UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

[   ] Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number:  0-30535

GRAYSON BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia (State or other jurisdiction of incorporation or organization)	54-1647596 (I.R.S. Employer Identification No.)
113 West Main Street Independence, Virginia (Address of principal executive offices)	24348 (Zip Code)

(276) 773-2811

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  R    No   £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   £    No   £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   £	Accelerated filer   £
Non-accelerated filer   £ (Do not check if smaller reporting company)	Smaller reporting company   R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   £    No   R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

1,718,968 shares of Common Stock, par value

$1.25 per share, outstanding as of November 12, 2010.

PART I                 FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets—September 30, 2010 (Unaudited)
	and December 31, 2009 (Audited)	3
	Unaudited Consolidated Statements of Income—Nine Months Ended
	September 30, 2010 and September 30, 2009	4
	Unaudited Consolidated Statements of Income—Three Months Ended
	September 30, 2010 and September 30, 2009	5
	Consolidated Statements of Changes in Stockholders’ Equity—Nine Months
	Ended September 30, 2010 (Unaudited) and Year Ended December 31, 2009 (Audited)	6
	Unaudited Consolidated Statements of Cash Flows—Nine Months Ended
	September 30, 2010 and September 30, 2009	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	23
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Removed and Reserved	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
Signatures		25

Part I.  Financial Information

Item 1.  Financial Statements

Grayson Bankshares, Inc. and Subsidiary

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

	September 30,			December 31,
	2010			2009
Assets	(Unaudited)			(Audited)
Cash and due from banks	$	9,026,939		$	8,637,123
Interest-bearing deposits with banks		3,303,254			300,000
Federal funds sold		28,727,284			19,356,999
Investment securities available for sale		42,484,888			39,859,119
Investment securities held to maturity
(fair value approximately $2,330,861 at September 30, 2010,
and $2,254,196 at December 31,  2009)		2,209,841			2,174,882
Restricted equity securities		1,671,800			1,783,700
Loans, net of allowance for loan losses of $4,245,835 at
September 30, 2010 and $3,555,273 at December 31, 2009		257,445,564			266,628,050
Cash value of life insurance		8,323,134			8,098,134
Foreclosed assets		3,056,726			2,808,885
Property and equipment, net		10,719,962			11,133,834
Accrued interest receivable		2,549,564			2,626,164
Other assets		5,553,131			6,195,031
	$	375,072,087		$	369,601,921
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	46,796,434		$	44,924,699
Interest-bearing		270,346,925			268,558,517
Total deposits		317,143,359			313,483,216
Long-term debt		25,000,000			25,000,000
Accrued interest payable		809,851			382,653
Other liabilities		585,346			196,107
		343,538,556			339,061,976
Commitments and contingencies		-			-
Stockholders’ equity
Preferred stock, $25 par value; 500,000
shares authorized; none issued		-			-
Common stock, $1.25 par value; 2,000,000 shares
authorized; 1,718,968 shares issued
in 2010 and 2009, respectively		2,148,710			2,148,710
Surplus		521,625			521,625
Retained earnings		28,982,413			28,497,214
Accumulated other comprehensive income (loss)		(119,217	)		(627,604	)
		31,533,531			30,539,945
	$	375,072,087		$	369,601,921

See Notes to Consolidated Financial Statements.

3

Grayson Bankshares, Inc. and Subsidiary

Consolidated Statements of Income

For the Nine Months ended September 30, 2010 and 2009

	Nine Months Ended
	September 30,
	2010		2009
	(Unaudited)		(Unaudited)
Interest income
Loans and fees on loans	$	12,660,654	$	13,417,581
Interest-bearing deposits in banks		3,636		-
Federal funds sold		31,091		27,380
Investment securities:
Taxable		1,030,937		1,274,714
Exempt from federal income tax		273,191		311,080
		13,999,509		15,030,755
Interest expense
Deposits		4,240,737		5,656,925
Interest on borrowings		790,071		877,496
		5,030,808		6,534,421
Net interest income		8,968,701		8,496,334
Provision for loan losses		1,562,733		862,331
Net interest income after
provision for loan losses		7,405,968		7,634,003
Noninterest income
Service charges on deposit accounts		798,554		736,123
Increase in cash value of life insurance		225,000		225,000
Net realized gains on securities		203,101		165,773
Gain on sale of cost-based investment		213,499		-
Other income		512,952		470,418
		1,953,106		1,597,314
Noninterest expense
Salaries and employee benefits		4,694,115		4,923,179
Occupancy expense		348,119		359,606
Equipment expense		584,234		631,765
Other expense		2,480,717		2,324,989
		8,107,185		8,239,539
Income before income taxes		1,251,889		991,778
Income tax expense		251,000		160,000
Net income	$	1,000,889	$	831,778
Basic earnings per share	$	0.58	$	0.48
Weighted average shares outstanding		1,718,968		1,718,968
Dividends declared per share	$	0.30	$	0.30

See Notes to Consolidated Financial Statements.

