SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


For the Fiscal Year ended:                                Commission File
      DECEMBER 31, 1999                                   Number:  430893107
      -----------------                                            ---------


                           HIGHLANDS BANKSHARES, INC.
                           --------------------------
             (Exact name of registrant as specified in its charter)


VIRGINIA                                                  54-1796693
--------                                                  ----------
(State or other jurisdiction                              (I.R.S. Employer
of incorporation or organization)                         Identification Number)

340 WEST MAIN STREET
ABINGDON, VIRGINIA                                        24210-1128
------------------                                        ----------
(Address of principal                                     (Zip Code)
executive offices)

Registrant's telephone number, including area code:       (540) 628-9181


           Securities registered pursuant to Section 12(b) of the Act:
                                 NOT APPLICABLE
                                 --------------

           Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, $1.25 PAR VALUE
                          -----------------------------
                                (Title of Class)


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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X]  No [ ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

As of December 31, 1999, there were 2,623,856 shares of Common Stock
outstanding.

                                        1
<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE



List hereunder the following documents if incorporated by reference and the Part
of Form 10-K into which the documents are incorporated:

(1)  Part II incorporates information by reference from the registrant's Annual
     Report to Stockholders for the fiscal year ended December 31, 1999.

(2)  Part III incorporates by reference from the registrant's proxy statement
     for its Annual Meeting of Stockholders scheduled for May 10, 2000.

(3)  Part IV incorporates by reference from: (i) the registrant's Annual Report
     to Stockholders for the fiscal year ended December 31, 1999, and (ii) the
     registrant's proxy statement for its Annual Meeting of Stockholders
     scheduled for May 10, 2000.

The exhibit index is located on page 26.


                                        2
<PAGE>

PART I.

ITEM I.  BUSINESS

                                     GENERAL

         Highlands Bankshares Inc. (the "Corporation") was incorporated in
Virginia in 1995 to serve as the holding company for Highlands Union Bank, (the
"Bank"). The stockholders of the Bank approved the Plan of Reorganization at the
Annual Meeting on December 13, 1995, and the reorganization was consummated on
December 29, 1995 with the Bank becoming a wholly-owned subsidiary of the
Corporation. The Bank is a state charted bank with principal offices in
Abingdon, Virginia. The Bank was incorporated in 1985.

         At December 31, 1999, the Corporation had total assets of $358,348,000,
deposits of $306,193,000, and net worth of $20,408,000.

         The Corporation's principal business activities, which are conducted
through the Bank, are attracting checking and savings deposits from the general
public through its retail banking offices and originating and servicing loans
secured by first mortgage liens on single-family dwellings, including
condominium units. All of the retail banking offices are located in Virginia.
The Corporation also lends funds to retail banking customers by means of home
equity and installment loans, and originates residential constructions loans and
loans secured by commercial property, multi-family dwellings and manufactured
housing units. The Corporation opened an indirect lending department in 1997.
The majority of indirect lending originates through new and used car
dealerships. The indirect lending portfolio comprises a significant portion of
the total consumer loan portfolio. The Corporation invests in certain U.S.
Government and agency obligations and other investments permitted by applicable
laws and regulations. The operating results of the Corporation are highly
dependent on net interest income, the difference between interest income earned
on loans and investments and the cost of checking and savings deposits and
borrowed funds.

         The Bank is a member of the Federal Deposit Insurance Corporation
("FDIC"), and its deposit accounts are insured up to $100,000 as applied by FDIC
guidelines. The Bank is also a member of the Federal Reserve System, as such,
the Bank and the Corporation are subject to the supervision, regulation and
examination of the Federal Reserve. As a Virginia state chartered bank the Bank
is also subject to supervision, regulation and examination by the Virginia State
Corporation Commission.

         The Corporation has two direct subsidiaries as of December 31, 1999.
The Bank which was formed in 1985 and Highlands Capital Trust I, a statutory
business trust (the "Trust") which was created by the Corporation on January 21,
1998. The Corporation's material assets as of December 31, 1999 include:
approximately $2.5 million in loan participations from the subsidiary bank;
approximately $1.4 million in building and land; investment securities,
approximately $1.1 million; and its investment in subsidiaries, approximately
$21.8 million. The Corporation's only material liability is the note payable on
the trust preferred debentures issued in January of 1998, $7.5 million.

         The Bank had one direct wholly-owned subsidiary, Highlands Union
Insurance Services, Inc., that became effective on October 8, 1999. This entity
is still in the startup stage as of December 31, 1999 and is anticipated to
become fully operational during 2000. This entity will be used to sell insurance
services through the Virginia Bankers' Insurance Services, LLC.

         The Corporation operates six full service and one express facility
throughout Washington County, Virginia, the City of Bristol, Virginia, Marion,
Virginia, and Glade Spring, Virginia. The Corporation also operates twenty
off-site ATM's throughout the service areas listed above as well as Russell
County and Wythe County, Virginia.

         The results of operations for the fiscal years ended December 31, 1999,
1998, and 1997 ("fiscal year 1999", "fiscal year 1998" and "fiscal year 1997",
respectively) reflect the Corporation's strategies of expanding its community
banking operations.


                                        3
<PAGE>

See "Management's Discussion and Analysis" of operations and financial
condition, included as part of the Annual Report to Stockholders, for a detailed
discussion of certain aspects of the Corporation's business.

                               LENDING ACTIVITIES

RESIDENTIAL MORTGAGE LENDING

         The Corporation's lending policy is generally to lend up to 80% of the
appraised value of residential property. The Corporation lends up to 95% of the
appraised value with the normal requirement of insurance from private mortgage
insurance companies. This insurance normally covers amounts in excess of 80%
loan to value up to 95%.

         The in-house residential mortgages are comprised of primarily one,
three and five year adjustable rate mortgages and 15 year fixed rate mortgages.
Adjustable rate mortgages are indexed to 275 basis points over the average yield
on United States Treasury securities adjusted to a constant maturity of one,
three or five years. An adjustment limitation (increase or decrease) of 2% per
annum applies to the one year adjustable product. A 5% lifetime cap over the
initial rate of the loan is included in the one, three and five year adjustable
rate mortgages.

         The corporation's existing loan contracts generally provide for
repayment of residential mortgage loans over periods ranging from 15 to 30
years. However, such loans normally have remained outstanding for much shorter
periods of time as borrowers refinance or prepay their loans through the sale of
their homes.

         Most of the Corporation's residential mortgage loans have "due on sale"
clauses which allows the creditor the right to declare a loan immediately due
and payable in the event the borrower sells or otherwise disposes of the real
property. Most of the Corporation's residential mortgage loans are not
assumable.

         Mortgage loans exceeding $450,000 but less than $750,000 must be
approved by the loan committee of the Board of Directors. Mortgage loans in
excess of $750,000 must be approved by the Board of Directors.

         All of the Corporation's mortgage lending is subject to loan
origination procedures established by the Board of Directors. Most originations
require a property valuation by state licensed appraisers, for a fee, approved
by the Board of Directors. Loan applications are obtained to determine the
borrowers ability to repay. Significant items are verified through the use of
credit reports, financial statements, etc.

         It is generally the Corporation's policy to require title insurance on
first mortgage loans in excess of $100,000 (lower where deemed necessary). It is
also the Bank's general policy to require an attorney's opinion statement on all
first mortgage deeds of trust. Fire and casualty insurance (extended coverage)
is generally required on all property serving as security for these loans.
Hazard insurance and flood insurance (where required) is generally provided by
the customer prior to closing of the loan. The borrower is generally responsible
for paying insurance premiums and real estate taxes.

         Federal regulations allow the Corporation to originate loans on real
estate within the State of Virginia, and within limits, to originate and
purchase loans or loan participations secured by real estate located in any part
of the United States. During fiscal year 1999 the Corporation's primary lending
area was Washington County, Virginia , the City of Bristol, Virginia, and Smyth
County, Virginia.

         Residential loan originations come from many sources. Some of these
sources include existing customers, walk-in applications, referrals from real
estate brokers and others.

         Federal regulation limits loans to one borrower to a maximum of 15% of
unimpaired capital and unimpaired surplus of the Bank.

         The Corporation receives fees in addition to interest in connection
with real estate loan originations, loan modifications, late payments, etc.
Income from these activities varies from period to period depending on the
volume and type of loan made. Although not a significant portion of the
Corporation's income, late charges are received when monthly payments are
delinquent but are later paid.

         The Corporation also offers secondary market fixed rate mortgages with
terms up to 30 years and up to 95% loan to value. These loans and servicing
rights are generally sold immediately into the secondary market and fees
received booked into income. These loans must meet certain criteria generally
set by the secondary market and are not a significant portion of the Bank's
residential mortgage activity.

         Residential mortgages, including equity lines of credit, made up
approximately 38.09% of the loan portfolio as of December 31, 1999.

