a consumer or residential real estate loan or is both well-secured and in the process of collection.

Impaired loans are required to be presented in the financial statements at the present value of the expected future cash flows or at the
fair value of the loans collateral. Homogeneous loans such as real estate mortgage loans, individual consumer loans and home equity loans are evaluated collectively for impairment. Management, considering current information and events
regarding the borrowers ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment
losses are included in the allowance for loan losses through a charge to the provision for loan losses. Cash receipts on impaired loans receivable are applied first to reduce interest on such loans to the extent of interest contractually due and any
remaining amounts are applied to principal.



| | (f) | Loan Origination and Commitment Fees and Certain Related Direct Costs
| | --- | ---------------------------------------------------------------------

Loan origination and commitment fees and certain direct loan origination costs charged by the Company are deferred and the net amount
amortized as an adjustment of the related loans yield. The Company amortizes these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Fees related to standby letters of credit
are recognized over the commitment period.



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

Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed by the straight-line and declining-balance methods over the estimated useful lives of the assets.
Depreciable lives include 15 years for land improvements, 40 years for buildings, and 3 to 7 years for equipment, furniture and fixtures. The cost of assets retired and sold and the related accumulated depreciation are eliminated from the accounts
and the resulting gains or losses are included in determining net income. Expenditures for maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized.



| | (h) | Foreclosed Properties
| | --- | ---------------------

Foreclosed properties consist of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at the lower of cost or fair value less estimated costs to sell. Losses from the acquisition of property
in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged to expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the
year of the sale.



| | (i) | Impairment or Disposal of Long-Lived Assets
| | --- | -------------------------------------------

The Companys long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used, such as bank premises and equipment, is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, such as foreclosed properties, are reported at the lower of the carrying amount or
fair value less costs to sell.



| | (j) | Pension Plan
| | --- | ------------

The
Company maintains a noncontributory defined benefit pension plan, which covers substantially all of its employees. The net periodic pension expense includes a service cost component, interest on the projected benefit obligation, a component
reflecting the actual return on plan assets, the effect of deferring and amortizing certain actuarial gains and losses, and the amortization of any unrecognized



34



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net transition obligation on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. The Companys funding policy is to make
annual contributions in amounts necessary to satisfy the Internal Revenue Services funding standards, to the extent that they are tax deductible.

In September 2006, the FASB issued ASC topic, Defined Benefit Plans, which requires a business entity to recognize the overfunded or underfunded status of a single-employer defined benefit
postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in comprehensive income in the year in which the changes occur. Defined Benefit Plansalso requires a business
entity to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The recognition and disclosure provisions of Defined Benefit Planswere adopted by the Company beginning
with the year ended December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the Companys fiscal year end statement of position was adopted on December 31, 2008.



| | (k) | Advertising
| | --- | -----------

The
Company expenses advertising expenses as incurred.



| | (l) | Income Taxes
| | --- | ------------

Income taxes are accounted for under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period that includes the enactment date.

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred
taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or
litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized
tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.



| | (m) | Stock Options
| | --- | -------------

The
Company accounts for its stock based compensation plan under the provisions of ASC topic, Share-Based Paymentwhich requires recognizing expense for options granted equal to the grant date fair value of the unvested amounts over their
remaining vesting periods. There were no options granted in 2009 or 2008. Future levels of compensation cost recognized related to share-based compensation awards may be impacted by new awards and/or modification, repurchases and cancellations of
existing awards after the adoption of this standard.



35



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| | (n) | Net Income per Share
| | --- | --------------------

Basic 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. Diluted net income per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the
periods indicated:



|                                 |  |                       |       |                     |           |                 |   |     
|-------------------------------- |  | --------------------- | ----- | ------------------- | --------- | --------------- | - | ----
|Year ended December 31, 2009     |  | Net income(numerator) |       | Shares(denominator) |           | Per shareamount
|Basic net income per share       |  | $                     | 351   |                     | 1,485,089 |                 | $ | 0.24
|                                 |  |                       |       |                     |           |                 |   |     
|Effect of dilutive stock options |  |                       |      |                     |          |                 |   |     
|                                 |  |                       |       |                     |           |                 |   |     
|Diluted net income per share     |  | $                     | 351   |                     | 1,485,089 |                 | $ | 0.24
|                                 |  |                       |       |                     |           |                 |   |     
|                                 |  |                       |      
|Year ended December 31, 2008     |  | Net income(numerator) |       | Shares(denominator) |           | Per shareamount
|Basic net income per share       |  | $                     | 306   |                     | 1,485,089 |                 | $ | 0.21
|                                 |  |                       |       |                     |           |                 |   |     
|Effect of dilutive stock options |  |                       |      |                     | 3,124     |                 |   |     
|                                 |  |                       |       |                     |           |                 |   |     
|Diluted net income per share     |  | $                     | 306   |                     | 1,488,213 |                 | $ | 0.21
|                                 |  |                       |       |                     |           |                 |   |     
|                                 |  |                       |      
|Year ended December 31, 2007     |  | Net income(numerator) |       | Shares(denominator) |           | Per shareamount
|Basic net income per share       |  | $                     | 2,600 |                     | 1,479,689 |                 | $ | 1.76
|                                 |  |                       |       |                     |           |                 |   |     
|Effect of dilutive stock options |  |                       |      |                     | 9,688     |                 |   |     
|                                 |  |                       |       |                     |           |                 |   |     
|Diluted net income per share     |  | $                     | 2,600 |                     | 1,489,377 |                 | $ | 1.75
|                                 |  |                       |       |                     |           |                 |   |     



| | (o) | Consolidated Statements of Cash Flows
| | --- | -------------------------------------

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks (with original maturities of three months or less), and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.



| | (p) | Comprehensive Income
| | --- | --------------------

ASC topic Comprehensive Income,requires the Company to classify items of Other Comprehensive Income (such as net unrealized gains (losses) on available-for-sale securities) by their nature in a financial statement and
present the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Companys other comprehensive income consists of net
income, and net unrealized gains (losses) on securities available-for-sale, net of income taxes, and adjustments relating to its defined benefit plan, net of income taxes.



| | (q) | Fair Value Measurements
| | --- | -----------------------

Effective January 1, 2008, the Company adopted the provisions of ASC topic, Fair Value Measurements and Disclosures. Fair Value Measurements and Disclosures, which was issued in September 2006, establishes a framework for
using fair value. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In accordance with Fair Value Measurements and Disclosures, the Company groups its financial assets and financial liabilities in three
levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The most significant



36



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instruments that the Company measures at fair value are available-for-sale securities. All instruments fall into Level 2 fair value hierarchy. Valuation methodologies for the fair value hierarchy
are as follows:

Level 1  Valuations for identical assets and liabilities traded in active exchange markets, such as the
New York Stock Exchange.

Level 2  Valuations for assets and liabilities are obtained from readily available pricing
sources via independent providers for market transactions involving similar assets or liabilities or other observable inputs.

Level 3  Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or
broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining fair value assigned to such assets and liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Available-for-sale Securities

Available-for-sale securities are recorded
at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available, and would in such case be included as a Level 1 asset. The Company currently carries no Level 1 securities. If quoted prices are not available,
valuations are obtained from readily available pricing sources from independent providers for market transactions involving similar assets or liabilities. The Companys principal market for these securities is the secondary institutional
markets, and valuations are based on observable market data in those markets. These would be classified as Level 2 assets. The Companys entire available-for-sale securities portfolio is classified as Level 2 securities. The Company currently
carries no Level 3 securities for which fair value would be determined using unobservable inputs.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an
allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with ASC topic, Impairment of a Loan. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of a similar debt,
liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans at which fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2009,
substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with Impairment of a Loan, impaired loans where an allowance is established based on the fair value of the collateral require
classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 asset. When an appraised value is
not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as a nonrecurring Level 3 asset.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices,
appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on observable market



37



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price or a current appraised value, the Company records the foreclosed asset as a nonrecurring Level 2 asset. When an appraised value is not available or management determines the fair value of
the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as a nonrecurring Level 3 asset.

Below are tables that present information about certain assets and liabilities measured at fair value on a recurring or nonrecurring basis:

Fair Value Measurements on December 31, 2009



|                              |  |                                                                |        |                                                    |   |                                                             |  |                                            |  |                                         |        |  |   |      
|----------------------------- |  | -------------------------------------------------------------- | ------ | -------------------------------------------------- | - | ----------------------------------------------------------- |  | ------------------------------------------ |  | --------------------------------------- | ------ |  | - | -----
|Description                   |  | Total CarryingAmount in TheConsolidatedBalance
Sheet12/31/2009 |        | Assets/LiabilitiesMeasured at FairValue 12/31/2009 |   | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |  | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|                              |  |                                                                |        |                                                    |  
|Available-for-sale securities |  | $                                                              | 19,105 |                                                    | $ | 19,105                                                      |  | NA                                         |  | $                                       | 19,105 |  |   | NA   
|Impaired loans                |  | $                                                              | 4,478  |                                                    | $ | 4,478                                                       |  | NA                                         |  |                                         | NA     |  | $ | 4,478
|Foreclosed assets             |  | $                                                              | 461    |                                                    | $ | 461                                                         |  | NA                                         |  |                                         | NA     |  | $ | 461  

Fair Value
Measurements on December 31, 2008



|                              |  |                                                                |        |                                                    |   |                                                             |  |                                            |  |                                         |        |  |   |      
|----------------------------- |  | -------------------------------------------------------------- | ------ | -------------------------------------------------- | - | ----------------------------------------------------------- |  | ------------------------------------------ |  | --------------------------------------- | ------ |  | - | -----
|Description                   |  | Total CarryingAmount in TheConsolidatedBalance
Sheet12/31/2008 |        | Assets/LiabilitiesMeasured at FairValue 12/31/2008 |   | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |  | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|                              |  |                                                                |        |                                                    |  
|Available-for-sale securities |  | $                                                              | 11,426 |                                                    | $ | 11,426                                                      |  | NA                                         |  | $                                       | 11,426 |  |   | NA   
|Impaired loans                |  | $                                                              | 3,212  |                                                    | $ | 3,212                                                       |  | NA                                         |  |                                         | NA     |  | $ | 3,212
|Foreclosed assets             |  | $                                                              | 300    |                                                    | $ | 300                                                         |  | NA                                         |  |                                         | NA     |  | $ | 300  



| | (r) | Use of Estimates
| | --- | ----------------

In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance
sheets and revenues and expenses for the years ended December 31, 2009, 2008 and 2007. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the
determination of the allowance for loan losses.