4

Grayson Bankshares, Inc. and Subsidiary

Consolidated Statements of Income

For the Three Months ended September 30, 2010 and 2009

	Three Months Ended
	September 30,
	2010		2009
	(Unaudited)		(Unaudited)
Interest income
Loans and fees on loans	$	4,184,684	$	4,477,716
Interest-bearing deposits in banks		3,307		-
Federal funds sold		11,132		8,624
Investment securities:
Taxable		348,850		410,220
Exempt from federal income tax		87,223		98,412
		4,635,196		4,994,972
Interest expense
Deposits		1,363,655		1,755,274
Interest on borrowings		266,251		266,251
		1,629,906		2,021,525
Net interest income		3,005,290		2,973,447
Provision for loan losses		712,974		280,694
Net interest income after
provision for loan losses		2,292,316		2,692,753
Noninterest income
Service charges on deposit accounts		293,772		274,797
Increase in cash value of life insurance		75,000		69,000
Net realized gains on securities		170,134		1,592
Gain on sale of cost-based investment		213,499		-
Other income		198,771		149,335
		951,176		494,724
Noninterest expense
Salaries and employee benefits		1,539,286		1,632,452
Occupancy expense		103,345		121,501
Equipment expense		188,243		209,833
Other expense		818,453		790,568
		2,649,327		2,754,354
Income before income taxes		594,165		433,123
Income tax expense		146,000		87,000
Net income	$	448,165	$	346,123
Basic earnings per share	$	0.26	$	0.20
Weighted average shares outstanding		1,718,968		1,718,968
Dividends declared per share	$	0.10	$	0.10

See Notes to Consolidated Financial Statements.

5

Grayson Bankshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Nine Months ended September 30, 2010 (unaudited) and the Year ended December 31, 2009 (audited)

											Accumulated
											Other
		Common Stock						Retained			Comprehensive
		Shares		Amount		Surplus		Earnings			Income (Loss)			Total
Balance, December 31, 2008			1,718,968	$	2,148,710	$	521,625	$	28,302,082		$	(1,955,722	)	$	29,016,695
Comprehensive income
	Net income		-		-		-		882,719			-			882,719
	Net change in pension reserve
	net of income taxes of $555,893				-		-		-			1,079,087			1,079,087
	Net change in unrealized
	gain on investment
	securities available for
	sale, net of taxes of $203,119		-		-		-		-			394,290			394,290
	Reclassification adjustment,
	net of income taxes of ($74,830)		-		-		-		-			(145,259	)		(145,259	)
Total comprehensive income															2,210,837
	Dividends paid
	($.40 per share)		-		-		-		(687,587	)		-			(687,587	)
Balance, December 31, 2009			1,718,968		2,148,710		521,625		28,497,214			(627,604	)		30,539,945
Comprehensive income
	Net income		-		-		-		1,000,889			-			1,000,889
	Net change in unrealized
	loss on investment
	securities available for
	sale, net of taxes of $330,951		-		-		-		-			642,434			642,434
	Reclassification adjustment,
	net of income taxes of ($69,054)		-		-		-		-			(134,047	)		(134,047	)
Total comprehensive income															1,509,276
	Dividends paid
	($.30 per share)		-		-		-		(515,690	)		-			(515,690	)
Balance, September 30, 2010			1,718,968	$	2,148,710	$	521,625	$	28,982,413		$	(119,217	)	$	31,533,531

See Notes to Consolidated Financial Statements.