                                        4
<PAGE>

CONSTRUCTION AND COMMERCIAL REAL ESTATE LENDING

         The Corporation generally makes construction loans for periods up to
one year on residential and commercial real estate property. These loans are for
interim financing and are either paid off or converted to permanent financing
when completed. At December 31, 1999 outstanding construction loans (net of
undisbursed funds) totaled $3,164,000. These loans are generally made at 80% or
less of appraised value at completion. Funds are advanced as the project is
completed after an inspection by a staff inspector or the appraiser as deemed
appropriate. These loans are made based on established corporate underwriting
standards. Most of these construction loans are one to four family dwellings.
The Corporation generally charges a 1% origination fee on these construction
loans in addition to applicable interest.

         Loans on commercial properties, multi-family dwellings, and apartment
buildings are typically made at 75% to 80% of the appraised value. These loans
totaled $56,158,000 or 21.46% of total loans held for investment at December 31,
1999.

         Commercial and construction loans, by nature, entail additional risk as
compared to residential mortgage lending. They are generally more complex and
involve larger balances than typical residential mortgages. Payments are
typically dependent upon successful operation of a related real estate project
or business as compared to individual earnings on most residential mortgages.
Therefore, the market risk is somewhat greater. Construction delays, cost
overruns or the inability of the contractor to sell the finished product add an
element of risk to such lending.

CONSUMER LENDING

         The Corporation offers other types of loans in addition to real estate
mortgage and construction loans. Consumer loans of many types are offered by the
Corporation. Some of these loans are loans to purchase automobiles, boats,
recreational vehicles and manufactured housing, as well as other secured and
unsecured consumer loans. The Corporation further makes loans secured by savings
accounts at 2% above the rate of the savings instrument. The terms generally do
not exceed ten years for manufactured housing loans and five years on other
consumer loans. Outstanding consumer loans at December 31, 1999 were
$68,097,000.

COMMERCIAL AND AGRICULTURE NON-REAL ESTATE LOANS

         The Corporation also makes commercial (including agriculture) non-real
estate loans. These loans in general have higher risk associated with them than
real estate loans. They are generally secured by inventory, equipment, accounts
receivable, etc., or unsecured in some cases backed by appropriate financial
condition as per the underwriting standards of the Corporation. Agriculture
loans are generally secured by machinery, equipment, other miscellaneous assets
or unsecured in keeping with the underwriting standards of the Corporation. The
timely pay back is dependent upon the successful operation of the business or
farm. The outstanding balance of non-real estate commercial loans was
$27,072,000 at December 31, 1999 and the outstanding balance of non-real estate
agriculture loans was $3,215,000 at December 31, 1999.

                                   INVESTMENTS

INVESTMENT SECURITIES

         The Corporation invests in mortgage-backed securities, agency notes and
bonds, collateralized mortgage obligations (CMO's), municipal bonds, equity
securities and United States Treasury Notes.

         A substantial portion of the mortgage-backed security portfolio
consists of securities that are either insured or guaranteed by FHLMC, FNMA or
GNMA. Guaranteed securities are more liquid than individual mortgage loans. At
December 31, 1999 the Corporation's mortgage-backed securities portfolio had a
carrying value of $51,099,000 or 14.26% of total assets compared to $38,131,000
or 12.39% of total assets at December 31, 1998. Amortized costs of
mortgage-backed securities were $51,594,000 at December 31, 1999 and $38,288,000
for the comparable 1998 period. Due to repayments and prepayments of the
underlying loans, the actual maturities of mortgage-backed securities are
expected to be substantially less than the scheduled maturities.

                                        5
<PAGE>

         The Corporation also holds investments in CMO's with a market value at
December 31, 1999 of $11,170,000 and amortized cost of $11,240,000 compared to a
market value of $7,873,000 and amortized cost of $7,886,000 at December 31,
1998.

         The Corporation held no investments in United States Treasury Notes for
the comparable periods ending December 31, 1999 and December 31, 1998.

         The Corporation had $4,206,000 and $3,264,000 in United States
Government-sponsored Agency Obligations at December 31, 1999 and 1998
respectively. These investments represent approximately 1.17% and 1.06% of total
assets at those dates.

         The Corporation holds the following equity investments: Federal Reserve
Bank Stock of $295,400 for the periods ending December 31, 1999 and 1998
respectively; Federal Home Loan Bank Stock of $1,245,100 and $950,900 for the
same dates as above; and Community Bankers' Bank Stock of $54,750 and $54,750
for the same dates as above.

         The Corporation also holds investments in municipal bonds of $2,258,000
and $759,000 as of December 31, 1999 and 1998 respectively. These investments
represented approximately 0.63% and 0.25% of total assets at those dates.

INVESTMENT ACTIVITIES

         Under Federal Reserve regulations, the Bank is required to maintain
certain liquidity ratios and does so by investing in certain obligations and
other securities which qualify as liquid assets under Federal Reserve
regulations. See "Regulation". As a state chartered bank, the Bank's investment
authority is limited by federal law which permits investment in, among other
things, certain certificates of deposit issued by commercial bank, banker's
acceptances, loans to commercial banks for Federal Funds, United States
government and agency obligations of state governments, and corporate bonds.

         The Corporation's investment committee, which meets monthly, follows
Federal Reserve guidelines with respect to portfolio investment and accounting.
Such Federal Reserve guidelines state that insured institutions must account for
securities held for investment, sale and/or trading in accordance with generally
accepted accounting principles. The Corporation maintains a written investment
policy to set forth investment portfolio composition and investment strategy.
The investment portfolio composition policy considers, among other factors, the
financial condition of the institution, the types of securities, amounts of
investments in those securities and safety and soundness considerations
pertaining to the institution. The investment strategy considers, among other
factors, interest rate risk, anticipated maturity of each type of investment and
the intent of the institution with respect to each investment.

                                SOURCES OF FUNDS

GENERAL

         Deposit accounts have traditionally been the principal source of the
Corporation's funds for use in lending and for other general business purposes.
In addition to deposits, the Corporation derives funds from loan repayments,
repayments from securities, FHLB advances and loan participation sales.
Borrowings may be used on a short-term basis to compensate for seasonal or other
reductions in deposits or inflows at less than projected levels, as well as on a
long term basis to support expanded lending activities.

DEPOSIT ACTIVITIES

         The Corporation, in its continuing effort to remain a competitive force
in its markets, offers a wide variety of deposit services, with varied
maturities, minimum-balance requirements and market-sensitive interest rates
that are attractive to all types of depositors. The Corporation's deposit
products include checking accounts, statement savings accounts, money market
deposit accounts, negotiable orders of withdrawal accounts, individual
retirement accounts and certificates of deposit accounts. The Corporation is
able to offer a broad array of products that are consistent with current Federal
Reserve regulations, and as a major result, the Corporation's deposit portfolio
is, for the most part, sensitive to general market fluctuations.


                                        6
<PAGE>

The following table sets forth the various types of accounts offered by the
Corporation at December 31, 1999:
<TABLE>
<CAPTION>
                             Weighted
                             Average               Minimum       Amount
                             Interest              Balance       In                % of
Type of Account              Rate        Term      Deposit       Thousands         Total
---------------              ----        ----      -------       ---------         -----
<S>                          <C>                   <C>            <C>              <C>
Checking Account             0.00%       none      $ 100.00       $ 39,504         12.90%
Interest Checking            3.49        none        100.00         18,037          5.89
Passbook Accounts            4.00        none         25.00         44,680         14.59
Money Market
    Deposit Accounts         3.80        none        500.00          8,037          2.63
Christmas Club Accts         4.05        none          5.00             71          0.02
Individual Retirement
    Accounts                 6.26        various     500.00         28,752          9.39
Certificates of Deposit
    Accounts                 5.32        various     500.00        167,112         54.58
                                                                  --------        ------

Totals                                                            $306,193        100.00%
                                                                  --------        ------
</TABLE>

         The variety of deposit accounts offered by the Corporation and the
competitive rates paid on these deposit accounts has increased the Corporation's
ability to retain deposits and has allowed it to be more competitive in
obtaining new funds, reducing the threat of disintermediation (the flow of funds
away from deposit institutions into direct investment vehicles such as
government and corporate securities). As customers have become more rate
conscious and willing to move funds to higher yielding accounts, the ability of
the Corporation to attract and maintain deposits and the Corporation's cost of
funds have been, and will continue to be, significantly affected by money market
conditions.

         The following table sets forth information relating to the
Corporation's deposit flows during the years indicated.

                                                  Years Ended December 31
(In Thousands)                                  1999       1998       1997
--------------                                --------   --------   --------
Increase (decrease) in deposits before
   interest credited back to accounts         $ 22,698   $ 28,880   $ 41,924
Interest credited back to accounts              11,154      6,815      5,251
                                              --------   --------   --------
Net increase in deposits                        33,852     35,695     47,175
                                              --------   --------   --------
Total deposits at year end                    $306,193   $272,341   $236,646
                                              --------   --------   --------


BORROWINGS

         The Corporation may obtain advances from the FHLB upon the security of
the capital stock it owns in the bank and certain of its home mortgage loans
provided certain standards related to creditworthiness have been met. Such
advances may be made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities and the FHLB
prescribes the acceptable uses to which the advances pursuant to each program
may be used, as well as limitations on the size of such advances. Depending on
the program, such limitations are based either on a fixed percentage of the
Corporation's net worth or on the FHLB's assessment of the Corporation's
creditworthiness. The FHLB is required to review its credit limitations and
standards at least once every six months. FHLB


                                        7
<PAGE>

advances have from time been available to meet seasonal and other withdrawals of
savings accounts and to expand lending.