38



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| | (s) | Current Accounting Developments
| | --- | -------------------------------

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements, to
amend existing guidance in FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, to expand and clarify existing disclosures regarding recurring and nonrecurring fair value measurements. The
amended guidance in ASC820 is effective for interim and annual reporting periods beginning after December 15, 2009. The Company is evaluating the impact the amended guidance in ASU 2010-06 will have on its consolidated financial statements.

In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share
(or Its Equivalent), to amend the existing guidance in ASC 820 for measuring the fair value of investments in certain entities that do not have a quoted market price but calculate net asset value (NAV) per share or its equivalent. As
a practical expedient, the amendments in ASU 2009-12 permit, but do not require, a reporting entity to measure the fair value of an investment in an investee within the scope of the amendments in the ASU based on the investees NAV per share or
its equivalent. The amended guidance in ASC 820 is effective for interim and annual periods ending after December 15, 2009. The amended guidance in ASU 2009-12 had no impact on the Companys consolidated financial statements. In August
2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value, to amend ASC 820 to clarify how entities should estimate the fair value of liabilities. ASC 820, as amended, includes clarifying guidance for circumstances in which a
quoted price in an active market is not available, the effect of the existence of liability transfer restrictions, and the effect of quoted prices for the identical liability, including when the identical liability is traded as an asset. The amended
guidance in ASC820 on measuring liabilities at fair value is effective for the first interim or annual reporting period beginning after August 26, 2009. The company is evaluating the impact the amended guidance in ASU 2009-05 will have on its
consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 168, The FASB Accounting Standards Codification  and the Hierarchy of Generally Accepted Accounting Principles. This Statement was incorporated into ASC 105 and became the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretative releases of the Securities and Exchange Commission (SEC) under
authority of federal securities law are also sources of authoritative GAAP for SEC registrants. ASC 105 became effective for the quarterly period ended September 30, 2009, and adoption had no impact on the Companys financial condition or
results of operations.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets-an
amendment of FASB Statement No. 140. This Statement was incorporated into ASC 860 and removes the concept of qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should
be derecognized when the transferor has not transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the
transferred financial asset. The Statement is effective for annual reporting periods beginning after November 15, 2009 and interim and annual reporting periods thereafter. The Company is evaluating the impact that SFAS No. 166 will have on
its consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This
Statement was incorporated into ASC 855 and establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 became
effective for the quarterly period ended June 30, 2009, and adoption had no impact on the Companys financial condition or results of operations. In connection with the adoption of ASC 855, the Company evaluated all subsequent events
through February 24, 2010 and has disclosed all material subsequent events in Note 17 (Subsequent Events).



39



---

In April 2009, the FASB issued Staff Position (FSP) FAS 157-4, Determining
the Fair Value of a Financial Asset When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP was incorporated into ASC 820 and provides additional
guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also provides guidance on identifying circumstances that indicate the transaction is not orderly. Provisions of this
FSP incorporated into ASC 820 became effective for the quarterly period ended June 30, 2009, and adoption had no impact on the Companys financial condition or results of operations.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP
was incorporated into ASC 320 and amends the other-than-temporary impairments on debt and equity securities in the financial statements. The FSP did not amend existing recognition and measurement guidance related to other-than-temporary impairments
of equity securities. Provisions of this FSP incorporated into ASC 320 became effective for the quarterly period ended June 30, 2009, and adoption had no impact on the Companys financial condition or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB
Statement No. 133. This Statement was incorporated into ASC 815 and is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand
their effects on an entitys financial condition, financial performance, and cash flows. Provisions of this Statement incorporated into ASC 815 became effective for the quarterly period ended March 31, 2009, and adoption had no impact on
the Companys financial condition or results of operations.

In December 2007, the FASB issued SFAS no. 141 (revised
2007), Business Combinations. This Statement was incorporated into ASC 805 and applies to all transaction or other events in which one entity obtains control over another. ASC 805 defines the acquirer as the entity that obtains control over
one or more businesses and defines the acquisition date as the date the acquirer achieves control. ASC 805 requires the acquirer to recognize assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their respective
fair values as of the acquisition date. The revised standard changes the treatment of acquisition-related costs, restructuring costs related to an acquisition that the acquirer expects but is not obligated to incur, contingent consideration
associated with the purchase price and pre-acquisition contingencies associated with acquired assets and liabilities. Effective January 1, 2009, the Company adopted the provisions of the Statement which were incorporated into ASC 805 and will
apply them to any business combination which occurs after that date.



|(2) | Restrictions on Cash
|--- | --------------------

To
comply with Federal Reserve regulations, the Company is required to maintain certain average reserve balances. The daily average reserve requirements were approximately $4,300 and $2,304 for the weeks including December 31, 2009 and 2008,
respectively.



40



---

|(3) | Securities
|--- | ----------

The amortized
costs, gross unrealized gains, gross unrealized losses and fair values for securities at December 31, 2009 and 2008 are as follows:



|                                                                                      |  |                |        |                      |     |                       |     |   |            |       
|------------------------------------------------------------------------------------- |  | -------------- | ------ | -------------------- | --- | --------------------- | --- | - | ---------- | ------
|                                                                                      |  | 2009          
|Available-for-Sale                                                                    |  | Amortizedcosts |        | Grossunrealizedgains |     | Grossunrealizedlosses |     |   | Fairvalues
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $              | 11,532 |                      | 66  |                       | (18 | ) |            | 11,580
|Obligations of states and political subdivisions                                      |  |                | 4,728  |                      | 128 |                       | (17 | ) |            | 4,839 
|Corporate securities                                                                  |  |                | 1,000  |                      | 3   |                       |    |   |            | 1,003 
|Mortgage-backed securities  government                                               |  |                | 1,514  |                      | 59  |                       |    |   |            | 1,573 
|Other securities                                                                      |  |                | 110    |                      |    |                       |    |   |            | 110   
|                                                                                      |  |                |        |                      |     |                       |     |   |            |       
|Total available-for-sale                                                              |  | $              | 18,884 |                      | 256 |                       | (35 | ) |            | 19,105
|                                                                                      |  |                |        |                      |     |                       |     |   |            |       
|                                                                                      | 
|                                                                                      |  | 2009          
|Held-to-Maturity                                                                      |  | Amortizedcosts |        | Grossunrealizedgains |     | Grossunrealizedlosses |     |   | Fairvalues
|Obligations of states and political subdivisions                                      |  | $              | 1,051  |                      | 27  |                       |    |   |            | 1,078 
|                                                                                      |  |                |        |                      |     |                       |     |   |            |       
|                                                                                      | 
|                                                                                      |  | 2008          
|Available-for-Sale                                                                    |  | Amortizedcosts |        | Grossunrealizedgains |     | Grossunrealizedlosses |     |   | Fairvalues
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $              | 2,031  |                      | 15  |                       | (6  | ) |            | 2,040 
|Obligations of states and political subdivisions                                      |  |                | 4,891  |                      | 109 |                       | (27 | ) |            | 4,973 
|Corporate securities                                                                  |  |                | 999    |                      |    |                       | (25 | ) |            | 974   
|Mortgage-backed securities  government                                               |  |                | 3,339  |                      | 54  |                       | (4  | ) |            | 3,389 
|Other securities                                                                      |  |                | 50     |                      |    |                       |    |   |            | 50    
|                                                                                      |  |                |        |                      |     |                       |     |   |            |       
|Total available-for-sale                                                              |  | $              | 11,310 |                      | 178 |                       | (62 | ) |            | 11,426
|                                                                                      |  |                |        |                      |     |                       |     |   |            |       
|                                                                                      | 
|                                                                                      |  | 2008          
|Held-to-Maturity                                                                      |  | Amortizedcosts |        | Grossunrealizedgains |     | Grossunrealizedlosses |     |   | Fairvalues
|Obligations of states and political subdivisions                                      |  | $              | 2,505  |                      | 70  |                       |    |   |            | 2,575 
|                                                                                      |  |                |        |                      |     |                       |     |   |            |       



41



---

The following table shows the gross unrealized losses and fair value of the Companys
investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009:



|                                                                                      |  |                     |       |                       |    |           |   |                       |   |           |       |                       |   
|------------------------------------------------------------------------------------- |  | ------------------- | ----- | --------------------- | -- | --------- | - | --------------------- | - | --------- | ----- | --------------------- | --
|                                                                                      |  | Less than 12 months |       | 12 months or more     |    | Total    
|Description of Securities                                                             |  | Fairvalue           |       | Grossunrealizedlosses |    | Fairvalue |   | Grossunrealizedlosses |   | Fairvalue |       | GrossUnrealizedlosses
|                                                                                      |  |                     |       |                       |    |          
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $                   | 4,099 |                       | 18 |           |  |                       |  |           | 4,099 |                       | 18
|Obligations of states and political subdivisions                                      |  |                     | 1,060 |                       | 17 |           |  |                       |  |           | 1,060 |                       | 17
|                                                                                      |  |                     |       |                       |    |           |   |                       |   |           |       |                       |   
|                                                                                      |  |                     |       |                       |    |          
|Total temporarily impaired securities                                                 |  | $                   | 5,159 |                       | 35 |           |  |                       |  |           | 5,159 |                       | 35
|                                                                                      |  |                     |       |                       |    |           |   |                       |   |           |       |                       |   

The Company does not consider the unrealized losses
other-than-temporary losses based on the volatility of the securities market price involved, the credit quality of the securities, and the Companys ability if necessary, to hold the securities until maturity. The securities include 10 bonds
that have continuous losses for less than 12 months and no bonds that have continuous losses for more than 12 months. The $5,159 in securities in which there is an unrealized loss of $35 includes unrealized losses ranging from less than $1 to $15 or
from 0.01% to 3.39% of the original cost of the investment. Gross realized gains on securities sold in 2009 totaled $33 and $0 in 2008 and 2007. There were no gross realized losses on securities sold in 2009, 2008 and 2007.