6

Grayson Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months ended September 30, 2010 and 2009

	Nine Months Ended
	September 30,
	2010			2009
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	1,000,889		$	831,778
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization		571,500			616,500
Provision for loan losses		1,562,733			862,331
Deferred income taxes		(12,000	)		639,628
Net realized gains on securities		(203,101	)		(165,773	)
Accretion of discount on securities, net of
amortization of premiums		163,351			76,344
Deferred compensation		(21,246	)		(17,272	)
Net realized (gain) loss on foreclosed assets		(1,733	)		9,487
Changes in assets and liabilities:
Cash value of life insurance		(225,000	)		(225,000	)
Accrued income		76,600			613,854
Other assets		392,004			11,540
Accrued interest payable		427,198			427,703
Other liabilities		410,485			(2,698,977	)
Net cash provided by operating activities		4,141,680			982,143
Cash flows from investing activities
Net increase in interest-bearing deposits		(3,003,254	)		-
Net decrease in federal funds sold		(9,370,285	)		(4,579,314	)
Purchases of available-for-sale investment securities		(28,352,647	)		(13,980,295	)
Sales of available-for-sale investment securities		4,041,712			5,657,100
Maturities/calls/paydowns of available-for-sale investment securities		22,460,240			13,607,028
Maturities/calls/paydowns of held-to-maturity investment securities		-			500,000
(Purchases) sales of restricted equity securities		111,900			(51,950	)
Net (increase) decrease in loans		7,161,753			(756,581	)
Proceeds from the sale of foreclosed assets		211,892			191,668
Purchases of property and equipment, net of sales		(157,628	)		(780,900	)
Net cash used in investing activities		(6,896,317	)		(193,244	)
Cash flows from financing activities
Net increase in deposits		3,660,143			5,680,125
Dividends paid		(515,690	)		(515,690	)
Net decrease in long-term debt		-			(5,000,000	)
Net cash provided by financing activities		3,144,453			164,435
Net increase in cash and due from banks		389,816			953,334
Cash and due from banks, beginning		8,637,123			9,536,772
Cash and due from banks, ending	$	9,026,939		$	10,490,106
Supplemental disclosure of cash flow information
Interest paid	$	4,603,610		$	6,106,718
Taxes paid	$	100,000		$	190,000
Transfers of loans to foreclosed properties	$	458,000		$	520,000

See Notes to Consolidated Financial Statements.

7

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 1.  Organization and Summary of Significant Accounting Policies

Organization

Grayson Bankshares, Inc. (the “Company”) was incorporated as a Virginia corporation on February 3, 1992 to acquire the stock of The Grayson National Bank (the “Bank”) in a bank holding company reorganization.  The Bank was acquired by the Company on July 1, 1992.

The Bank was organized under the laws of the United States in 1900 and currently serves Grayson County, Virginia and surrounding areas through ten banking offices.  As an FDIC-insured National Banking Association, the Bank is subject to regulation by the Comptroller of the Currency.  The Company is regulated by the Board of Governors of the Federal Reserve System.

The consolidated financial statements as of September 30, 2010 and for the periods ended September 30, 2010 and 2009 included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s consolidated financial position, results of operations, changes in stockholders’ equity and cash flows for such interim periods.  Management believes that all interim period adjustments are of a normal recurring nature.  These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2009, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  The results of operations for the nine-month and three-month periods ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year.

The accounting and reporting policies of the Company and the Bank follow generally accepted accounting principles and general practices within the financial services industry.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and the Bank, which is wholly owned.  All significant intercompany transactions and balances have been eliminated in consolidation.

Recent Accounting Pronouncements

In March 2010, guidance related to derivatives and hedging was amended to exempt embedded credit derivative features related to the transfer of credit risk from potential bifurcation and separate accounting.  Embedded features related to other types of risk and other embedded credit derivative features are not exempt from potential bifurcation and separate accounting.  The amendments were effective for the Company on July 1, 2010.  These amendments will have no impact on the financial statements.

Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010.   According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staff's understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President.  The amendment had no impact on the financial statements.

In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis.  The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.

8

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 1.  Organization and Summary of Significant Accounting Policies, continued

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future.  Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks.  Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments.  Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112.  The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests(s)”.  The updates were effective upon issuance but had no impact on the Company’s financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

9

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 2.  Restrictions on Cash

To comply with banking regulations, the Bank is required to maintain certain average cash reserve balances.  The daily average cash reserve requirement was approximately $2,222,000 and $1,612,000 for the periods including September 30, 2010 and December 31, 2009, respectively.