         The Bank also has established credit arrangements with several of it's
correspondent banks. At December 31, 1999 the Bank had approximately $76,179,000
of unused lines of credit, including FHLB unused lines of credit, to fund any
necessary cash requirements.

         The following table sets forth certain information as to the
Corporation's advances and other borrowings at the dates indicated. See Notes 8,
9 and 14 to the Consolidated Financial Statements, included as part of the
Annual Report to Stockholders, for information as to rates, maturities, average
balances and maximum amounts outstanding.

                                             December 31
(In Thousands)                            1999        1998        1997
--------------                          -------     -------     -------
Advances from FHLB                      $18,500     $ 6,643     $ 1,786
Guaranteed preferred beneficial
  interests in corporation's junior
  subordinated debt securities            7,500       7,500         -0-
Other borrowings                             99         120         828
                                        -------     -------     -------

          Total borrowings              $26,099     $14,263     $ 2,614
                                        -------     -------     -------

                                    EMPLOYEES

         The Corporation at December 31, 1999 had 154 full time employees. None
of these employees are represented by a collective agent, and the Corporation
believes its employee relations are excellent.

                                   COMPETITION

         The Corporation encounters competition for both deposits and loans. For
deposits, competition comes from other commercial banks, savings and loan
associations and/or savings banks, mutual money market funds, credit unions and
various other corporate and financial institutions. Competition also comes from
interest paying obligations issued by various levels of government and from a
variety of securities paying dividends or interest. Competition for loans comes
primarily from other commercial banks, savings and loan associations and/or
savings banks, insurance companies, mortgage companies and other lending
institutions.

                                  SUBSIDIARIES

         The Corporation was incorporated in Virginia in 1995 to serve as the
holding company for the Bank. The Bank is a state chartered bank with principal
offices in Abingdon, Virginia. The Bank was incorporated in 1985 under the laws
of the Commonwealth of Virginia. The Corporation formed a statutory business
trust, Highlands Capital Trust I, in January of 1998 to issue trust preferred
securities in order to raise additional capital.

         The Bank formed a wholly-owned subsidiary, Highlands Union Insurance
Services, Inc., on October 8, 1999 for the purpose of selling insurance services
through Virginia Bankers' Insurance Services, LLC. The subsidiary should become
fully operational during 2000.

                          FEDERAL HOME LOAN BANK SYSTEM

         The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
System is regulated by the Federal Housing Finance Board ("FHFB"). The FHFB is
composed of five members, including the Secretary of Housing and Urban
Development and four private citizens appointed by the President with the advice
and consent of the Senate for terms of seven years. At least one director must
be chosen from organizations with more than a two-year history of representing
consumer or community interests on banking services, credit needs, housing or
financial consumer protections.

                                        8
<PAGE>

         The Bank, as a member of the FHLB of Atlanta, is required to purchase
and maintain stock in its bank in an amount as if 30 percent of the member's
assets were home mortgage loans.

         The FHFB is required to adopt regulations establishing standards of
community investment or service for members of the Federal Home Loan Banks as a
condition for continued access to advances. The regulations are to take into
account the record of performance of the institution under the Community
Reinvestment Act of 1977 and its record of lending to first time home buyers.

         In addition, new collateral requirements for advances are to be
established which will be designed to insure credit quality and marketability of
the collateral.

                                   REGULATION
GENERAL

         The Corporation and it's subsidiary are subject to the supervision,
regulation and examination of the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the state regulators of the Commonwealth of Virginia
which has jurisdiction over financial institutions and has obtained regulatory
approval for it's various activities to the extent required.

FEDERAL AND STATE LAWS AND REGULATIONS

         Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Corporation and
it's subsidiary.

BANK HOLDING COMPANY REGULATION

         The Corporation is registered as a "bank holding company" with the
Board of Governors of the Federal Reserve System ("Federal Reserve"), and is
subject to supervision by the Federal Reserve under the Bank Holding Corporation
Act ("BHC Act"). The Corporation is required to file with the Federal Reserve
periodic reports and such additional information as the Federal Reserve may
require pursuant to the BHC Act. The Federal Reserve examines the Corporation
and the subsidiary bank.

         The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
of the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of the voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for it's
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.

BANK REGULATION

         The Bank, as a state chartered member of the Federal Reserve Systems,
is subject to regulation and examination by the Virginia State Corporation
Commission and the Federal Reserve Board. In addition, the Bank is subject to
the rules and regulations of the Federal Deposit Insurance Corporation, which
currently insures the deposits of each member bank to a maximum of $100,000 per
depositor.

         The commercial banking business is affected by the monetary policies
adopted by the Federal Reserve Board. Changes in the discount rate on member
bank borrowings, availability of borrowing at the "discount window", open market
operations, the imposition of any changes in reserve requirements against member
banks' deposits and certain borrowings by banks and their affiliates, and the
limitation of interest rates which member banks may pay on deposits are some of
the instruments of monetary policy available to the Federal Reserve Board. Taken
together, these controls give the Board a significant influence over the growth
and profitability of all banks. Management of the Bank is unable to predict how
the Board's monetary policies (or the fiscal policies or economic controls
imposed by Federal or state governments)


                                        9
<PAGE>

will affect the business and earnings of the Bank or the Corporation, or what
those policies or controls will be.

         The references in this section to various aspects of supervision and
regulation are brief summaries which do not purport to be complete and which are
qualified in their entirety by reference to applicable laws, rules and
regulations.

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT

         The difficulties encountered nationwide by financial institutions
during 1990 and 1991 prompted federal legislation designed to reform the banking
industry and to promote the viability of the industry and of the deposit
insurance system. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), which became effective on December 19, 1991, bolsters the
deposit insurance fund, tightens bank and thrift regulation and trims the scope
of federal deposit insurance as summarized below.

         FDICIA requires each federal banking regulatory agency to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate exposure; (v) asset growth; (vi) compensation, fees and
benefits; and (vii) such other operational and managerial standards as the
agency determines to be appropriate. The compensation standards would prohibit
employment contracts, compensation or benefit arrangements, stock option plans,
fee arrangements or other compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material financial loss. In
addition, each federal banking regulatory agency must prescribe by regulation
standards specifying (i) a maximum ratio of classified assets to capital; (ii)
minimum earnings sufficient to absorb losses without impairing capital; (iii) to
the extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies; and (iv) such other standards relating to asset quality, earnings and
valuation as the agency determines to be appropriate. If an insured institution
fails to meet any of the standards promulgated by regulation, then such
institution will be required to submit a plan to its federal regulatory agency
specifying the steps it will take to correct the deficiency.

         Prompt corrective action measures adopted in FDICIA and which became
effective on December 19, 1992, impose significant new restrictions and
requirements on depository institutions that fail to meet their minimum capital
requirements. Under new Section 38 of the Federal Deposit Insurance Act ("FDI
Act"), the federal banking regulatory agencies have developed a classification
system pursuant to which all depository institutions are placed into one of five
categories based on their capital levels and other supervisory criteria: well
capitalized, adequately capitalized; undercapitalized; significantly
undercapitalized; and critically undercapitalized.

         The Bank met the requirements at December 31, 1999 to be classified as
"adequately capitalized". This classification is determined solely for the
purposes of applying the prompt corrective action regulations and may not
constitute an accurate representation of the Corporation's overall financial
condition.

         An undercapitalized depository institution is required to submit a
capital restoration plan to its principal federal regulator. The federal banking
agencies may not accept a capital plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital and is guaranteed by the parent
holding company. If a depository institution fails to submit an acceptable plan,
it will be treated as if it were significantly undercapitalized.

         Unless its principal federal regulator has accepted its capital plan,
an undercapitalized bank may not increase its average total assets in any
calendar quarter. If an undercapitalized institution's capital plan has been
accepted, asset growth will be permissible only if the growth is consistent with
the plan and the institution's ratio of tangible equity to assets increases
during the quarter at a rate sufficient to enable the institution to become
adequately capitalized within a reasonable time.

         An institution that is undercapitalized may not solicit deposits by
offering rates of interest that are significantly higher than the prevailing
rates on insured deposits in the institution's normal market areas or in the
market area in which the deposits would otherwise be accepted.

                                       10
<PAGE>

         An undercapitalized may not branch, acquire an interest in another
business or institution or enter a new line of business unless its capital plan
has been accepted and its principal federal regulator approves the proposed
action.

         An insured depository institution may not pay management fees to any
person having control of the institution nor may an institution, except under
certain circumstances and with prior regulatory approval, make any capital
distribution if, after making such payment or distribution, the institution
would be undercapitalized.

         Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to appointment of a
receiver or conservator.