The following table shows the gross unrealized losses and fair value of the Companys investments, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2008:



|                                                                                      |  |                     |       |                       |    |           |     |                       |    |           |       |                       |   
|------------------------------------------------------------------------------------- |  | ------------------- | ----- | --------------------- | -- | --------- | --- | --------------------- | -- | --------- | ----- | --------------------- | --
|                                                                                      |  | Less than 12 months |       | 12 months or more     |    | Total    
|Description of Securities                                                             |  | Fairvalue           |       | Grossunrealizedlosses |    | Fairvalue |     | Grossunrealizedlosses |    | Fairvalue |       | GrossUnrealizedlosses
|                                                                                      |  |                     |       |                       |    |          
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $                   | 934   |                       | 6  |           |    |                       |   |           | 934   |                       | 6 
|Obligations of states and political subdivisions                                      |  |                     | 1,030 |                       | 27 |           |    |                       |   |           | 1,030 |                       | 27
|Corporate securities                                                                  |  |                     | 492   |                       | 7  |           | 482 |                       | 18 |           | 974   |                       | 25
|Mortgage-backed securities-government                                                 |  |                     | 47    |                       | 2  |           | 436 |                       | 2  |           | 483   |                       | 4 
|                                                                                      |  |                     |       |                       |    |           |     |                       |    |           |       |                       |   
|                                                                                      |  |                     |       |                       |    |          
|Total temporarily impaired securities                                                 |  | $                   | 2,503 |                       | 42 |           | 918 |                       | 20 |           | 3,421 |                       | 62
|                                                                                      |  |                     |       |                       |    |           |     |                       |    |           |       |                       |   

The Company does not consider the unrealized losses
other-than-temporary losses based on the volatility of the securities market price involved, the credit quality of the securities, and the Companys ability if necessary, to hold the securities until maturity. The securities include 6 bonds
that have continuous losses for less than 12 months and 3 bonds that have continuous losses for more than 12 months. The $3,421 in securities in which there is an unrealized loss of $62 includes unrealized losses ranging from less than $1 to $18 or
from 0.01% to 5.96% of the original cost of the investment. No securities were sold in 2008.



42



---

The amortized costs and fair values of available-for-sale and held-to-maturity securities at
December 31, 2009, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                       |  |                    |        |                  |        |                |       |            |      
|-------------------------------------- |  | ------------------ | ------ | ---------------- | ------ | -------------- | ----- | ---------- | -----
|                                       |  | 2009              
|                                       |  | Available-for-Sale |        | Held-to-Maturity
|                                       |  | Amortizedcosts     |        | Fairvalues       |        | Amortizedcosts |       | Fairvalues
|Due in one year or less                |  | $                  | 1,575  |                  | 1,581  |                | 250   |            | 256  
|Due after one year through five years  |  |                    | 9,168  |                  | 9,283  |                | 801   |            | 822  
|Due after five years through ten years |  |                    | 5,640  |                  | 5,692  |                |      |            |     
|Due after ten years                    |  |                    | 987    |                  | 976    |                |      |            |     
|                                       |  |                    |        |                  |        |                |       |            |      
|                                       |  |                    |        |                 
|                                       |  |                    | 17,370 |                  | 17,532 |                | 1,051 |            | 1,078
|                                       |  |                    |        |                 
|Mortgage-backed securities             |  |                    | 1,514  |                  | 1,573  |                |      |            |     
|                                       |  |                    |        |                  |        |                |       |            |      
|                                       |  |                    |        |                 
|Totals                                 |  | $                  | 18,884 |                  | 19,105 |                | 1,051 |            | 1,078
|                                       |  |                    |        |                  |        |                |       |            |      

Securities with amortized costs of approximately
$3,328 and $3,709 (fair values of $3,416 and $3,781, respectively) as of December 31, 2009 and 2008, respectively, were pledged as collateral for public deposits and to the Federal Reserve for overdraft protection and treasury tax and loan.



|(4) | Loans
|--- | -----

A summary of loans
at December 31, 2009 and 2008 follows:



|                                                                           |  |      |         |   |      |         |  
|-------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | -
|                                                                           |  | 2009 |         |   | 2008 |        
|Real estate loans:                                                         |  |      |         |   |      |         |  
|Residential-mortgage                                                       |  | $    | 106,619 |   |      | 104,653 |  
|Residential-construction                                                   |  |      | 9,640   |   |      | 13,153  |  
|Commercial                                                                 |  |      | 81,219  |   |      | 86,915  |  
|Loans to individuals for household, family and other consumer expenditures |  |      | 50,097  |   |      | 54,329  |  
|Commercial and industrial loans                                            |  |      | 21,589  |   |      | 23,820  |  
|All other loans                                                            |  |      | 612     |   |      | 514     |  
|                                                                           |  |      |         |   |      |         |  
|Total loans, gross                                                         |  |      | 269,776 |   |      | 283,384 |  
|Less unearned income and fees                                              |  |      | (149    | ) |      | (216    | )
|                                                                           |  |      |         |   |      |         |  
|Loans, net of unearned income and fees                                     |  |      | 269,627 |   |      | 283,168 |  
|Less allowance for loan losses                                             |  |      | (3,723  | ) |      | (3,969  | )
|                                                                           |  |      |         |   |      |         |  
|Loans, net                                                                 |  | $    | 265,904 |   |      | 279,199 |  
|                                                                           |  |      |         |   |      |         |  

Nonaccrual loans amounted to approximately $2,619 and $2,292 at December 31, 2009 and 2008,
respectively. There were no commitments to lend additional funds to customers whose loans were on nonaccrual status at December 31, 2009.

In the normal course of business, the Bank has made loans to executive officers and directors. At December 31, 2009, loans to executive officers and directors were approximately $764 compared to $399
at December 31, 2008. During 2009, new loans to executive officers and directors amounted to approximately $527 and repayments amounted to approximately $162. Loans to companies in which executive officers and directors have an interest
amounted to approximately $374 and $523 at December 31, 2009 and 2008, respectively. All such loans were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion of management, do not involve more than normal risk or present other unfavorable features.



43



---

Activity in the allowance for loan losses for the years ended December 31, 2009, 2008
and 2007 is summarized as follows:



|                              |  |      |        |   |      |       |   |      |       |  
|----------------------------- |  | ---- | ------ | - | ---- | ----- | - | ---- | ----- | -
|                              |  | 2009 |        |   | 2008 |       |   | 2007 |      
|                              |  |      |       
|Balances at beginning of year |  | $    | 3,969  |   |      | 1,720 |   |      | 1,770 |  
|Provision for loan losses     |  |      | 1,530  |   |      | 2,881 |   |      | 462   |  
|Loans charged off             |  |      | (2,057 | ) |      | (805  | ) |      | (646  | )
|Loan recoveries               |  |      | 281    |   |      | 173   |   |      | 134   |  
|                              |  |      |        |   |      |       |   |      |       |  
|                              |  |      |       
|Balances at end of year       |  | $    | 3,723  |   |      | 3,969 |   |      | 1,720 |  
|                              |  |      |        |   |      |       |   |      |       |  

At December 31, 2009, 2008 and 2007, the recorded investment in loans for which impairment has been
identified totaled approximately $2,619, $2,292 and $634, respectively, with corresponding valuation allowances of approximately $318, $543 and $110, respectively. The average recorded investment in impaired loans receivable during 2009, 2008 and
2007 was approximately $4,194, $1,609 and $445, respectively. Interest income recognized on a cash basis on impaired loans during 2009, 2008 and 2007 was approximately $354, $278 and $61, respectively.



|(5) | Bank Premises and Equipment
|--- | ---------------------------

Bank premises and equipment, net were comprised of the following as of December 31, 2009 and 2008:



|                                  |  |      |        |   |      |        |  
|--------------------------------- |  | ---- | ------ | - | ---- | ------ | -
|                                  |  | 2009 |        |   | 2008 |       
|Land improvements                 |  | $    | 453    |   |      | 480    |  
|Buildings                         |  |      | 6,036  |   |      | 6,100  |  
|Equipment, furniture and fixtures |  |      | 4,349  |   |      | 3,692  |  
|                                  |  |      |        |   |      |        |  
|                                  |  |      | 10,838 |   |      | 10,272 |  
|Less accumulated depreciation     |  |      | (5,290 | ) |      | (4,777 | )
|                                  |  |      |        |   |      |        |  
|                                  |  |      | 5,548  |   |      | 5,495  |  
|Land                              |  |      | 1,680  |   |      | 1,151  |  
|                                  |  |      |        |   |      |        |  
|Bank premises and equipment, net  |  | $    | 7,228  |   |      | 6,646  |  
|                                  |  |      |        |   |      |        |  



|(6) | Deposits
|--- | --------

A summary of
deposits at December 31, 2009 and 2008 follows:



|                                    |  |      |         |      |        
|----------------------------------- |  | ---- | ------- | ---- | -------
|                                    |  | 2009 |         | 2008
|Noninterest-bearing demand deposits |  | $    | 32,276  |      | 27,731 
|Interest-bearing:                   |  |      |         |      |        
|Savings and money market accounts   |  |      | 46,225  |      | 47,045 
|NOW accounts                        |  |      | 57,220  |      | 40,787 
|Time deposits  under $100,000      |  |      | 114,404 |      | 118,449
|Time deposits  $100,000 and over   |  |      | 51,994  |      | 53,221 
|                                    |  |      |         |      |        
|Total interest-bearing deposits     |  |      | 269,843 |      | 259,502
|                                    |  |      |         |      |        
|Total deposits                      |  | $    | 302,119 |      | 287,233
|                                    |  |      |         |      |        

At December 31, 2009, the scheduled maturity of
time deposits is as follows: $90,770 in 2010; $13,585 in 2011; $3,295 in 2012; $38,585 in 2013 and $20,163 in 2014.