Note 3.  Investment Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.  The carrying amount of securities and their approximate fair values at September 30, 2010 and December 31, 2009 follow:

	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2010
Available for sale:
U.S. Government agency securities	$	1,291,681	$	64,778	$	-	$	1,356,459
Government sponsored enterprises		17,917,104		321,216		59,053		18,179,267
Mortgage-backed securities		14,854,927		694,053		16,995		15,531,985
State and municipal securities		7,071,280		347,500		1,603		7,417,177
	$	41,134,992	$	1,427,547	$	77,651	$	42,484,888
Held to maturity:
State and municipal securities	$	2,209,841	$	121,020	$	-	$	2,330,861
December 31, 2009
Available for sale:
U.S. Government agency securities	$	1,629,026	$	81,689	$	-	$	1,710,715
Government sponsored enterprises		13,067,890		38,375		204,195		12,902,070
Mortgage-backed securities		17,295,436		560,310		-		17,855,746
State and municipal securities		7,287,155		162,768		59,335		7,390,588
	$	39,279,507	$	843,142	$	263,530	$	39,859,119
Held to maturity:
State and municipal securities	$	2,174,882	$	86,889	$	7,575	$	2,254,196

There were no securities transferred between the available for sale and held to maturity portfolios during the nine-month period ended September 30, 2010 or the year ended December 31, 2009.

Restricted equity securities were $1,671,800 at September 30, 2010 and $1,783,700 at December 31, 2009.  Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (“FHLB”), Community Bankers Bank, Pacific Coast Bankers Bank, and the Federal Reserve Bank of Richmond, all of which are carried at cost.  All of these entities are upstream correspondents of the Bank.  The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow money.  The Bank is required to hold that stock so long as it borrows from the FHLB.  The Federal Reserve requires banks to purchase stock as a condition for membership in the Federal Reserve system.  The Bank’s stock in Community Bankers Bank and Pacific Coast Bankers Bank is restricted only in the fact that the stock may only be repurchased by the respective banks.

10

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 3.  Investment Securities, continued

The following table details unrealized losses and related fair values in the Company’s held to maturity and available for sale investment securities portfolios.  This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2010 and December 31, 2009.

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2010
Available for sale
U.S. Government agency securities	$	-	$	-	$	-	$	-	$	-	$	-
Government sponsored enterprises		7,212,942		59,053		-		-		7,212,942		59,053
Mortgage-backed securities		1,900,821		16,995		-		-		1,900,821		16,995
State and municipal securities		630,242		1,603		-		-		630,242		1,603
Total securities available for sale	$	9,744,005	$	77,651	$	-	$	-	$	9,744,005	$	77,651
Held to maturity
State and municipal securities	$	-	$	-	$	-	$	-	$	-	$	-
December 31, 2009
Available for sale
U.S. Government agency securities	$	-	$	-	$	-	$	-	$	-	$	-
Government sponsored enterprises		5,454,054		204,195		-		-		5,454,054		204,195
Mortgage-backed securities						-		-		-		-
State and municipal securities		1,006,692		8,439		708,900		50,896		1,715,592		59,335
Total securities available for sale	$	6,460,746	$	212,634	$	708,900	$	50,896	$	7,169,646	$	263,530
Held to maturity
State and municipal securities	$	-	$	-	$	220,031	$	7,575	$	220,031	$	7,575

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, and the financial condition and near-term prospects of the issuer.  The relative significance of these and other factors will vary on a case by case basis.

In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition and the issuer's anticipated ability to pay the contractual cash flows of the investments. Since the Company intends to hold all of its investment securities until maturity, and it is more likely than not that the Company will not have to sell any of its investment securities before unrealized losses have been recovered, and the Company expects to recover the entire amount of the amortized cost basis of all its securities, none of the securities are deemed other than temporarily impaired at September 30, 2010. Management continues to monitor all of these securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of these securities are other than temporarily impaired, which could require a charge to earnings in such periods.

11

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 3.  Investment Securities, continued

Investment securities with amortized cost of approximately $18,137,439 at September 30, 2010 and $15,278,151 at December 31, 2009, were pledged as collateral on public deposits and for other purposes as required or permitted by law.  Gross realized gains and losses for the nine-month and three-month periods ended September 30, 2010 and 2009 are as follows:

	Nine-months ended Sep 30,						Three-months ended Sep 30,
	2010			2009			2010		2009
Realized gains	$	243,085		$	223,298		$	170,134		1,592
Realized losses		(39,984	)		(57,525	)		--		--
	$	203,101		$	165,773		$	170,134	$	1,592

The scheduled maturities of securities available for sale and securities held to maturity at September 30, 2010, were as follows:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	11,262	$	11,470	$	-		-
Due after one year through five years		3,543,058		3,730,537		1,500,446		1,584,382
Due after five years through ten years		10,793,391		11,235,905		227,751		233,362
Due after ten years		26,787,281		27,506,976		481,644		513,117
	$	41,134,992	$	42,484,888	$	2,209,841	$	2,330,861

Maturities of mortgage backed securities are based on contractual amounts.  Actual maturity will vary as loans underlying the securities are prepaid.