         If its principal federal regulator determines that an adequately
capitalized institution is in an unsafe or unsound condition or is engaging in
an unsafe or unsound practice, it may require the institution to submit a
corrective action plan, restrict its asset growth and prohibit branching, new
acquisitions and new lines of business. An institution's principal federal
regulator may deem it to be engaging in an unsafe or unsound practices if it
receives a less than satisfactory rating for asset quality, management, earnings
or liquidity in its most recent examination.

         In addition, regulators were required to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels, effective December 1, 1993. The legislation also requires
regulators to perform annual on-site bank examinations, place limits on real
estate lending by banks and tightens auditing requirements.

                           FEDERAL AND STATE TAXATION

GENERAL

         The following discussion of federal taxation is a summary of certain
pertinent federal income tax matters as they pertain to the Corporation. With
some exceptions, including particularly the reserve for bad debts discussed
below, the Corporation is subject to federal income tax under the Internal
Revenue Code of 1986 (the "Code") in the same general manner as other
corporations.

BAD DEBT RESERVES

         Commercial banks such as the Bank, which meet certain definitional
tests primarily relating to their assets and the nature of their businesses, are
permitted to establish a reserve for bad debts and to make annual additions to
the reserve. These additions, may within specified formula limits, be deducted
in arriving at the Bank's taxable income. For purposes of computing the
deductible addition to its bad debt reserve, the Bank utilizes the experience
method.

         Under the experience method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (1) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years to bear to the sum
of the loans outstanding at the close of those six years or (2) the lower of (a)
the balance in the reserve account at the close of the last taxable year prior
to the most recent adoption of the experience method (the base year is the last
taxable year beginning before 1988), or (b) if the amount of loans outstanding
at the close of the taxable year is less than the amount of loans outstanding at
the close of the base year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans outstanding at the close
of the base year.


MINIMUM TAX

         A 20% corporate alternative minimum tax generally will apply to a base
of regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI") and will be payable to the


                                       11
<PAGE>

extent such AMTI is in excess of an exemption amount. The Code provides that an
item of tax preference is the excess of the bad debt deduction over the amount
allowable under the experience method. The other items of tax preference that
constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) 75% of adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses).

OTHER

         For federal income tax purposes, the Corporation reports its income and
expenses on the accrual basis method of accounting and uses a year ending
December 31 for filing its income tax returns. The Corporation may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding ten taxable years except in the case of that portion of a net
operating loss created by a bad debt deduction which may be carried back ten
and forward five years.

         The Commonwealth of Virginia imposes an income tax on corporations
domiciled in the state. The Virginia taxable income is based on the federal
taxable income with certain adjustments for interest and dividend income on
obligations of securities of the United States and states other than Virginia.
The tax rate is 6% of taxable income.

         See Note 6 to the Consolidated Financial Statements, included as part
of the Annual Report to Stockholders, for additional information regarding the
income taxes of the Company.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
<S>                                                                    <C>
                                                   Year Ended December 31,
                                          1999                              1998                             1997
                                                   (Dollars in Thousands)

                              AVERAGE                YIELD/    AVERAGE                 YIELD/    AVERAGE                 YIELD/
                              BALANCE   INTEREST      RATE     BALANCE    INTEREST      RATE     BALANCE    INTEREST      RATE
                              -------   --------      ----     -------    --------      ----     -------    --------      ----
     ASSETS
Interest earning assets
 (taxable-equivalent
  basis (1) :

Loans (net of un-
  earned discount) (2)       $246,687   $ 21,873      8.87%    $213,069   $ 19,618      9.21%    $175,542   $ 16,249      9.26%
Securities (3)                 63,050      3,733      5.79       56,757      3,057      5.39       38,158      2,363      6.19
Federal funds sold              1,446         65      4.50        4,250        222      5.22        3,244        169      5.20
                             --------   --------      ----     --------   --------      ----     --------   --------      ----
Total interest-earning
  assets                     $311,183   $ 25,671      8.25%    $274,076   $ 22,897      8.35%    $216,944   $ 18,781      8.66%
                             --------   --------      ----     --------   --------      ----     --------   --------      ----
     LIABILITIES
Interest-bearing
  liabilities :

Savings & time dep           $255,385   $ 12,810      5.02%    $226,142   $ 12,336      5.46%    $181,846   $ 10,099      5.55%
Other interest-bearing
  liabilities                  19,262      1,357      7.04       13,933      1,065      7.64        3,366        222      6.59
                             --------   --------      ----     --------   --------      ----     --------   --------      ----
Total interest-bearing
  liabilities                $274,647   $ 14,167      5.16%    $240,075   $ 13,401      5.58%    $185,212   $ 10,321      5.57%
                             --------   --------      ----     --------   --------      ----     --------   --------      ----

Net interest income                     $ 11,504                          $  9,496                          $  8,460
Net margin on int.
  earning assets on a
  tax equivalent basis                                3.70%                             3.46%                             3.90%
Average interest
  spread                                              3.09%                             2.77                              3.09%
</TABLE>

(1)  Tax equivalent adjustments (using 34% federal tax rates) have been made in
     calculating yields on tax-free loans and investments. Virginia banks are
     exempt from state income tax.
(2)  For the purposes of these computations, non-accruing loans are included in
     the daily average loan amounts outstanding.
(3)  The yield on securities classified as available for sale is computed based
     on the average balance of the historical amortized cost balance without the
     effects of the fair value adjustment required by FAS115

                                       12
<PAGE>

         As the largest component of income, net interest income represents the
amount that interest and fees earned on loans and investments exceeds the
interest costs of funds used to support these earning assets. Net interest
income is determined by the relative levels, rates and mix of earning assets and
interest-bearing liabilities. The following table attributes changes in net
interest income either to changes in average volume or to changes in interest
due to both rate and volume. The amounts below have been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of
the change in each.
<TABLE>
<CAPTION>
<S>                                      <C>              <C>                                  <C>              <C>
                                         1999 Compared to 1998                                 1998 Compared to 1997

                              Increase          Increase                           Increase            Increase
                           (decrease) due    (decrease) due                     (decrease) due      (decrease) due
                            to change in      to change in     Net increase      to change in        to change in      Net increase
Increase (Decrease) in         volume             rate          (decrease)          volume               rate           (decrease)
----------------------         ------             ----          ----------          ------               ----           ----------

INTEREST INCOME
Securities ...........       $   449           $   227           $   676          $ 1,148              $  (454)          $   694
Federal funds sold ...          (146)              (11)             (157)              52                    1                53
Loans ................         2,979              (724)            2,255            3,474                 (105)            3,369
                             -------           -------           -------          -------              -------           -------
Total Income Change          $ 3,282           $  (508)          $ 2,774          $ 4,674              $  (558)          $ 4,116
                             -------           -------           -------          -------              -------           -------

INTEREST EXPENSE
Savings and time
   deposits ..........       $ 1,469           $  (995)          $   474          $ 2,441              $  (204)          $ 2,237
Other interest-bearing
   liabilities .......           374               (82)              292              697                  146               843
                             -------           -------           -------          -------              -------           -------
Total Expense Change         $ 1,843           $(1,077)          $   766          $ 3,138              $   (58)          $ 3,080
                             -------           -------           -------          -------              -------           -------
Increase (Decrease) in
   Net Interest Income       $ 1,439           $   569           $ 2,008          $ 1,536              $  (500)          $ 1,036
                             -------           -------           -------          -------              -------           -------
</TABLE>

INVESTMENT PORTFOLIO

         The following table presents the maturity distribution, market value,
book value and approximate tax equivalent yield (assuming a 34% federal income
tax rate) of the investment portfolio at December 31, 1999.
<TABLE>
<CAPTION>
                                                (Dollars in Thousands)

                                   One Year     Five Years
                     Within One     Through       Through      After Ten      Market                Total Book
                        Year      Five Years     Ten Years       Years         Value       Yield       Value
                        ----      ----------     ---------       -----         -----       -----       -----
<S>                  <C>            <C>           <C>           <C>           <C>           <C>       <C>
U.S. Gov Agency      $    55        $ 4,716       $ 4,152       $57,552       $66,475       5.72%     $67,168
State & Muni's           -0-            -0-           203         2,055         2,258       6.41        2,473
Other .........          -0-            -0-           -0-         2,065         2,065       8.28        2,095
                     -------        -------       -------       -------       -------       ----      -------

  TOTAL .......      $    55        $ 4,716       $ 4,355       $61,672       $70,798       5.79%     $71,736
                     -------        -------       -------       -------       -------       ----      -------
</TABLE>

                                       13
<PAGE>

LOAN PORTFOLIO
--------------

         The table below classifies loans, net of unearned income, by major
category and percentage distribution at December 31, 1999 for each of the past
three years:
<TABLE>
<CAPTION>
                                  December 31,
                             (Dollars in thousands)
                          1999                       1998                       1997

DESCRIPTION        AMOUNT      PERCENTAGE     AMOUNT      PERCENTAGE     AMOUNT      PERCENTAGE
-----------        ------      ----------     ------      ----------     ------      ----------
<S>               <C>            <C>         <C>            <C>         <C>            <C>
Commercial        $ 27,055       10.34%      $ 24,234       10.38%      $ 24,395       12.71%
Real Estate        163,317       62.41        136,184       58.37        104,818       54.59
Consumer            68,091       26.02         70,132       30.05         59,653       31.07
Other                3,215        1.23          2,821        1.20          3,139        1.63
                  --------      ------       --------      ------       --------      ------