In the
normal course of business, the Bank has received deposits from executive officers and directors. At December 31, 2009 and 2008, deposits from executive officers and directors were approximately $3,692 and $3,833, respectively. All such deposits
were received in the ordinary course of business on substantially the same terms and conditions, including interest rates, as those prevailing at the same time for comparable transactions with unrelated persons.



|(7) | Employee Benefit Plans
|--- | ----------------------

The Bank maintains a noncontributory defined benefit pension plan that covers substantially all of its employees. Benefits are computed based on employees average final compensation and years of credited service. Pension expense
amounted to approximately $427, $358 and $329 in 2009, 2008 and 2007,



44



---

respectively. The change in benefit obligation, change in plan assets and funded status of the pension plan at December 31, 2009 and September 30, 2008 and 2007 (most recent information
available) and pertinent assumptions are as follows:



|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ---- | ------ | - | ---- | ------ | -
|                                                                                      |  | Pension Benefits |       
|                                                                                      |  | 2009             |        |   | 2008 |        |   | 2007 |       
|Change in Benefit Obligation                                                          |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Benefit obligation at beginning of year                                               |  | $                | 5,814  |   |      | 5,440  |   |      | 4,907  |  
|Service cost                                                                          |  |                  | 264    |   |      | 482    |   |      | 363    |  
|Interest cost                                                                         |  |                  | 347    |   |      | 423    |   |      | 293    |  
|Actuarial (gain) loss                                                                 |  |                  | 21     |   |      | (519   | ) |      | (29    | )
|Benefits paid                                                                         |  |                  | (193   | ) |      | (12    | ) |      | (94    | )
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Benefit obligation at end of year                                                     |  | $                | 6,253  |   |      | 5,814  |   |      | 5,440  |  
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Change in Plan Assets                                                                 |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Fair value of plan assets at beginning of year                                        |  |                  | 3,847  |   |      | 5,491  |   |      | 4,911  |  
|Actual return on plan assets                                                          |  |                  | 1,210  |   |      | (2,031 | ) |      | 674    |  
|Employer contribution                                                                 |  |                  |       |   |      | 400    |   |      |       |  
|Benefit paid                                                                          |  |                  | (193   | ) |      | (12    | ) |      | (94    | )
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Fair value of plan assets at end of year                                              |  | $                | 4,864  |   |      | 3,848  |   |      | 5,491  |  
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Funded Status at the End of the Year                                                  |  |                  | (1,388 | ) |      | (1,966 | ) |      | 51     |  
|                                                                                      |  |                  |       
|Amounts Recognized in the Balance Sheet                                               |  |                  |        |   |      |        |   |      |        |  
|Other liabilities, accrued pension                                                    |  |                  | (1,388 | ) |      | (1,966 | ) |      |       |  
|Other assets, prepaid pension                                                         |  | $                |       |   |      |       |   |      | 51     |  
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Amounts Recognized in Accumulated Other Comprehensive Income Net of Tax Effect        |  |                  |        |   |      |        |   |      |        |  
|Unrecognized net actuarial loss                                                       |  |                  | 846    |   |      | 1,500  |   |      | 98     |  
|Prior service cost                                                                    |  |                  | 3      |   |      | 6      |   |      | 10     |  
|Net obligation in transition                                                          |  |                  | 2      |   |      | 5      |   |      | 7      |  
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|Benefit obligation included in accumulated other comprehensive income                 |  | $                | 851    |   |      | 1,511  |   |      | 115    |  
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|                                                                                      |  |                  |       
|Funded Status                                                                         |  |                  |        |   |      |        |   |      |        |  
|Benefit obligation                                                                    |  |                  | (6,253 | ) |      | (5,814 | ) |      | (5,440 | )
|Fair value of assets                                                                  |  |                  | 4,864  |   |      | 3,848  |   |      | 5,491  |  
|Unrecognized net actuarial (gain) loss                                                |  |                  | 1,282  |   |      | 2,274  |   |      | 149    |  
|Unrecognized net obligation at transition                                             |  |                  | 4      |   |      | 7      |   |      | 11     |  
|Unrecognized prior service cost                                                       |  |                  | 4      |   |      | 8      |   |      | 15     |  
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|(Accrued)/prepaid benefit cost included in the balance sheet                          |  | $                | (99    | ) |      | 323    |   |      | 226    |  
|                                                                                      |  |                  |        |   |      |        |   |      |        |  
|                                                                                      | 
|                                                                                      |  | Pension Benefits |       
|Weighted Average Assumptions as of December 31, 2009 and September 30, 2008 and 2007: |  | 2009             |        |   | 2008 |        |   | 2007 |       
|Discount rate                                                                         |  |                  | 6.00   | % |      | 6.25   | % |      | 6.25   | %
|Expected long-term return on plan assets                                              |  |                  | 8.00   | % |      | 8.50   | % |      | 8.50   | %
|Rate of compensation increase                                                         |  |                  | 4.00   | % |      | 4.00   | % |      | 5.00   | %



45



---

|                                                                                                               |  |                  |      |   |      |       |   |      |      |  
|-------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---- | - | ---- | ----- | - | ---- | ---- | -
|                                                                                                               |  | Pension Benefits |     
|                                                                                                               |  | 2009             |      |   | 2008 |       |   | 2007 |     
|Other Changes in Plan Assets and Benefit Obligation Recognized in Other Comprehensive Income Net of Tax
Effect |  |                  |      |   |      |       |   |      |      |  
|Net (gain)/loss                                                                                                |  | $                | (654 | ) |      | 1,403 |   |      | (236 | )
|Prior service cost                                                                                             |  |                  |     |   |      |      |   |      |     |  
|Amortization of prior service cost                                                                             |  |                  | (3   | ) |      | (4    | ) |      | (3   | )
|Net obligation at transition                                                                                   |  |                  |     |   |      |      |   |      |     |  
|Amortization of net obligation at transition                                                                   |  |                  | (3   | ) |      | (3    | ) |      | (3   | )
|                                                                                                               |  |                  |      |   |      |       |   |      |      |  
|Total recognized in other comprehensive income                                                                 |  | $                | (660 | ) |      | 1,396 |   |      | (242 | )
|                                                                                                               |  |                  |     
|Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income                                   |  | $                | (578 | ) |      | 1,639 |   |      | 76   |  

The
estimated portion of prior service cost and net transition obligation included in accumulated other comprehensive income that will be recognized as a component of net periodic pension cost over the next fiscal year are $5 and $5, respectively.

The Company selects the expected long-term rate-of-return-on-assets assumption in consultation with its investment advisors
and actuary. This rate is intended to reflect the average rate of return expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed  especially with respect to real rates of
return (net of inflation)  for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, and higher
significance is placed on current forecasts of future long-term economic conditions.

Because assets are held in a qualified
trust, anticipated returns are not reduced for taxes. Further  solely for this purpose  the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the
potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within
periodic cost).

The components of net pension benefit cost under the plan for the years ended December 31, 2009, 2008 and
2007 is summarized as follows:



|                               |  |                  |      |   |      |      |   |      |      |  
|------------------------------ |  | ---------------- | ---- | - | ---- | ---- | - | ---- | ---- | -
|                               |  | Pension Benefits |     
|                               |  | 2009             |      |   | 2008 |      |   | 2007 |     
|                               |  |                  |     
|Service cost                   |  | $                | 265  |   |      | 529  |   |      | 363  |  
|Interest cost                  |  |                  | 347  |   |      | 424  |   |      | 293  |  
|Expected return on plan assets |  |                  | (306 | ) |      | (613 | ) |      | (348 | )
|Net amortization               |  |                  | 9    |   |      | 11   |   |      | 9    |  
|Recognized net actuarial loss  |  |                  | 108  |   |      |     |   |      | 1    |  
|                               |  |                  |      |   |      |      |   |      |      |  
|Net pension benefit cost       |  | $                | 423  |   |      | 351  |   |      | 318  |  
|                               |  |                  |      |   |      |      |   |      |      |  



46



---

Projected Benefit Payments

The projected benefit payments under the plan are summarized as follows for the years ending December 31:



|          |  |   |      
|--------- |  | - | -----
|2010      |  | $ | 153  
|          | 
|2011      |  |   | 151  
|          | 
|2012      |  |   | 162  
|          | 
|2013      |  |   | 181  
|          | 
|2014      |  |   | 201  
|          | 
|2015-2019 |  |   | 1,822

Plan Asset
Allocation

Plan assets are held in a pooled pension trust fund administered by the Virginia Bankers Association. The
pooled pension trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 20% fixed income and 80% equities. The Investment Manager selects investment
fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the pension plans investment strategy. The Investment Manager will consider both actively and passively
managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.

It is the responsibility of the Virginia Bankers Association to administer the investments of the pooled pension trust fund within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not limited to,
management and custodial fees, consulting fees, transaction costs and other administrative costs.

The asset or
liabilitys fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and
minimize the use of unobservable inputs. Following is a description of the valuation methodologies used for assets measured at fair value.

Mutual funds-fixed income and equity funds: Valued at the net asset value of shares held at year-end.

Cash and equivalents: Valued at cost which approximates fair value.

The
preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement as of December 31, 2009.