Note 4.  Allowance for Loan Losses

The following is an analysis of the allowance for loan losses for the nine months ended September 30, 2010 and 2009.

	2010			2009
Balance, beginning	$	3,555,273		$	3,359,946
Provision charged to expense		1,562,733			862,331
Recoveries of amounts charged off		163,332			21,271
Amounts charged off		(1,035,503	)		(879,572	)
Balance, ending	$	4,245,835		$	3,363,976

Note 5.  Income Taxes

A reconciliation of income tax expense computed at the statutory federal income tax rate to income tax expense included in the statements of income for the nine months ended September 30, 2010 and 2009 follows:

	2010			2009
Tax at statutory federal rate	$	425,642		$	337,205
Tax exempt interest income		(115,658	)		(119,753	)
Other tax exempt income		(76,500	)		(76,500	)
Other		17,516			19,048
	$	251,000		$	160,000

12

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 6.  Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees.  The benefits are primarily based on years of service and earnings.  The following is a summary of net periodic pension costs for the nine-month and three-month periods ended September 30, 2010 and 2009.

	Nine-months ended Sep 30,						Three-months ended Sep 30,
	2010			2009			2010			2009
Service cost	$	308,880		$	293,307		$	102,960			97,769
Interest cost		312,774			286,107			104,258			95,369
Expected return on plan assets		(495,213	)		(347,828	)		(165,071	)		(129,147	)
Amortization of net obligation at transition		-			(15	)		-			(5	)
Amortization of prior service cost		2,424			8,085			808			2,695
Amortization of net (gain) or loss		29,097			108,303			9,699			36,101
Net periodic benefit cost	$	157,962		$	347,959		$	52,654		$	102,782

It is Bank policy to contribute the maximum tax-deductible amount each year as determined by the plan administrator.  A contribution of $772,933 was made in the second quarter of 2010.

Note 7.  Commitments and Contingencies

The Bank is 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 involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments.  A summary of the Bank’s commitments at September 30, 2010 and 2009 is as follows:

	2010		2009
Commitments to extend credit	$	14,229,994	$	17,447,278
Standby letters of credit		-		-
	$	14,229,994	$	17,447,278

Commitments to extend credit are agreements to lend to a customer, at a fixed or variable interest rate, 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.  The Bank evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party.   Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances that the Bank deems necessary.

13

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 8.  Fair Value

FASB ASC 825, “Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.  FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and due from banks:  The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.

Interest-bearing deposits with banks:  Due to their short-term nature, the carrying value of interest-bearing deposits approximate their fair value.

Federal funds sold:  Due to their short-term nature, the carrying value of federal funds sold approximate their fair value.

Securities:  Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  The carrying values of restricted equity securities approximate fair values.

Loans receivable:  For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts.  The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.  The carrying amount of accrued interest receivable approximates its fair value.

Cash value of life insurance:  The carrying amount reported in the balance sheet approximates fair value as it represents the cash surrender value of the life insurance.

Deposit liabilities:  The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date.  The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.  The carrying amount of accrued interest payable approximates fair value.

Long-term debt:  The fair value of long-term debt is estimated using a discounted cash flow calculation that applies interest rates currently available on similar instruments.

14

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 8.  Fair Value, continued

The estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and due from banks	$	9,027	$	9,027	$	8,637	$	8,637
Interest bearing deposits with banks		3,303		3,303		300		300
Federal funds sold		28,727		28,727		19,357		19,357
Securities, available for sale		42,485		42,485		39,859		39,859
Securities, held to maturity		2,210		2,331		2,175		2,254
Restricted equity securities		1,672		1,672		1,784		1,784
Loans, net of allowance for loan losses		257,446		264,358		266,628		269,442
Cash value of life insurance		8,323		8,323		8,098		8,098
Accrued interest receivable		2,550		2,550		2,626		2,626
Financial liabilities
Deposits		317,143		320,121		313,483		315,789
Long-term debt		25,000		28,593		25,000		27,511
Accrued interest payable		810		810		383		383

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Securities available for sale, and derivatives are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans or foreclosed assets.  These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

Under FASB ASC 820, “Fair Value Measurements and Disclosures”, the Company groups assets and liabilities at fair value 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.  These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques may include the use of option pricing models, discounted cash flow models and similar techniques.