  Total           $261,678      100.00%      $233,371      100.00%      $192,005      100.00%
                  --------      ------       --------      ------       --------      ------

         The following table shows the maturity of loans outstanding, inclusive
of contractual amortization as of December 31, 1999. Loans are classified based
upon the period in which the final payment is due.
<CAPTION>
                                December 31, 1999
                             (Dollars in Thousands)


                    Within  One            After One But         After Five
                        Year              Within Five Years         Years
                        ----              -----------------         -----

                Fixed       Floating   Fixed     Floating   Fixed       Floating
                Rate         Rate       Rate       Rate      Rate        Rate      Total
                ----         ----       ----       ----      ----        ----      -----
<S>               <C>            <C>         <C>            <C>         <C>            <C>
Commercial    $  8,952   $  7,166   $  8,787   $    611   $  1,514   $     25   $ 27,055
Real Estate     21,100      4,687     60,174      6,464     24,549     46,343    163,317
Consumer        22,244        183     43,906         11      1,736         11     68,091
Other              913      1,193      1,058         14         37         -0-     3,215
                 -----      -----      -----      -----      -----     ------      -----

Total         $ 53,209   $ 13,229   $113,925   $  7,100   $ 27,836   $ 46,379   $261,678
                ------     ------    -------    -------    -------     ------    -------

</TABLE>

NON-PERFORMING LOANS
--------------------

         The loan portfolio of the Bank is reviewed regularly by senior officers
to evaluate loan performance. The frequency of the review is based on a rating
of credit worthiness of the borrower utilizing various factors such as net
worth, credit history, customer relationship, etc. The evaluations emphasize
different factors depending upon the type of loan involved. The commercial and
real estate type loans are reviewed on the basis of estimated net realizable
value through an evaluation of collateral and the financial strength of the
borrower. Installment loans are evaluated largely on the basis of delinquency
data because of the large number of such loans and relatively small size of each
individual loan.
         Management review of commercial and other loans may result in a
determination that a loan should be placed on a non-accrual of interest basis.
It is the policy of the Bank to discontinue the accrual of interest on any loan
on which full collectability of principal and / or interest is doubtful.
Subsequent collection of interest is recognized as income on a cash basis upon
receipt. Placing a loan on non-accrual status for the purpose of income
recognition is not in itself a reliable indication of potential loss of
principal. Other factors, such as the value of the collateral securing the loan
and the financial condition of the borrower, serve as more reliable indications
of potential loss of principal.
         The policy of the Bank is that non-performing loans consist of loans
accounted for on a non-accrual basis and loans which are contractually past due
90 days or more in regards to interest and/ or principal payments. As of the
three periods ended December 31, 1999, 1998 and 1997, non-accrual loans amounted
to $1,152,000, $1,396,000 and $888,000, respectively. Interest income lost on
non-accruing loans was approximately $136,000, $146,000, and $71,000 for
December 31, 1999, 1998, and 1997 respectively.

                                       14
<PAGE>

SUMMARY OF LOAN LOSS EXPERIENCE

         The allowance for loan losses is increased by the provision for loan
losses and reduced by loans charged off net of recoveries. The allowance for
loan losses is established and maintained at a level judged by management to be
adequate to cover any anticipated loan losses to be incurred in the collection
of outstanding loans. In determining the adequate level of the allowance for
loan losses, management considers the following factors: (a) loan loss
experience; (b) problem loans, including loans judged to exhibit potential
charge-off characteristics, loans on which interest is no longer being accrued,
loans which are past due and loans which have been classified in the most recent
regulatory examination; and (c) anticipated economic conditions and the
potential impact these conditions may have on individual classifications of
borrowers.

         The following table presents the Corporation's loan loss experience for
the past three years:

                                             Years Ended December 31,
                                              (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                          1999         1998        1997
                                                          ----         ----        ----

<S>                                                        <C>          <C>         <C>
Allowance for loan losses at
beginning of year                                      $  2,008    $  1,636    $  1,072

Loans charged off:
     Commercial                                             357         271          42
     Real Estate                                             27          -0-         -0-
     Consumer                                               710         786         470
     Other                                                  -0-         -0-         -0-
                                                       --------    --------    --------

Total                                                  $  1,094    $  1,057    $    512
                                                       --------    --------    --------

Recoveries of loans previously charged off:
    Commercial                                         $     97          42           6
    Real Estate                                              -0-         -0-         -0-
    Consumer                                                 65         157          68
    Other                                                    -0-         -0-         -0-
                                                       --------    --------    --------
Total                                                  $    162    $    199    $     74
                                                       --------    --------    --------

Net loans charged off                                  $    932    $    858    $    438
Provision for loan losses                                 1,418       1,230       1,002
                                                       --------    --------    --------
Allowance for loan losses end of year                  $  2,494    $  2,008    $  1,636
                                                       --------    --------    --------

Average total loans (net of unearned income)           $246,687    $213,069    $175,542
Total loans (net of unearned income) at year-end       $261,678    $233,371    $192,005

Ratio of net charge-offs to average loans                 0.378%      0.403%      0.249%
Ratio of provision for loan losses to average loans       0.575%      0.577%      0.571%
Ratio of provision for loan losses to net charge-off    152.146%    143.357%    228.770%
Allowance for loan losses to year-end loans               0.953%      0.860%      0.852%
</TABLE>

                                       15
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
-------------------------------------------

         The following table provides an allocation of the allowance for loan
losses as of December 31, 1999

                          Year Ended December 31, 1999
                        Percent of Loans on each category

                             (Dollars in Thousands)
                Allowance for      Percentage of      Percentage of
                  Loan Loss       Total Loan Loss      Total Loans
                  ---------       ---------------      -----------

Commercial       $  625               25.06%              10.34%
Real Estate         147                5.89               62.42
Consumer          1,719               68.93               26.01
Other                 3                0.12                1.23
                  -----               -----               -----

Total            $2,494              100.00%             100.00%
                  -----               -----               -----

DEPOSITS
--------

         The following table provides a breakdown of deposits at December 31 for
the years indicated is as follows:

                                                  December 31,
                                              (Dollars in Thousands)

                                          1999       1998      1997
                                          ----       ----      ----

Non-interest bearing demand deposits   $ 39,504   $ 36,187   $ 30,930
Interest bearing demand deposits         26,074     21,936     15,065
Savings deposits                         44,751     35,640     26,808
Time deposits                           195,864    178,578    163,843
                                        -------    -------    -------

Total Deposits                         $306,193   $272,341   $236,646
                                        -------    -------    -------


         The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:

                             Year Ended December 31,
                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                    1999                   1998                     1997
                            Amount       Rate       Amount       Rate        Amount        Rate
                            ------       ----       ------       ----        ------        ----
<S>                           <C>        <C>         <C>          <C>         <C>           <C>
Non-interest bearing
demand deposits           $ 38,651       0.00%    $ 33,671       0.00%     $ 28,177        0.00%
Interest-bearing demand
deposits                    24,728       3.59       18,239       3.60        14,029        3.58
Savings deposits            44,505       4.00       32,681       4.00        24,600        4.00
Time deposits              186,151       5.45      175,222       5.92       143,217        6.01
                          --------                --------                 --------

Total                     $294,035                $259,813                 $210,023
                          --------                --------                 --------
</TABLE>

                                       16
<PAGE>
         The remaining maturities of time deposits at December 31, 1999 are as
follows (in thousands) :

         Maturity

         3 months or less.................................... $  39,967
         Over 3 through 12 months............................    84,634
         Over 12 months......................................    71,263
                                                                -------

              Total                                            $195,864
                                                               --------

INTEREST RATE SENSITIVITY ANALYSIS
----------------------------------

         The following table provides the maturities of investment securities,
loans, and deposits as of December 31, 1999, and measures the interest rate
sensitivity gap for each range of maturity indicated. The amounts below also
reflect various prepayment assumptions.
                                                     December 31, 1999
                                                   (Dollars in Thousands)
                                                           Maturing
<TABLE>
<CAPTION>
                                              Within One      After One But            After Five
                                                 Year       Within Five Years            Years           Total
                                                 ----       -----------------            -----           -----
<S>                                               <C>             <C>                    <C>              <C>
ASSETS
Interest-bearing
   Investment Securities                       $ 15,555         $ 11,428              $ 43,815         $ 70,798
   Fed Funds Sold                                    -0-              -0-                   -0-              -0-
   Loans                                         66,461          121,113                71,610          259,184
Noninterest-bearing
   Other Assets                                  13,988               -0-               14,378           28,366
                                               --------         --------              --------         --------

Total Assets                                   $ 96,004         $132,541              $129,803         $358,348
                                               --------         --------              --------         --------