The following table presents the fair value of the assets, by asset category, at December 31, 2009 and 2008.



|                           |  |      |       |      |   |      
|-------------------------- |  | ---- | ----- | ---- | - | -----
|                           |  | 2009 |       | 2008
|Cash and equivalents       |  | $    | 23    |      | $ | 158  
|Mutual funds-fixed income  |  |      | 1,147 |      |   | 2,986
|Mutual funds-equity        |  |      | 3,694 |      |   | 704  
|                           |  |      |       |      |   |      
|Total assets at fair value |  | $    | 4,864 |      | $ | 3,848
|                           |  |      |       |      |   |      



47



---

The following table sets forth by level, within the fair value hierarchy, the assets carried
at fair value as of December 31, 2009.



|                           |  |                                              |       |         |   |         |  |       |   |  |   |      
|-------------------------- |  | -------------------------------------------- | ----- | ------- | - | ------- |  | ----- | - |  | - | -----
|                           |  | Assets at Fair Value as of December 31, 2009
|                           |  | Level 1                                      |       | Level 2 |   | Level 3 |  | Total
|Cash and equivalents       |  | $                                            | 23    |         | $ |        |  | $     |  |  | $ | 23   
|Mutual funds-fixed income  |  |                                              | 1,147 |         |   |        |  |       |  |  |   | 1,147
|Mutual funds-equity        |  |                                              | 3,694 |         |   |        |  |       |  |  |   | 3,694
|                           |  |                                              |       |         |   |         |  |       |   |  |   |      
|Total assets at fair value |  | $                                            | 4,864 |         | $ |        |  | $     |  |  | $ | 4,864
|                           |  |                                              |       |         |   |         |  |       |   |  |   |      

Contributions

The Company expects to contribute $423 to its pension plan in 2009.

The Company also has a 401(k) plan under which the Company did not match employee contributions to the plan in 2008. In 2009, the Company
matched 100% of the first 1% of salary deferral and 50% of the next 5% of salary deferral to the 401(k) savings provision. The amount expensed for the 401(k) plan during the year ended December 31, 2009, was $108.



|(8) | Income Taxes
|--- | ------------

Income tax
expense (benefit) attributable to income before income tax expense for the years ended December 31, 2009, 2008 and 2007 is summarized as follows:



|                         |  |      |      |   |      |      |   |      |       |  
|------------------------ |  | ---- | ---- | - | ---- | ---- | - | ---- | ----- | -
|                         |  | 2009 |      |   | 2008 |      |   | 2007 |      
|Current                  |  | $    | (112 | ) |      | 740  |   |      | 1,311 |  
|Deferred                 |  |      | 212  |   |      | (668 | ) |      | (84   | )
|                         |  |      |      |   |      |      |   |      |       |  
|Total income tax expense |  | $    | 100  |   |      | 72   |   |      | 1,227 |  
|                         |  |      |      |   |      |      |   |      |       |  

Reported income tax expense for the years ended December 31, 2009, 2008 and 2007 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax expense as a result of the following:



|                                                           |  |   |     |   |  |     |   |  |       |  
|---------------------------------------------------------- |  | - | --- | - |  | --- | - |  | ----- | -
|Computed expected income tax expense                     |  | $ | 154 |   |  | 129 |   |  | 1,301 |  
|Increase (reduction) in income tax expense resulting from: |  |   |     |   |  |     |   |  |       |  
|Tax-exempt interest                                        |  |   | (71 | ) |  | (80 | ) |  | (93   | )
|Disallowance of interest expense                           |  |   | 7   |   |  | 10  |   |  | 14    |  
|Other, net                                                 |  |   | 10  |   |  | 13  |   |  | 5     |  
|                                                           |  |   |     |   |  |     |   |  |       |  
|Reported income tax expense                                |  | $ | 100 |   |  | 72  |   |  | 1,227 |  
|                                                           |  |   |     |   |  |     |   |  |       |  



48



---

The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are as follows:



|                                                                                                           |  |      |       |   |      |       |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | ----- | -
|                                                                                                           |  | 2009 |       |   | 2008 |      
|Deferred tax assets:                                                                                       |  |      |       |   |      |       |  
|Loans, principally due to allowance for loan losses                                                        |  | $    | 1,020 |   |      | 1,182 |  
|Adjustments, defined benefit plan                                                                          |  |      | 438   |   |      | 778   |  
|Accrued pension, due to actual pension contributions in excess of accrual for financial reporting purposes |  |      | 34    |   |      |      |  
|Loans, due to unearned fees, net                                                                           |  |      | 27    |   |      | 31    |  
|Other                                                                                                      |  |      | 66    |   |      | 131   |  
|                                                                                                           |  |      |       |   |      |       |  
|Total gross deferred tax assets                                                                            |  |      | 1,585 |   |      | 2,122 |  
|                                                                                                           |  |      |       |   |      |       |  
|Deferred tax liabilities:                                                                                  |  |      |       |   |      |       |  
|Bank premises and equipment, due to differences in depreciation                                            |  |      | (199  | ) |      | (229  | )
|Accrued pension, due to actual pension contributions in excess of accrual for financial reporting purposes |  |      |      |   |      | (110  | )
|Net unrealized gains on available-for-sale securities                                                      |  |      | (75   | ) |      | (40   | )
|Other                                                                                                      |  |      | (289  | ) |      | (133  | )
|                                                                                                           |  |      |       |   |      |       |  
|Total gross deferred tax liabilities                                                                       |  |      | (563  | ) |      | (512  | )
|                                                                                                           |  |      |       |   |      |       |  
|Net deferred tax asset, included in other assets                                                           |  | $    | 1,022 |   |      | 1,610 |  
|                                                                                                           |  |      |       |   |      |       |  

The Bank has determined that a valuation allowance for the gross deferred tax assets is not necessary at
December 31, 2009, 2008 and 2007, since realization of the entire gross deferred tax assets can be supported by the amounts of taxes paid during the carryback periods available under current tax laws.

The Company adopted the provisions of ASC topic, Income Taxes, on January 1, 2007 with no impact on the financial statements. The
Company did not recognize any interest or penalties related to income tax during the years ended December 31, 2008 and 2009, and did not accrue any interest or penalties as of December 31, 2008 or 2009. The Company does not have an accrual
for uncertain tax positions as deductions taken and benefits accrued are based on widely understood administrative practices and procedures are based on clear and unambiguous tax law. Tax returns for all years 2006 and thereafter are subject to
future examination by tax authorities.



|(9) | Financial Instruments with Off-Balance-Sheet Risk
|--- | -------------------------------------------------

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments
to extend credit and standby letters of credit. These instruments may involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheets. The contract amounts of these instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.

Credit risk is defined as the possibility of sustaining a loss
because the other parties to a financial instrument fail to perform in accordance with the terms of the contract. The Companys maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by
the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Company requires collateral to support financial instruments when it is deemed necessary. The Bank evaluates such customers
creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on managements credit evaluation of the counterparty. Collateral may include deposits held in financial institutions, U.S. Treasury
securities, other marketable securities, real estate, accounts receivable, inventory, and property, plant and equipment.



49



---

Financial instruments whose contract amounts represent credit risk:



|                             |  |                                 |        |      |       
|---------------------------- |  | ------------------------------- | ------ | ---- | ------
|                             |  | Contract amounts atDecember 31,
|                             |  | 2009                            |        | 2008
|Commitments to extend credit |  | $                               | 47,515 |      | 47,365
|                             |  |                                 |        |      |       
|Standby letters of credit    |  | $                               | 1,203  |      | 427   
|                             |  |                                 |        |      |       

Commitments to extend credit are agreements to lend to
a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby
letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and
similar transactions. Unless renewed, substantially all of the Companys standby letters of credit commitments at December 31, 2009 will expire within one year. Management does not anticipate any material losses as a result of these
transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.



|(10) | Leases
|---- | ------

The Company
leases premises and equipment under various operating lease agreements. Generally, operating leases provide for one or more renewal options on the same basis as current rental terms. Certain leases require increased rentals under cost-of-living
escalation clauses. The following are future minimum lease payments as required under the agreements:



|                 |  |            |  |          |      
|---------------- |  | ---------- |  | -------- | -----
|                 |  | Year       |  | Payments
|Operating Leases |  | 2010       |  | $        | 230  
|                 |  | 2011       |  | $        | 150  
|                 |  | 2012       |  | $        | 139  
|                 |  | 2013       |  | $        | 141  
|                 |  | 2014       |  | $        | 141  
|                 |  | After 2014 |  | $        | 2,151
|                 |  |            |  |          |      
|                 |  | Total      |  | $        | 2,952
|                 |  |            |  |          |      

The Company entered into a lease of the Amherst branch
facility with an entity in which a director of the Company has a 50% ownership interest. The original term of the lease is twenty years and may be renewed at the Companys option for two additional terms of five years each. The Companys
current rental payment under the lease is $130 annually.



|(11) | Concentrations of Credit Risk
|---- | -----------------------------

The Company grants commercial, residential and consumer loans to customers primarily in the central Virginia area. The Company has a diversified loan portfolio that is not dependent upon any particular economic sector. As a whole, the
portfolio is affected by general economic conditions in the central Virginia region.

The Companys commercial and real
estate loan portfolios are diversified, with no significant concentrations of credit other than the geographic focus on the central Virginia region. The installment loan portfolio consists of consumer loans primarily for automobiles and other
personal property. Overall, the Companys loan portfolio is not concentrated within a single industry or group of industries, the loss of any one or more of which would generate a materially adverse impact on the business of the Company.



50



---

The Company has established operating policies relating to the credit process and collateral
in loan originations. Loans to purchase real and personal property are generally collateralized by the related property. Credit approval is principally a function of collateral and the evaluation of the creditworthiness of the borrower based on
available financial information.

At times, the Company may have cash and cash equivalents at a financial institution in excess
of insured limits. The Company places its cash and cash equivalents with high credit quality financial institutions whose credit rating is monitored by management to minimize credit risk.



|(12) | Dividend Restrictions and Capital Requirements
|---- | ----------------------------------------------

Bankshares principal source of funds for dividend payments is dividends received from its subsidiary Bank. For the years ended December 31, 2009 and 2008, dividends from the subsidiary Bank
totaled $420 and $978, respectively.