15

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 8.  Fair Value, continued

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

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities.  Securities classified as Level 3 include asset-backed securities in less liquid markets.

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 FASB ASC 310, “Receivables”.   The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  At September 30, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with FASB ASC 820, impaired loans where an allowance is established based on the fair value of 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 nonrecurring Level 2.  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 nonrecurring Level 3.

Derivative Assets and Liabilities

Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available.  Management engages third-party intermediaries to determine the fair market value of these derivative instruments and classifies these instruments as Level 2.  Examples of Level 2 derivatives are interest rate swaps, caps and floors.  No derivative instruments were held as of September 30, 2010, or December 31, 2009.

Foreclosed Assets

Foreclosed assets are adjusted to fair value, less selling costs, 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 an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2.  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 nonrecurring Level 3.

16

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 8.  Fair Value, continued

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

September 30, 2010	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Government agency securities	$	1,356,459	$	-	$	1,356,459	$	-
Government sponsored enterprises		18,179,267		-		18,179,267		-
Mortgage-backed securities		15,531,985		-		15,531,985		-
State and municipal securities		7,417,177		-		7,417,177		-
Total investment securities
available for sale	$	42,484,888	$	-	$	42,484,888	$	-
Total assets at fair value	$	42,484,888	$	-	$	42,484,888	$	-
Total liabilities at fair value	$	-	$	-	$	-	$	-
December 31, 2009	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Government agency securities	$	1,710,715	$	-	$	1,710,715	$	-
Government sponsored enterprises		12,902,070		-		12,902,070		-
Mortgage-backed securities		17,855,746		-		17,855,746		-
State and municipal securities		7,390,588		-		7,390,588		-
Total investment securities
available for sale	$	39,859,119	$	-	$	39,859,119	$	-
Total assets at fair value	$	39,859,119	$	-	$	39,859,119	$	-
Total liabilities at fair value	$	-	$	-	$	-	$	-

There were no significant transfers to or from Levels 1 and 2 during the nine-month period ended September 30, 2010 or for the year ended December 31, 2009.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets and liabilities measured at fair value on a nonrecurring basis are included in the table below.

September 30, 2010	Total		Level 1		Level 2		Level 3
Loans	$	2,146,871	$	-	$	1,177,671	$	969,200
Foreclosed assets		634,000		-		-		634,000
Total assets at fair value	$	2,780,871	$	-	$	1,177,671	$	1,603,200
Total liabilities at fair value	$	-	$	-	$	-	$	-

17

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 8.  Fair Value, continued

December 31, 2009	Total		Level 1		Level 2		Level 3
Loans	$	1,365,896	$	-	$	637,004	$	728,892
Foreclosed assets		331,159		-		67,159		264,000
Total assets at fair value	$	1,697,055	$	-	$	704,163	$	992,892
Total liabilities at fair value	$	-	$	-	$	-	$	-

Note 9.  Subsequent Events

Management has evaluated events occurring subsequent to the balance sheet date through the date these financial statements were issued, determining no events require additional disclosure in these consolidated financial statements.

18

Part I.  Financial Information

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

General

The following discussion provides information about the major components of the results of operations and financial condition of the Company.  This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.

Critical Accounting Policies

For a discussion of the Company’s critical accounting policies, including its allowance for loan losses, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Overall, pre-tax earnings for the quarter ended September 30, 2010 totaled $594,165 compared to $433,123 for the same period in 2009.   Income tax expense increased by $59,000 from the third quarter of 2009 to 2010 resulting in net income of $448,165 for the third quarter of 2010 compared to $346,123 for the same period in 2009.

Total interest income decreased by $359,776 for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009, while interest expense on deposits and other borrowings decreased by $391,619 over the same period.  The decrease in interest income was attributable primarily to decreases in the average outstanding balances of both loans and investment securities for the third quarter of 2010 as compared to the same quarter in 2009, an increase in the amount of loans on non-accrual status, and a decrease in the average yield on investment securities in the third quarter of 2010 compared to 2009.  The decrease in total loans outstanding was primarily the result of continued weakness in loan demand.  As a result, there was little incentive to grow customer deposits for funding purposes.  This allowed management to more aggressively lower interest rates on deposits, leading to the greater reduction in interest expense.   The result was a slight increase in net interest income of $31,843, or 1.07% for the quarter ended September 30, 2010, compared to the same quarter last year.