LIABILITIES AND SHARE-
  HOLDERS EQUITY
Interest-bearing
  All Interest-bearing Deposits                $148,591         $ 68,407              $ 49,691         $266,689
  Other Interest-bearing Liab                    11,352           10,434                 7,500           29,286
Noninterest-bearing
  Demand Deposit Non-Interest                        -0-              -0-               39,504           39,504
  Other Liabilities                               2,392               -0-                   69            2,461
  Shareholders Equity                                -0-              -0-               20,408           20,408
                                               --------         --------              --------         --------

Total Liabilities and Shareholders
  Equity                                       $162,335         $ 78,841              $117,172         $358,348
                                               --------         --------              --------         --------

Interest Rate Sensitivity GAP                  $(66,331)        $ 53,700              $ 12,631         $     -0-
</TABLE>

                                       17
<PAGE>
RETURN ON EQUITY AND ASSETS
---------------------------

         The following table highlights certain ratios for the periods
indicated:

                                                       Year Ended December 31,
                                                            (Percentage)



                                                     1999       1998       1997
                                                     ----       ----       ----
Net income to:
  Average total assets                               0.64       0.61       0.84
  Average shareholders equity                       11.13      10.06      12.53

Dividend payout ratio(dividends declared per
  share divided by net income per share)             0.07       0.07       0.00

Average shareholders equity to average total
  assets ratio                                       5.71       6.02       6.73

ITEM 2. PROPERTIES
------------------

         The Corporation's and the Bank's main offices are located at 340 W.
Main Street, Abingdon, Virginia. The main office is a two story brick structure
owned by the Bank. The Bank utilizes the entire structure for its day to day
operations. Attached to the main office is a four lane drive thru facility
constructed in 1998. The new drive thru replaced an older unit which was
detached from the main office's structure. The main office opened for operations
in 1985. In addition, the Bank has three other branch locations within
Washington County, Virginia. The East Abingdon branch is a one story brick
facility located at 24412 Maringo Road which operates as a full service branch.
The branch was completed and opened for operation in 1993. The West Abingdon
location operates as an "express facility." This location contains four drive
thru lanes and a walk-up window. This is a limited service facility. The West
Abingdon Express branch was completed and opened for operations in 1994 and is
located at Exit 14, I-81, Jonesboro Road, Abingdon, Virginia. During 1998, the
Bank constructed and placed in service a two-story brick building located at 506
Maple Avenue, Glade Spring, Virginia. The Glade Spring Office is a full service
location with four drive thru lanes. The Bank also has two full service branch
locations within the City of Bristol, Virginia. The East Bristol office is
located at 999 Old Airport Road, Bristol, Virginia. This is a two story brick
building with interior customer loan and deposit areas as well as a four lane
drive thru unit. The office was completed and opened for operations in 1988. The
Commonwealth office is located at 821 Commonwealth Avenue, Bristol, Virginia.
This is a two story block building with full service customer service areas and
a four lane drive thru facility. The Bank also operates its dealer finance
division out of the Commonwealth office. This office was completed and opened
for operations in 1995. The Bank also has a full service branch at 1425 North
Main Street , Marion, Virginia. The branch was placed in service in December of
1997. It is a two story brick building and operates as a full service branch.
The Marion office has two drive thru lanes. There is also an ATM located
approximately 1/2 mile from the branch on North Main Street. The ATM resides on
property purchased by the Bank in 1997. All of the Bank's branch locations
except Marion have an on premises ATM. All branch properties are owned by the
Bank and are free of liens. In September 1998, the Bank acquired the adjacent
building to its Commonwealth office to facilitate future expansion. This is a
one story brick structure, located at 801-805 Commonwealth Avenue, Bristol,
Virginia and is currently leased. A note payable to the sellers was executed and
is secured by a first deed of trust. The balance on the note as of December 31,
1999 was approximately $99,000. Also during 1998, the Bank initiated an off
premises ATM program. Throughout 1998 and 1999, 20 offsite ATMs were purchased
and installed throughout the Bank's market areas. Three machines were placed in
Bristol, Virginia; nine were installed in Washington County, Virginia; two in
Russell County, Virginia; five in Smyth County, Virginia, and one in Wythe
County, Virginia. All machines are free of liens. During 1999 the Bank purchased
a building, across from the Main Office in Abingdon, to provide for expansion of
the Bank's operations. The building is a brick and frame structure that is being
used to house the Bank's Financial Services Department, the Collections
Department, the Bank's credit card, check card and ATM card operations
department as well as the Bank's Check Printing

                                       18
<PAGE>

Department. The office space not currently being used by the Bank is being
leased to other businesses. This property is free of any liens.

         The Corporation acquired a commercial building during 1997 which is
located at 266 West Plumb Alley, Abingdon, Virginia. The building is a two story
concrete structure which was originally constructed by another bank for use as
an operations center. The Corporation assumed the lease of the building's
current tenants. The second floor of the structure is leased to third parties.
During 1997, the Corporation entered into a leasing arrangement with its
subsidiary to lease the first floor to be used for its operations center.
Currently, the bookkeeping, proof, accounting, shareholder services, human
resources, internal audit and training departments are located there. The West
Plumb Alley property is free of liens. Also during 1998, the Corporation
purchased the adjacent property to the operations center. The property purchased
is a one story brick structure which is currently leased. It is management's
intention to utilize the property as growth continues. The property is owned
free and clear of all liens.

ITEM 3. LEGAL PROCEEDINGS
-------------------------

         The Corporation is not involved in any pending legal proceedings, other
than non-material legal proceedings undertaken in the ordinary course of
business.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

         There were no matters submitted to a vote of security holders during
the quarter ended December 31, 1999.

                                    PART II.
                                    --------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------------------

         There is no established trading market for the stock of Highlands
Bankshares, Inc.. At December 31, 1999 the Corporation has approximately 1,075
stockholders of record. The Corporation acts as it's own registered Stock
Transfer Agent, without charging a transfer fee, ensuring that all applicable
federal guidelines relating to stock transfers are enforced. The Corporation
maintains a list of individuals who are interested in purchasing it's common
stock and connects these people with stockholders' who are interested in selling
their stock. These parties negotiate the per share price independent of the
Corporation. The stock transfer agent of the Corporation attempts to keep a
record of what the stock sales are trading at by asking the parties about the
trade price per share. Please refer to the table below entitled Common Stock
Performance for a breakdown of the trades for the four quarters of 1999. It is
the opinion of management that this range accurately reflects the market value
of the Corporations common stock at the present time.

                    Common Stock Performance-December 31 1999

                      High       Low      Quarterly Average
                      ----       ---      -----------------

First Quarter        $20.00     $16.00         $16.86

Second Quarter       $25.00     $17.00         $19.40

Third Quarter        $30.00     $20.00         $21.89

Fourth Quarter       $30.00     $21.00         $23.89


         The Corporation's and the Bank's Board of Directors determines whether
to declare dividends and the amount of any dividends declared. Such
determinations by the Board take into account the Corporation's financial
condition, results of operations, and other relevant factors. The declaration,
amount and timing of future dividends will be determined by the Board of
Directors after a review of the Corporation's operations and will be dependent
upon, among other factors, the Corporation's income,

                                       19
<PAGE>

operating costs, overall financial condition and capital requirements and upon
general business conditions. The Corporation declared and paid cash dividends of
$150,000 or $0.06 per share during 1999.

         At December 31, 1999, there were approximately 1,075 holders of the
Corporation's common stock (based on the number of record holders as of that
date).



ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

         The following table sets forth certain selected consolidated financial
data for the past five years.

                            Years Ended December 31,
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                           1999       1998       1997       1996       1995
                                           ----       ----       ----       ----       ----

Income Statement Amounts:
<S>                                     <C>        <C>        <C>        <C>        <C>
    Gross interest income               $ 25,671   $ 22,897   $ 18,781   $ 14,612   $ 11,585
    Gross interest expense                14,167     13,401     10,321      7,822      6,161
    Net interest income                   11,504      9,496      8,460      6,790      5,424
    Provision for possible loan
      Losses                               1,418      1,230      1,002        374        143
    Net interest income after
      provision                           10,086      8,266      7,458      6,416      5,281
    Other operating income                 1,353      1,367        842        644        488
    Other operating expense                8,187      6,962      5,382      4,439      3,541
    Income before income taxes
      and other items                      3,252      2,671      2,918      2,621      2,228
    Income taxes                           1,121        896        966        857        779
    Income before cumulative
      effect of change in
      accounting principles                2,131      1,775      1,952      1,764      1,449
    Cumulative effect of change
      in accounting principles                -0-        -0-        -0-        -0-        -0-
    Net income                          $  2,131   $  1,775   $  1,952   $  1,764      1,449

Per Share Data (1):

    Net income per share                $   0.85   $   0.72   $   0.79   $   0.72   $   0.60
    Cash dividends per share                0.06       0.05         -0-        -0-        -0-
    Book value (at year end)                7.77       7.33       6.82       5.98       5.26

Balance Sheet Amounts (at year-end):

    Total assets                        $358,348   $307,764    $258,236   $207,739  $162,543
    Total loans (net of unearned
      income)                            261,678    233,371     192,005    154,951   113,743
    Total deposits                       306,193    272,341     236,646    189,471   147,327
    Long-term debt                        10,599      6,763       2,614      1,929        -0-
    Guaranteed preferred
    beneficial interests in
    junior subordinated debt
    securities                             7,500      7,500          -0-        -0-       -0-
    Total equity                          20,408     18,279      16,802     14,617    12,812
</TABLE>
         (1) Adjusted for 1999 and 1995 two-for-one stock splits.