Substantially all of Bankshares retained earnings consist of undistributed earnings
of its subsidiary Bank, which are restricted by various regulations administered by federal banking regulatory agencies. Under applicable federal laws, the Comptroller of the Currency restricts, without prior approval, the total dividend payments of
the Bank in any calendar year to the net profits of that year, as defined, combined with the retained net profits for the two preceding years. At December 31, 2009, retained net profits of the Bank that were free of such restriction
approximated $2,218.

Bankshares and the Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bankshares
consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bankshares and the Bank must meet specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Bankshares and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Bankshares
and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2009, that Bankshares and the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2009, the most recent notification from Office of the Comptroller of the Currency categorized Bankshares and the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, Bankshares and the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed Bankshares and the Banks category.



51



---

Bankshares and the Banks actual capital amounts and ratios are presented in the table
below.



|                           |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|-------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------ | --------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                           |  | Actual |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                           |  | Amount |        | Ratio |                              |   | Amount |                                                                 | Ratio  |  |     | Amount |  | Ratio |       
|As of December 31, 2009:   |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Total Capital              |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|(to Risk Weighted Assets): |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Bankshares consolidated    |  | $      | 29,437 |       | 10.75                        | % |        | $                                                               | 21,910 |  | 8.0 | %      |  | $     | N/A    |  | N/A  |  
|Bank                       |  |        | 31,055 |       | 11.36                        | % |        |                                                                 | 21,877 |  | 8.0 | %      |  |       | 27,347 |  | 10.0 | %
|Tier 1 Capital             |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|(to Risk Weighted Assets): |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Bankshares consolidated    |  |        | 26,008 |       | 9.50                         | % |        |                                                                 | 10,955 |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank                       |  |        | 27,626 |       | 10.10                        | % |        |                                                                 | 10,939 |  | 4.0 | %      |  |       | 16,408 |  | 6.0  | %
|Tier 1 Capital (Leverage)  |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|(to Average Assets):       |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Bankshares consolidated    |  |        | 26,008 |       | 8.04                         | % |        |                                                                 | 12,945 |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank                       |  |        | 27,626 |       | 8.55                         | % |        |                                                                 | 12,930 |  | 4.0 | %      |  |       | 16,162 |  | 5.0  | %
|                           |  |        |       
|                           |  | Actual |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                           |  | Amount |        | Ratio |                              |   | Amount |                                                                 | Ratio  |  |     | Amount |  | Ratio |       
|As of December 31, 2008:   |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Total Capital              |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|(to Risk Weighted Assets): |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Bankshares consolidated    |  | $      | 29,315 |       | 10.45                        | % |        | $                                                               | 22,443 |  | 8.0 | %      |  | $     | N/A    |  | N/A  |  
|Bank                       |  |        | 30,038 |       | 10.72                        | % |        |                                                                 | 22,420 |  | 8.0 | %      |  |       | 28,025 |  | 10.0 | %
|Tier 1 Capital             |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|(to Risk Weighted Assets): |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Bankshares consolidated    |  |        | 25,806 |       | 9.20                         | % |        |                                                                 | 11,222 |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank                       |  |        | 26,529 |       | 9.47                         | % |        |                                                                 | 11,210 |  | 4.0 | %      |  |       | 16,815 |  | 6.0  | %
|Tier 1 Capital (Leverage)  |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|(to Average Assets):       |  |        |        |       |                              |   |        |                                                                 |        |  |     |        |  |       |        |  |      |  
|Bankshares consolidated    |  |        | 25,806 |       | 8.28                         | % |        |                                                                 | 12,461 |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank                       |  |        | 26,529 |       | 8.52                         | % |        |                                                                 | 12,451 |  | 4.0 | %      |  |       | 15,563 |  | 5.0  | %



|(13) | Disclosures about Fair Value of Financial Instruments
|---- | -----------------------------------------------------

The ASC topic Fair Value Option, requires the Company to disclose estimated fair values of its financial instruments.

The following methods and assumptions were used to estimate the approximate fair value of each class of financial instrument for which it is practicable to estimate that value.



| | (a) | Cash and Due from Banks and Federal Funds Sold
| | --- | ----------------------------------------------

The carrying amounts are a reasonable estimate of fair value.



| | (b) | Securities
| | --- | ----------

The
fair value of securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources
other than dealer quotations; so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.



52



---

| | (c) | Loans
| | --- | -----

Fair values
are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estateresidential, real estateother, loans to individuals and other loans. Each loan category is further
segmented into fixed and adjustable rate interest terms.

The fair value of fixed rate loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan as well as estimates for prepayments. The estimate of maturity is based on the
Companys historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.



| | (d) | Deposits and Note Payable to Federal Home Loan Bank
| | --- | ---------------------------------------------------

The fair value of demand deposits, NOW accounts, and savings deposits is the amount payable on demand. The fair value of fixed maturity time deposits, certificates of deposit and the note payable to the
Federal Home Loan Bank is estimated by discounting scheduled cash flows through the estimated maturity using the rates currently offered for deposits or borrowings of similar remaining maturities.



| | (e) | Commitments to Extend Credit and Standby Letters of Credit
| | --- | ----------------------------------------------------------

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed
significant at December 31, 2009 and 2008, and as such, the related fair values have not been estimated. The carrying amounts and approximate fair values of the Companys financial instruments are as follows at December 31, 2009 and
2008:



|                                       |  |                 |         |                        |         |                 |         |                        |        
|-------------------------------------- |  | --------------- | ------- | ---------------------- | ------- | --------------- | ------- | ---------------------- | -------
|                                       |  | 2009            |         | 2008                  
|                                       |  | Carryingamounts |         | Approximatefair values |         | Carryingamounts |         | Approximatefair values
|Financial assets:                      |  |                 |         |                        |         |                 |         |                        |        
|Cash and due from banks                |  | $               | 30,052  |                        | 30,052  |                 | 6,748   |                        | 6,748  
|Federal funds sold                     |  |                 | 2,008   |                        | 2,008   |                 | 9,178   |                        | 9,178  
|Securities:                            |  |                 |         |                        |         |                 |         |                        |        
|Available-for-sale                     |  |                 | 19,105  |                        | 19,105  |                 | 11,426  |                        | 11,426 
|Held-to-maturity                       |  |                 | 1,051   |                        | 1,078   |                 | 2,505   |                        | 2,575  
|Federal Reserve Bank Stock             |  |                 | 105     |                        | 105     |                 | 75      |                        | 75     
|Federal Home Loan Bank Stock           |  |                 | 579     |                        | 579     |                 | 728     |                        | 728    
|Loans, net of unearned income and fees |  |                 | 269,627 |                        | 274,623 |                 | 279,199 |                        | 287,388
|                                       |  |                 |         |                        |         |                 |         |                        |        
|                                       |  |                 |         |                       
|Total financial assets                 |  | $               | 322,527 |                        | 327,550 |                 | 309,859 |                        | 318,118
|                                       |  |                 |         |                        |         |                 |         |                        |        
|                                       |  |                 |         |                       
|Financial liabilities:                 |  |                 |         |                        |         |                 |         |                        |        
|Deposits                               |  | $               | 302,119 |                        | 306,987 |                 | 287,233 |                        | 291,313
|Note payable to Federal Home Loan Bank |  |                 |        |                        |        |                 | 5,000   |                        | 5,000  
|Line of credit                         |  |                 | 2,000   |                        | 2,000   |                 | 1,000   |                        | 1,000  
|                                       |  |                 |         |                        |         |                 |         |                        |        
|                                       |  |                 |         |                       
|Total financial liabilities            |  | $               | 304,119 |                        | 308,987 |                 | 293,233 |                        | 297,313
|                                       |  |                 |         |                        |         |                 |         |                        |        

Fair value estimates are made at a specific point in
time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the Companys financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.



53



---

Fair value estimates are based on existing on and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets
and premises and equipment and other real estate owned. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the
estimates.



|(14) | Parent Company Financial Information
|---- | ------------------------------------

Condensed financial information of Bankshares (Parent) is presented below:

Condensed Balance Sheets



|                                                                                                                    |  |              |        |   |      |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | ------ | -
|                                                                                                                    |  | December 31, |       
|                                                                                                                    |  | 2009         |        |   | 2008 |       
|Assets                                                                                                              |  |              |        |   |      |        |  
|Cash due from subsidiary                                                                                            |  | $            | 7      |   |      | 12     |  
|Investment in subsidiary, at equity                                                                                 |  |              | 27,469 |   |      | 25,633 |  
|Other assets                                                                                                        |  |              | 397    |   |      | 319    |  
|                                                                                                                    |  |              |        |   |      |        |  
|Total assets                                                                                                        |  | $            | 27,873 |   |      | 25,964 |  
|                                                                                                                    |  |              |        |   |      |        |  
|                                                                                                                    |  |             
|Liabilities and stockholders equity                                                                                |  |              |        |   |      |        |  
|Notes payable                                                                                                       |  | $            | 2,000  |   |      | 1,000  |  
|Other liabilities                                                                                                   |  |              | 22     |   |      | 45     |  
|                                                                                                                    |  |              |        |   |      |        |  
|Total liabilities                                                                                                   |  | $            | 2,022  |   |      | 1,045  |  
|                                                                                                                    |  |              |        |   |      |        |  
|                                                                                                                    |  |             
|Stockholders equity                                                                                                |  |              |        |   |      |        |  
|Common stock of $3 par value, authorized 3,000,000 shares; issued and outstanding 1,485,089 shares in 2009 and
2008 |  | $            | 4,455  |   |      | 4,455  |  
|Capital surplus                                                                                                     |  |              | 787    |   |      | 787    |  
|Retained earnings                                                                                                   |  |              | 21,306 |   |      | 21,102 |  
|Accumulated other comprehensive income (loss), net                                                                  |  |              | (697   | ) |      | (1,425 | )
|                                                                                                                    |  |              |        |   |      |        |  
|Total stockholders equity                                                                                          |  | $            | 25,851 |   |      | 24,919 |  
|Commitments, contingencies and other matters                                                                        |  |              |       |   |      |       |  
|                                                                                                                    |  |              |        |   |      |        |  
|Total liabilities and stockholders equity                                                                          |  | $            | 27,873 |   |      | 25,964 |  
|                                                                                                                    |  |              |        |   |      |        |  