The provision for loan losses was $712,974 for the quarter ended September 30, 2010 and $280,694 for the same period in 2009.  The increase was due to increased charge-offs as well as management’s desire to maintain higher reserve levels in light of deteriorating economic conditions and increases in the level of past-due loans.  The reserve for loan losses at September 30, 2010 was approximately 1.62% of total loans, compared to 1.32% at December 31, 2009 and 1.24% at September 30, 2009.  Management believes the provision and the resulting allowance for loan losses are adequate.

Total noninterest income was $951,176 in the third quarter of 2010 compared to $494,724 in the third quarter of 2009.  The majority of the increase came as a result of net realized gains on investment securities in 2010 totaling $170,134, compared to gains of $1,592 in 2009.  Other income also increased during the quarter ended September 30, 2010 as the Bank sold its holdings of stock in Triangle Capital Corporation, a small business investment company.  The sale resulted in a nonrecurring gain of $213,499.

Noninterest expenses decreased by $105,027, or 3.81%, for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009.  Salary and employee benefit expenses decreased by $93,166, or 5.71% due to employee attrition and reductions in benefit costs.  Other expenses increased by $27,885, or 3.52%.  This increase in other expenses in the third quarter of 2010 compared to the same period in 2009 was mainly due to increases in data processing costs and FDIC deposit insurance assessments.

For the nine months ended September 30, 2010, total interest income decreased by $1,031,246 compared to the nine-month period ended September 30, 2009, while interest expense decreased by $1,503,613 over the same period, resulting in an increase in net interest income of $472,367, or 5.56%.  As indicated in the quarterly discussion above, the decrease in interest income was due primarily to the lower average balances of loans outstanding, increased levels of non-accrual loans, and a decrease in the average yield on investment securities.  The decrease in interest expense was due mainly to decreases in deposit rates.

19

Part I.  Financial Information

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

The increase in noninterest income of $355,792 for the first nine months of 2010, compared to the same period in 2009 was the result of increases in service charges on deposit accounts, net realized gains on securities, increases in ATM fees and the above mentioned gain on the sale of stock in Triangle Capital Corporation.

Total noninterest expenses decreased by $132,354 for the nine-month period ended September 30, 2010, compared to the same period in 2009.  Salaries and employee benefits decreased by $229,064, or 4.65%, over this period due to employee attrition and reductions in benefit costs.  Other expenses increased by $155,728 from 2009 to 2010 due to the recognition of a nonrecurring expense credit in 2009 reducing provisions for overdraft losses by approximately $160,000.

In total, net income before taxes increased by $260,111, or 26.23% to $1,251,889, over the first nine months of 2010 compared to the first nine months of 2009.  Income tax expense increased by $91,000 over the prior year, resulting in an increase in net income of $169,111, or 20.33% for the nine months ended September 30, 2010.

Financial Condition

Total assets increased by $5,470,166, or 1.48%, from December 31, 2009 to September 30, 2010.  Net loans decreased by $9,182,486, federal funds sold increased by $9,370,285 and investment securities increased by $2,660,728.  Interest-bearing deposits with banks increased by $3,003,254.

Total deposits increased by $3,660,143, or 1.17%, from December 31, 2009 to September 30, 2010.  The increase in deposits came despite management’s moves to lower deposit rates in conjunction with decreases in rates on loans and investment securities.  Decreasing loan demand has continued to reduce the need to aggressively grow deposits for funding purposes.

Nonperforming assets, including nonaccrual loans, loans past due more than ninety days and foreclosed assets, increased from $18,130,704 at December 31, 2009 to $20,179,412 at September 30, 2010.  Foreclosed assets consist of twelve properties totaling $3,056,726 at September 30, 2010.  One commercial real estate property represents the majority of the balance in foreclosed assets with a value of $2,422,726.  The remaining properties include ten residential real estate properties and one commercial building.  There were six disposals of foreclosed property in the first nine months of 2010 resulting in a combined net gain of $1,733.  All foreclosed properties are being marketed for sale.  Loans past due more than ninety days increased from $1,163,076 at December 31, 2009 to $1,926,612 at September 30, 2010.

Nonaccrual loans increased from $14,158,743 at December 31, 2009 to $15,196,074 at September 30, 2010.  During the first nine months of 2010, loans totaling $6,131,466 were added to nonaccrual status while loans totaling $5,094,135 were removed from nonaccrual status.  Loans are generally placed in nonaccrual status when principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection.  Loans less than 90 days past due may be placed in nonaccrual status if management determines that payment in full of principal or interest is not expected.  Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof.  Management continues to closely monitor nonperforming assets and their impact on earnings and loan loss reserves.