                                       20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
--------------------------------------------------------------------------
OPERATIONS
----------

         The information required herein is incorporated by reference from pages
8 to 12 of the Annual Report to Stockholders for the fiscal year ended December
31, 1999.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

         The financial statements and supplementary data required herein are
incorporated by reference from pages 20 to 40 of the Annual Report to
Stockholders for the fiscal year ended December 31,1999.

ITEM 9. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-------------------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------

         None.

PART III.
---------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

         The information required herein is incorporated by reference to "The
Board of Directors", "Executive Officers Who Are Not Directors", "Security
Ownership of Certain Beneficial Owners" and "Compliance With Filing Requirements
Under the Securities Exchange Act of 1934" contained in the definitive proxy
statement for the Registrant's 1999 Annual Meeting of Stockholders to be
subsequently filed.

ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

         The information required herein is incorporated by reference to
"Remuneration" contained in the definitive proxy statement for the Registrant's
1999 Annual Meeting of Stockholders to be subsequently filed.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

         The information required herein is incorporated by reference to
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" contained in the definitive proxy statement for the Registrant's 1999
Annual Meeting of Stockholders to be subsequently filed.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

         The information required herein is incorporated by reference to
"Indebtedness of Management" contained in the definitive proxy statement for the
Registrant's 1999 Annual Meeting of Stockholders to be subsequently filed.

PART IV.
--------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------

         (a)      (1) The following financial statements are incorporated by
                  reference into Item 8 hereof from Exhibit 13 hereof:

                  Consolidated Statements of Financial Condition as of December
                  31, 1999, 1998 and 1997

                  Consolidated Statements of Operations for each of the years in
                  the three year period ended December 31, 1999

                  Consolidated Statements of Stockholder's Equity for each of
                  the years in the three year period ended December 31, 1999

                                       21
<PAGE>

                  Consolidated Statements of Cash Flows for each of the years in
                  the three year period ended December 31, 1999

                  Notes to Consolidated Financial Statements for December 31,
                  1999, 1998 and 1997

                  Independent Auditors' Report

         (a) (2)  There are no financial statement schedules required to be
                  filed herewith

               3a The following exhibits are filed as part of this report on
                  Form 10-K, and this list includes the Exhibit Index.

                                    EXHIBITS
                                    --------

                3a         None

         (b)  No reports on Form 8-K have been filed during the last quarter of
              the period covered by this report.

         (c)  See (a) (3) above for all exhibits filed herewith and the Exhibit
              Index.

         (d)  Separate financial statements are not applicable.


                                       22
<PAGE>
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.

                                       HIGHLANDS BANKSHARES, INC.

Date:  March 21, 2000                  BY:___________________________
                                             Samuel L. Neese
                                             Executive Vice President and
                                             Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 21, 2000.

                  Signature                                 Title
                  ---------                                 -----
<TABLE>
<CAPTION>

<S>                                 <C>                     <C>
/S/ James D Morefield               03-21-00
--------------------------------------------
James D. Morefield                  Date              Chairman of the Board, and Director


/S/ James D. Moore, Jr.             03-21-00
--------------------------------------------
Dr. James D. Moore, Jr.             Date             President


/S/ J. Carter Lambert               03-21-00
--------------------------------------------
J. Carter Lambert                   Date             Vice Chairman


/S/ Samuel L. Neese                 03-21-00
--------------------------------------------
Samuel L. Neese                     Date             Executive Vice President, and Chief Executive
                                                     Officer

/S/ James T. Riffe                  03-21-00
--------------------------------------------
James T. Riffe                      Date             Executive Vice President and Cashier


/S/ William E. Chaffin              03-21-00
--------------------------------------------
William E. Chaffin                  Date              Director


/S/ V. D. Kendrick                  03-21-00
---------------------------------------------
V.D. Kendrick                       Date             Director


/S/ Clydes B. Kiser                 03-21-00
---------------------------------------------
Clydes B. Kiser                     Date             Director


/S/ Charles P. Olinger              03-21-00
--------------------------------------------
Charles P. Olinger                  Date              Director


/S/ William J. Singleton            03-21-00
--------------------------------------------
William J. Singleton                Date             Director


/S/ H. Ramsey White, Jr.            03-21-00
--------------------------------------------
Dr. H. Ramsey White, Jr.            Date             Director
</TABLE>

                                       23
<PAGE>
Dear Shareholders:

We are pleased to report that 1999 was a successful year for Highlands
Bankshares Inc. The significant growth continued in 1999, as assets increased by
$50,584,000 or 16.44 percent; gross loans increased by $28,307,000 or 12.13
percent; and deposits increased by $33,852,000 or 12.43 percent. It was a record
year for earnings. Net income was $2,131,000 or an increase of 20.06 percent.
Return on equity was 11.13 percent compared to 10.06 percent in 1998. Return on
assets was 0.64 percent compared to 0.61 percent in 1998. In addition to this
increase in earnings, $1,418,000 was contributed to loan loss reserve to support
the continued loan growth and loan losses for 1999.

During 1999, the board of directors declared the second dividend in the
company's brief history in the amount of $0.12 per share. This was an increase
of 20 percent over the first-ever dividend in 1998. Also, the Board of Directors
was very pleased to announce a two-for-one stock split on April 22, 1999.

Highlands Union Bank (a wholly owned subsidiary of Highlands Bankshares Inc.)
has become known for its leadership in the community banking industry, for its
pattern of rapid growth and willingness to explore innovative technologies. 1999
was a year of expansion, new products and new locations.

The growth of our company continued to exceed the growth rate of the banking
industry in general. The market share of deposits held by Highlands Union Bank
increased in the markets served (Washington County, Smyth County and the City of
Bristol, Virginia). The first year of operation in Glade Spring exceeded
projections. It is expected that this unusual growth will continue as we further
develop the markets in which we operate and look for opportunities in new
markets.

In order to ensure the success of Highlands Bankshares Inc. and Highlands Union
Bank, our focus has always been on providing the best service possible to our
customers. We strive to provide sterling personal service in an environment that
offers state-of-the-art technology. In keeping with this theme, several
initiatives were undertaken. We were proud to be one of the first Virginia banks
to offer Internet banking to its customers. We introduced a state-of-the-art
Internet banking product that allows our customers to conduct routine banking
transactions from the privacy of their homes or any location with access to the
Internet.

We were also pleased to relocate our Financial Services division. Previously
located in the main bank building, it now has its own Main Street location at
the corner of Russell Road and Main Street in Abingdon (Highlands Union Center).
This new location adds convenience for our customers and additional street side
exposure for our Financial Services office.

Other initiatives include the expansion of our drive-thru facilities in Marion
to accommodate the growth at that location and the purchase of permanent back up
generators for our Operations Center and Main Office which will help provide
power and uninterrupted customer service in the event of a power outage. In
order to serve our existing and future customer base in a cost effective and
efficient manner, we upgraded and expanded our technology, delivery systems and
facilities. Additionally, we increased the number of our in-store ATM
facilities.

Our focus on customer service contributed to, not only exceptional growth, but
public recognition. We were proud and pleased to be named "The Best Bank in
Bristol" by readers of the BRISTOL HERALD COURIER. There are two Highlands Union
Bank offices in Bristol.

We continue to seek opportunities for growth of and enhancement of earnings for
our company. In that spirit, we are pleased to advise you that Highlands Union
Bank has applied for and received permission to open a new full service office
in Boone, North Carolina. We believe this market will offer new opportunities
for the bank. It is anticipated that this branch bank will open in late fall of
2000.

As we enter the new millennium - without any Y2K difficulties - we are
optimistic and excited about the opportunities available to our company. The
recently enacted financial modernization legislation will open the door to many
new business opportunities. We believe we are positioned to take advantage of
them.
<PAGE>

As in the past, we are truly appreciative of the support we continue to receive
from our customers, shareholders and friends. On behalf of the directors,
officers and employees of Highlands Bankshares Inc. and Highlands Union Bank,
thank you for your continued confidence and support.