54



---

Condensed Statements of Income



|                                                                                      |  |                         |     |      |      |   |      |      
|------------------------------------------------------------------------------------- |  | ----------------------- | --- | ---- | ---- | - | ---- | -----
|                                                                                      |  | Years endedDecember 31,
|                                                                                      |  | 2009                    |     | 2008 |      |   | 2007
|Income:                                                                               |  |                         |     |      |      |   |      |      
|Dividends from subsidiary                                                             |  | $                       | 420 |      | 978  |   |      | 743  
|Expenses:                                                                             |  |                         |     |      |      |   |      |      
|Other expenses                                                                        |  |                         | 265 |      | 103  |   |      | 97   
|                                                                                      |  |                         |     |      |      |   |      |      
|Income before income tax benefit and equity in undistributed net income of subsidiary |  |                         | 155 |      | 875  |   |      | 646  
|Applicable income tax benefit                                                         |  |                         | 90  |      | 35   |   |      | 33   
|                                                                                      |  |                         |     |      |      |   |      |      
|Income before equity in undistributed net income of subsidiary                        |  |                         | 245 |      | 910  |   |      | 679  
|Equity in undistributed net income of subsidiary                                      |  |                         | 106 |      | (604 | ) |      | 1,921
|                                                                                      |  |                         |     |      |      |   |      |      
|Net income                                                                            |  | $                       | 351 |      | 306  |   |      | 2,600
|                                                                                      |  |                         |     |      |      |   |      |      

Condensed Statements of Cash Flows



|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | ------ | - | ---- | ------ | -
|                                                                                  |  | Years endedDecember 31, |       
|                                                                                  |  | 2009                    |        |   | 2008 |        |   | 2007 |       
|Cash flows from operating activities:                                             |  |                         |        |   |      |        |   |      |        |  
|Net income                                                                        |  | $                       | 351    |   |      | 306    |   |      | 2,600  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |        |   |      |        |   |      |        |  
|Equity in undistributed net income of subsidiary                                  |  |                         | (106   | ) |      | 604    |   |      | (1,921 | )
|Increase in other assets                                                          |  |                         | (79    | ) |      | (60    | ) |      | (32    | )
|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|Net cash provided by operating activities                                         |  |                         | 166    |   |      | 850    |   |      | 647    |  
|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|Cash flows from investing activities:                                             |  |                         |        |   |      |        |   |      |        |  
|Additional investment in Bank                                                     |  |                         | (1,000 | ) |      | (1,000 | ) |      |       |  
|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|Net cash used in financing activity                                               |  |                         | (1,000 | ) |      | (1,000 | ) |      |       |  
|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|Cash flows from financing activities                                              |  |                         |        |   |      |        |   |      |        |  
|Proceeds from issuance of common stock                                            |  |                         |       |   |      |       |   |      | 255    |  
|Cash dividends paid                                                               |  |                         | (147   | ) |      | (889   | ) |      | (887   | )
|Draw on line of credit                                                            |  |                         | 1,000  |   |      | 1,000  |   |      |       |  
|Increase (decrease) in other liabilities                                          |  |                         | (24    | ) |      | 24     |   |      | (18    | )
|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|Net cash provided by (used in) financing activities                               |  |                         | 829    |   |      | 135    |   |      | (650   | )
|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|Net increase (decrease) in cash due from subsidiary                               |  |                         | (5     | ) |      | (15    | ) |      | (3     | )
|Cash due from subsidiary, beginning of year                                       |  |                         | 12     |   |      | 27     |   |      | 30     |  
|                                                                                  |  |                         |        |   |      |        |   |      |        |  
|Cash due from subsidiary, end of year                                             |  | $                       | 7      |   |      | 12     |   |      | 27     |  
|                                                                                  |  |                         |        |   |      |        |   |      |        |  



|(15) | Stock Options
|---- | -------------

The
Company has two incentive stock option plans. The 1997 Incentive Stock Plan (the 1997 Plan), pursuant to which the Companys Board of Directors could grant stock options to officers and key employees, became effective as of May 1, 1997.
The 1997 Plan authorized grants of options to purchase up to 50,000 shares of the Companys authorized, but unissued common stock. Accordingly, 50,000 shares of authorized, but unissued common stock were reserved for use in the 1997 Plan. All
stock options were granted with an exercise price equal to the stocks fair market value at the date of grant. At December 31, 2009, there were no additional shares available for grant under the 1997 Plan as the plan expired on May 1,
2007.



55



---

The 2004 Incentive Stock Plan (the 2004 Plan), pursuant to which the Companys Board of
Directors may grant stock options to officers and key employees, was approved by shareholders on April 13, 2004 and became effective as of May 1, 2004. The 2004 Plan authorizes grants of options to purchase up to 100,000 shares of the
Companys authorized, but unissued common stock. Accordingly, 100,000 shares of authorized, but unissued common stock were reserved for use in the 2004 Plan. All stock options are granted with an exercise price equal to the stocks fair
market value at the date of the grant. At December 31, 2009, there were 100,000 shares available for grant under the 2004 Plan.

Stock options generally have 10-year terms, vest at the rate of 20% per year, and become fully exercisable five years from the date of grant.

During 2009 and 2008, no stock options were exercised. During 2007, 25,500 stock options were exercised. During 2009, 2008 and 2007, there were no options granted to employees.

At December 31, 2009, options for 9,500 shares were exercisable at an exercise price of $14.00 per share, and 7,500 shares were
exercisable at an exercise price of $14.75 per share. As of December 31, 2009, there was no unrecognized compensation costs related to unvested stock options. Stock option activity during the years ended December 31, 2009 and 2008 is as
follows:



|                             |  |                |  |                              |      
|---------------------------- |  | -------------- |  | ---------------------------- | -----
|                             |  | NumberofShares |  | Weightedaverageexerciseprice
|                             |  |               
|Balance at December 31, 2007 |  | 17,000         |  | $                            | 14.33
|Forfeited                    |  |               |  |                              |     
|Exercised                    |  |               |  |                              |      
|Granted                      |  |               |  |                              |     
|Balance at December 31, 2008 |  | 17,000         |  | $                            | 14.33
|Exercised                    |  |               |  |                              |      
|Granted                      |  |               |  |                              |     
|Balance at December 31, 2009 |  | 17,000         |  | $                            | 14.33

The following table
summarizes information about stock options outstanding at December 31, 2009:



|              |                              |                     |                                                    |                     |                               |  |                                |       |                               |        |  |   |      
|------------- | ---------------------------- | ------------------- | -------------------------------------------------- | ------------------- | ----------------------------- |  | ------------------------------ | ----- | ----------------------------- | ------ |  | - | -----
|ExercisePrice |                              | Options Outstanding |                                                    | Options Exercisable
|              | NumberOutstandingat 12/31/09 |                     | Weighted-AverageRemainingContractualLife(in years) |                     | Weighted-AverageExercisePrice |  | NumberExercisable at12/31/2009 |       | Weighted-AverageExercisePrice
|$             | 14.00                        |                     | 9,500                                              |                     | 2.5                           |  | $                              | 14.00 |                               | 9,500  |  | $ | 14.00
|              | 14.75                        |                     | 7,500                                              |                     | 3.6                           |  |                                | 14.75 |                               | 7,500  |  |   | 14.75
|              |                              |                     |                                                    |                     |                               |  |                                |       |                               |        |  |   |      
|              |                              |                     | 17,000                                             |                     | 3.0                           |  | $                              | 14.33 |                               | 17,000 |  | $ | 14.33
|              |                              |                     |                                                    |                     |                               |  |                                |       |                               |        |  |   |      

The aggregate intrinsic value of options outstanding
was $0, of options exercisable was $0, and of options unvested and expected to vest was $0 at December 31, 2009.

The
total intrinsic value (market value on date of exercise less exercise price) of options exercised during the years ended December 31, 2009, 2008 and 2007 totaled $0, $0 and $303, respectively.



56



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|(16) | Quarterly Results of Operations (Unaudited)
|---- | -------------------------------------------

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2009, 2008 and 2007:



|                                    |  |              |       |   |               |       |              |       |               |        |  
|----------------------------------- |  | ------------ | ----- | - | ------------- | ----- | ------------ | ----- | ------------- | ------ | -
|                                    |  | 2009         |      
|                                    |  | Firstquarter |       |   | Secondquarter |       | Thirdquarter |       | Fourthquarter |       
|Income statement data:              |  |              |       |   |               |       |              |       |               |        |  
|Interest income                     |  | $            | 4,325 |   |               | 4,320 |              | 4,360 |               | 4,311  |  
|Interest expense                    |  |              | 1,957 |   |               | 1,871 |              | 1,821 |               | 1,663  |  
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Net interest income                 |  |              | 2,368 |   |               | 2,449 |              | 2,539 |               | 2,648  |  
|Provision for loan losses           |  |              | 774   |   |               | 67    |              | 188   |               | 501    |  
|Noninterest income                  |  |              | 692   |   |               | 810   |              | 867   |               | 779    |  
|Noninterest expense                 |  |              | 2,647 |   |               | 2,825 |              | 2,880 |               | 2,819  |  
|Income tax expense                  |  |              | (142  | ) |               | 112   |              | 101   |               | 29     |  
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Net income (loss)                   |  | $            | (219  | ) |               | 255   |              | 237   |               | 78     |  
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Per share data:                     |  |              |       |   |               |       |              |       |               |        |  
|Basic net income (loss) per share   |  | $            | (0.15 | ) |               | 0.17  |              | 0.16  |               | 0.06   |  
|Diluted net income (loss) per share |  |              | (0.15 | ) |               | 0.17  |              | 0.16  |               | 0.06   |  
|Cash dividends per share            |  |              | 0.10  |   |               | 0.00  |              | 0.00  |               | 0.00   |  
|Book value per share                |  |              | 16.57 |   |               | 16.74 |              | 16.93 |               | 17.41  |  
|                                    | 
|                                    |  | 2008         |      
|                                    |  | Firstquarter |       |   | Secondquarter |       | Thirdquarter |       | Fourthquarter |       
|Income statement data:              |  |              |       |   |               |       |              |       |               |        |  
|Interest income                     |  | $            | 4,551 |   |               | 4,614 |              | 4,767 |               | 4,623  |  
|Interest expense                    |  |              | 2,081 |   |               | 2,020 |              | 2,122 |               | 2,123  |  
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Net interest income                 |  |              | 2,470 |   |               | 2,594 |              | 2,645 |               | 2,500  |  
|Provision for loan losses           |  |              | 138   |   |               | 157   |              | 248   |               | 2,338  |  
|Noninterest income                  |  |              | 677   |   |               | 761   |              | 754   |               | 704    |  
|Noninterest expense                 |  |              | 2,287 |   |               | 2,384 |              | 2,474 |               | 2,701  |  
|Income tax expense (benefit)        |  |              | 229   |   |               | 262   |              | 215   |               | (634   | )
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Net income (loss)                   |  | $            | 493   |   |               | 552   |              | 462   |               | (1,201 | )
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Per share data:                     |  |              |       |   |               |       |              |       |               |        |  
|Basic net income (loss) per share   |  | $            | 0.33  |   |               | 0.37  |              | 0.31  |               | (0.80  | )
|Diluted net income (loss) per share |  |              | 0.33  |   |               | 0.37  |              | 0.31  |               | (0.80  | )
|Cash dividends per share            |  |              | 0.15  |   |               | 0.15  |              | 0.15  |               | 0.15   |  
|Book value per share                |  |              | 18.32 |   |               | 18.42 |              | 18.61 |               | 16.78  |  
|                                    | 
|                                    |  | 2007         |      
|                                    |  | Firstquarter |       |   | Secondquarter |       | Thirdquarter |       | Fourthquarter |       
|Income statement data:              |  |              |       |   |               |       |              |       |               |        |  
|Interest income                     |  | $            | 4,343 |   |               | 4,574 |              | 4,706 |               | 4,736  |  
|Interest expense                    |  |              | 1,930 |   |               | 2,049 |              | 2,081 |               | 2,118  |  
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Net interest income                 |  |              | 2,413 |   |               | 2,525 |              | 2,625 |               | 2,618  |  
|Provision for loan losses           |  |              | 73    |   |               | 118   |              | 86    |               | 185    |  
|Noninterest income                  |  |              | 608   |   |               | 658   |              | 680   |               | 686    |  
|Noninterest expense                 |  |              | 2,117 |   |               | 2,095 |              | 2,056 |               | 2,256  |  
|Income tax expense                  |  |              | 263   |   |               | 310   |              | 377   |               | 277    |  
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Net income                          |  | $            | 568   |   |               | 660   |              | 786   |               | 586    |  
|                                    |  |              |       |   |               |       |              |       |               |        |  
|Per share data:                     |  |              |       |   |               |       |              |       |               |        |  
|Basic net income per share          |  | $            | 0.39  |   |               | 0.44  |              | 0.53  |               | 0.40   |  
|Diluted net income per share        |  |              | 0.38  |   |               | 0.44  |              | 0.53  |               | 0.40   |  
|Cash dividends per share            |  |              | 0.15  |   |               | 0.15  |              | 0.15  |               | 0.15   |  
|Book value per share                |  |              | 16.97 |   |               | 17.13 |              | 17.59 |               | 18.06  |  



57



---

|(17) | Subsequent Events
|---- | -----------------

The Company evaluated
all subsequent events for potential recognition and disclosure through February 24, 2010.

Managements Report
on Internal Control over Financial Reporting.

The Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.

Management assessed the effectiveness of the Companys internal control over financial reporting
as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated Framework. Based on this
assessment, our management concluded that, as of December 31, 2009, the Companys internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.

Changes in Internal Controls.

No changes in our internal control over financial reporting occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



58



---

LOGO

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Pinnacle
Bankshares Corporation

Altavista, Virginia

We have audited the accompanying consolidated balance sheets of Pinnacle Bankshares Corporation and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders equity
and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Banks management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle Bankshares Corporation and subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.



|                       
|-----------------------
|LOGO                   
|Raleigh, North Carolina
|February 24, 2010      



59



---

IN MEMORIAM

LOGO

Brenda Miles Eades

January 14, 1952  December 27, 2009

Assistant Vice
President & Real Estate Loan Officer

1993 to 2009



60



---

IN MEMORIAM

LOGO

Deborah Dowdy Howell

April 9, 1967  January 19, 2009

Mortgage Loan Processor

2004 to 2009



61



---

Shareholder Information

PERFORMANCE GRAPH

The graph below compares total returns assuming
reinvestment of dividends of Pinnacle Bankshares Common Stock, the NASDAQ Market Index, and an Industry Peer Group Index. The graph assumes $100 invested on January 1, 2004 in Pinnacle Bankshares Corporation Common Stock and in each of the
indices. In 2009, the financial holding companies in the SIC Code Index consisted of 568 banks with the same standard industry code of 6022 as Pinnacle Bankshares Corporation.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG

PINNACLE BANKSHARES CORP., NASDAQ MARKET INDEX AND SIC CODE INDEX

LOGO



|                                                |      |   |        |  |      |        |      |   |        |  |      |        |  |   |       |  |   |       
|----------------------------------------------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ |  | - | ----- |  | - | ------
|Cumulative Total Returns For Fiscal Year Ending |      |   |        |  |      |        |      |   |        |  |      |       
|                                                | 2004 |   | 2005   |  | 2006 |        | 2007 |   | 2008   |  | 2009
|                                                |      |   |        |  |      |       
|Pinnacle Bankshares, Inc.                       |      | $ | 100.00 |  | $    | 98.77  |      | $ | 109.01 |  | $    | 79.89  |  | $ | 62.45 |  | $ | 78.35 
|NASDAQ Market Index                             |      | $ | 100.00 |  | $    | 101.37 |      | $ | 111.03 |  | $    | 121.92 |  | $ | 72.49 |  | $ | 104.31
|SIC Code Index                                  |      | $ | 100.00 |  | $    | 98.33  |      | $ | 111.89 |  | $    | 99.80  |  | $ | 64.76 |  | $ | 59.86 



---

Shareholder Information

Annual Meeting

The 2010 Annual Meeting of Shareholders will be held on
April 13, 2010, at 11:30 am. at the Fellowship Hall of Altavista Presbyterian Church, located at 707 Broad Street, Altavista, Virginia.

Market for Common Equity and Related Stockholder Matters

The Companys Common Stock is quoted on the OTC Bulletin
Board. The following table presents the high and low bid prices per share of the Common Stock, as reported on the OTC Bulletin Board, and dividend information of the Company for the quarters presented. The high and low bid prices of the Common Stock
presented below reflect inter-dealer prices and do not include retail markups, markdowns or commissions, and may not represent actual transactions.



|               |  |      |       |      |   |           |  |      |      |     |   |           |  |   |       |  |   |     
|-------------- |  | ---- | ----- | ---- | - | --------- |  | ---- | ---- | --- | - | --------- |  | - | ----- |  | - | ----
|               |  | 2009 |       | 2008
|               |  | High |       | Low  |   | Dividends |  | High |      | Low |   | Dividends
|               |  |      |       |      |   |          
|First Quarter  |  | $    | 13.00 |      | $ | 6.40      |  | $    | 0.10 |     | $ | 24.00     |  | $ | 18.00 |  | $ | 0.15
|               |  |      |       |      |   |          
|Second Quarter |  | $    | 9.49  |      | $ | 7.10      |  | $    | 0.00 |     | $ | 15.90     |  | $ | 17.25 |  | $ | 0.15
|               |  |      |       |      |   |          
|Third Quarter  |  | $    | 10.00 |      | $ | 5.84      |  | $    | 0.00 |     | $ | 18.25     |  | $ | 16.90 |  | $ | 0.15
|               |  |      |       |      |   |          
|Fourth Quarter |  | $    | 9.75  |      | $ | 6.50      |  | $    | 0.00 |     | $ | 16.76     |  | $ | 10.99 |  | $ | 0.15

Each share of Common Stock is entitled
to participate equally in dividends, which are payable as and when determined by the Board of Directors after consideration of the earnings, general economic conditions, the financial condition of the business and other factors as might be
appropriate. The Companys ability to pay dividends is dependent upon its receipt of dividends from its subsidiary. Prior approval from the Comptroller of the Currency is required if the total of all dividends declared by a national bank,
including the proposed dividend, in any calendar year will exceed the sum of the Banks net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. This limitation has not
had a material impact on the Banks ability to declare dividends during 2009 and 2008 and is not expected to have a material impact during 2010.

As of March 1, 2010, there were approximately 371 shareholders of record of Bancshares Common Stock.

Requests for
Information

Requests for information about the Company should be directed to Bryan M. Lemley, Secretary, Treasurer and Chief Financial
Officer, P.O. Box 29, Altavista, Virginia 24517, telephone (434) 369-3000. A copy of the Companys Annual Report on Form 10-K for the year ended December 31, 2009, will be furnished without charge to shareholders upon written
request.

Shareholders seeking information regarding lost certificates and dividends should contact Registrar and Transfer Company in
Cranford, New Jersey, telephone (800) 368-5948. Please submit address changes in writing to:

Registrar and Transfer
Company

Investor Relations Department

10 Commerce Drive

Cranford, New Jersey 07016-9982



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LOGO

622 Broad Street

Post Office Box 29

Altavista, Virginia 24517

(434) 369-3000