At September 30, 2010, the allowance for loan losses included $10,195 specifically reserved for impaired loans in the amount of $2,157,066.  Based on management's impairment analysis, loans totaling $9,485,265 were also considered to be impaired but did not require a specific reserve or the related reserve had previously been charged-off.  Impaired loans at December 31, 2009 totaled $14,400,933, of which $585,471 required specific reserves of $74,888.

The decrease in impaired loans from December 31, 2009 to September 30, 2010 was mostly attributable to principal repayments through customers liquidating collateral with a portion related to additional write downs.

Certain types of loans, such as option ARM products, interest-only loans, subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans.  The Bank has not offered these types of loans in the past and does not offer them currently.  Junior-lien mortgages can also be considered higher risk loans.  Our junior-lien portfolio at September 30, 2010 totaled $6.7 million, or 2.57% of total loans.  Historical charge-off rates in this category have not varied significantly from other real estate secured loans.

Stockholders’ equity totaled $31,533,531 at September 30, 2010 compared to $30,539,945 at December 31, 2009.  The $993,586 increase was the result of earnings for the nine months combined with an increase in the market value of securities classified as available for sale of $508,387, offset by the payment of dividends of $515,690.

20

Part I.  Financial Information

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

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios at the Bank level which assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities.  The Bank exceeds all regulatory capital guidelines and is considered to be “well capitalized.”

Liquidity and Capital Resources

Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss.Unsecured federal fund lines available from correspondent banks totaled $9,000,000 at September 30, 2010.  No balances were outstanding on these lines at September 30, 2010 or December 31, 2009.  Long-term debt consists of borrowings from the Federal Home Loan Bank and Deutsche Bank.  Borrowings from the Federal Home Loan Bank, which are secured by a blanket collateral agreement on the Bank’s 1 to 4 family residential real estate loans, totaled $15,000,000 at September 30, 2010 and December 31, 2009.  Borrowings from Deutsche Bank, which are secured by the pledging of specific investment securities, totaled $10,000,000 at each of September 30, 2010, and December 31, 2009.  The unused credit line from the Federal Home Loan Bank as of September 30, 2010 is approximately $40,000,000.

The Bank uses cash and federal funds sold to meet its daily funding needs.  If funding needs are met through holdings of excess cash and federal funds, then profits might be sacrificed as higher-yielding investments are foregone in the interest of liquidity.  Therefore management determines, based on such items as loan demand and deposit activity, an appropriate level of cash and federal funds and seeks to maintain that level.

The Bank’s investment security portfolio also serves as a source of liquidity.  The primary goals of the investment portfolio are liquidity management and maturity gap management.  As investment securities mature, the proceeds are reinvested in federal funds sold if the federal funds level needs to be increased; otherwise the proceeds are reinvested in similar investment securities.  The majority of investment security transactions consist of replacing securities that have been called or matured.  The Bank keeps a portion of its investment portfolio in unpledged assets with average lives or repricing terms of less than 60 months.  These investments are a preferred source of funds because their market value is not as sensitive to changes in interest rates as investments with longer durations.

As a result of the steps described above, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.  Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company.  Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.  For additional information on known and unknown risks, see the “Forward Looking Statements” section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

21

Part I.  Financial Information

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

22

Part I.  Financial Information

Item 4.  Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934.  Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in its periodic filings with the Securities and Exchange Commission.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

23

Part II.  Other Information

Item 1.                 Legal Proceedings

There are no pending legal proceedings to which the Company or the Bank is a party or of which any of their property is subject.

Item 1A.                 Risk Factors

Not applicable to smaller reporting companies.

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

Not applicable

Item 3.                 Defaults Upon Senior Securities

Not applicable

Item 4.                 Removed and Reserved

Item 5.                 Other Information

None

Item 6.                 Exhibits

31.1	Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2	Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.Section 1350.

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SIGNATURES

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

	GRAYSON BANKSHARES, INC.
Date: November 15, 2010	By:	/s/ Jacky K. Anderson
		Jacky K. Anderson
		President and Chief Executive Officer
	By:	/s/ Blake M. Edwards
		Blake M. Edwards
		Chief Financial Officer

25

Exhibit Index

Exhibit No.	Description
31.1	Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2	Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.