Samuel L. Neese                                      James T. Riffe
Chief Executive Officer                              Chief Operating Officer

<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS                    1999       1998       1997                            1999/1998     1998/1997
                                   (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA                  PERCENTAGE CHANGE


    <S>                                     <C>        <C>        <C>                                <C>           <C>
    Net Interest Income                 $ 11,504   $  9,496   $  8,460                              21.15%        12.25%
    Net Income <Loss>                      2,131      1,775      1,952                              20.06         (9.07)

    FINANCIAL CONDITION AT YEAR-END

    Assets                              $358,348   $307,764   $258,236                              16.44%        19.18%
    Loans                                261,678    233,371    192,005                              12.13         21.54
    Securities                            70,798     51,355     41,963                              37.86         22.38
    Deposits                             306,193    272,341    236,646                              12.43         15.08
    Stockholders Equity                   20,408     18,279     16,802                              11.65          8.79

    Shares Outstanding                     2,624      2,494      2,464                               5.21          1.22


    SIGNIFICANT RATIOS

    Return on average assets                0.64%      0.61%      0.84%                              4.92%       (27.38%)
    Return on average equity               11.13      10.06      12.53                              10.64        (19.71)
    Average stockholders' equity to
       average assets                       5.71       6.02       6.73                              (5.15)       (10.55)
    Allowance for loan losses as a
       percentage of total loans            0.95       0.86       0.85                               10.47          1.18
    Non-performing loans to total loans     0.63       0.87       0.99                              (27.59)       (12.12)


PER SHARE DATA
Based on weighted-average shares
   outstanding
    Net Income                             $0.85      $0.72      $0.79                              18.06%         (9.43%)
    Stockholders' eqyity (book value)
       per shares outstanding at
       year-end                             7.77       7.33       6.82                               6.00          7.51
</TABLE>
<PAGE>

     COMPARISON OF RESULTS OF                     COMPARISON OF RESULTS OF
  OPERATIONS FOR THE YEARS ENDED                 OPERATIONS FOR THE YEARS ENDED
     DECEMBER 31, 1999 AND 1998                    DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S>                                                          <C>
  Net interest income for the year ended          Net interest income for the year ended
  December 31, 1999 increased 21.15%,             December 31, 1998 increased 12.25%,
  approximately $2.01 million over 1998.          approximately $1.04 million over 1997.
  Average interest earning assets increased       Average interest earning assets increased
  $38.5 million from 1998 to 1999 while           $57.1 million from 1997 to 1998 while
  average interest bearing liabilities            average interest bearing liabilities
  increased $34.6 million. The yield on           increased $54.8 million. The yield on
  average interest earning assets for the year    average interest earning assets for the year
  ended December 31, 1999 was 8.25% compared      ended December 31, 1998 was 8.35% compared
  with 8.35% for the comparable 1998 period.      with 8.66% for the comparable 1997 period.
  The 1999 yield on average loans decreased by    The 1998 yield on average loans decreased by
  34 basis points to 8.87% as compared to the     5 basis points to 9.21% as compared to the
  1998 period yield of 9.21%. The 1999 yield      1997 period yield of 9.26%. The 1998 yield
  on average investments increased .40% to        on average investments decreased .74% to
  5.77% from December 31, 1998 to 1999. The       5.37% from December 31, 1997 to 1998. The
  yield on average interest bearing               yield on average interest bearing
  liabilities decreased 42 basis points during    liabilities increased 1 basis point during
  1999 to 5.16% as compared to 5.58% during       1998 to 5.58% as compared to 5.57% during
  1998. Net income for the year-ended 1999 was    1997. Net income for the year-ended 1998 was
  $2.13 million, an increase of 20.06% over       $1.78 million, a decrease of 9.07% over the
  the 1998 period. Income tax expense for 1999    1997 period. Income tax expense for 1998
  increased 25% to $1,121 thousand as compared    decreased 7.25% to $896 thousand as compared
  to $896 thousand for the 1998 period.           to $966 thousand for the 1997 period
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

      COMPARISON OF FINANCIAL                           COMPARISON OF FINANCIAL
 CONDITION AT DECEMBER 31, 1999 AND               CONDITION AT DECEMBER 31, 1998 AND
               1998                                            1997
<S>                                                          <C>
 Total assets at December 31, 1999 totaled        Total assets at December 31, 1998 totaled
 $358.3 million compared to $307.8 million at     $307.8 million compared to $258.2 million at
 December 31, 1998. This 16.44% growth in         December 31, 1997. This 19.18% growth in
 assets was primarily due to the large volume     assets was primarily due to the large volume
 of loans originated. Total loans increased       of loans originated. Total loans increased
 12.13% or $28.3 million over the comparable      21.54% or $41.3 million over the comparable
 1998 period. The security portfolio              1997 period. The security portfolio
 increased 37.86% to $70.8 million during         increased 22.38% to $51.3 million during
 1999 as contrasted to the 1998 period. Total     1998 as contrasted to the 1997 period. Total
 deposits increased to $306.2 million or          deposits increased to $272.3 million or
 12.43% from 1998's level of $272.3 million.      15.08% from 1997's level of $236.6 million.
 Stockholders' Equity increased 11.65% during     Stockholders' Equity increased 8.79% during
 1999. The Financial Accounting Standards         1998. The Financial Accounting Standards
 Board's (FASB) Statement on Accounting           Board's (FASB) Statement on Accounting
 Standards No. 115 was implemented during         Standards No. 115 was implemented during
 1994. FASB's SAS 115 required that all           1994. FASB's SAS 115 required that all
 securities classified as "Available for          securities classified as "Available for
 Sale" be adjusted to market value through        Sale" be adjusted to market value through
 the use of a valuation account and any           the use of a valuation account and any
 unrealized (paper) gains or losses be run        unrealized (paper) gains or losses be run
 through the Stockholders' Equity section of      through the Stockholders' Equity section of
 the balance sheet. The effect of SAS 115         the balance sheet. The effect of SAS 115
 caused an decrease in Stockholders' Equity       caused an increase in Stockholder's Equity
 at December 31, 1998 of $100 thousand, net       at December 31, 1997 of $104 thousand, net
 of the related deferred tax. As of December      of the related deferred tax. As of December
 31, 1999, the Corporation's security             31, 1998, the Corporation's security
 portfolio had $619 thousand in unrealized        portfolio had $100 thousand in unrealized
 losses, net of deferred taxes. The               losses, net of deferred taxes. The
 Corporation notes that it does have the          Corporation notes that it does have the
 ability and intent to carry to maturity the      ability and intent to carry to maturity the
 existing $70.8 million of "available for         existing $51.3 million of "available for
 sale" securities.                                sale" securities.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
 COMPARSION OF SIGNIFICANT RATIOS                COMPARISON OF SIGNIFICANT RATIOS
  AT DECEMBER 31, 1999 AND 1998                       AT DECEMBER 1998 AND 1997
<S>                                                          <C>
 Return on average assets increased to .64%      Return on average assets dropped to .61% for
 for the year-ended December 31, 1999 as         the year-ended December 31, 1998 as compared
 compared to .61% for the comparable 1998        to .84% for the comparable 1997 period. The
 period. The continued growth in assets, the     continued growth in assets, the absorption
 absorption of the operational costs from the    of the operational costs from the new branch
 new branch openings, the costs and interest     openings, the costs and interest expense
 expense related to the trust preferred          related to the trust preferred securities,
 securities, and the addition of over 1.4        and the addition of over 1.2 million to the
 million to the allowance for loan loss          allowance for loan loss account all had
 account all had a significant impact to this    significant impact relating to the decrease
 performance ratio. Return on average equity     in this performance ratio. Return on average
 increased from 10.06% at December 31, 1998      equity decreased from 12.53% at December 31,
 to 11.13% at year-end 1999. Average             1997 to 10.06% at year-end 1998. Average
 Stockholders' Equity to average assets          Stockholders' Equity to average assets
 declined to 5.71% at December 31, 1999 from     declined to 6.02% at December 31, 1998 from
 6.02% at December 31, 1998. Non-performing      6.73% at December 31, 1997. Non-performing
 loans to total loans decreased to .63% as of    loans to total loans decreased to .87% as of
 December 31, 1999 as compared to .87% for       December 31, 1998 as compared to .99% for
 the comparable 1998 period. Allowance for       the comparable period 1997 period. Allowance
 loan losses as a percentage of total loans      for loan losses as a percentage of total
 increased 10.47% to .95% at December 31,        loans increased 1.18% to .86% at December
 1999. The decrease in average Stockholders'     31, 1998. The decrease in average
 Equity to average assets is primarily           Stockholders' Equity to average assets is
 attributable to the enormous amount of          primarily attributable to the enormous
 growth which the Corporation sustained          amount of growth which the Corporation
 during 1999.                                    sustained during 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

   COMPARSION OF PER SHARE DATA                      COMPARISION OF PER SHARE DATA
 FOR THE YEARS ENDED DECEMBER 31,                  FOR THE YEARS ENDED DECEMBER 31,
          1999 AND 1998                                    1998 AND 1997
<S>                                                          <C>
 Net income per share, on a weighted average      Net income per share, on a weighted average
 basis, increased 18.1% to $.85 at December       basis, decreased 9.43% to $.72 at December
 31, 1999 as compared to $.72 for the             31, 1998 as compared to $.795 for the
 comparable 1998 period. Book value per share     comparable 1997 period. Book value per share
 of common stock increased by 6.0% to $7.77       of common stock increased by 7.51% to $7.33
 per share as compared to $7.33 at December       per share as compared to $6.82 at December
 31, 1998. The Corporation had approximately      31, 1998. The Corporation had approximately
 619 thousand in unrealized losses as of          100 thousand in unrealized losses as of
 December 31, 1999, net of deferred taxes,        December 31, 1998, net of deferred taxes,
 due to FASB's SAS 115 which affected the         due to FASB's SAS 115 which affected the
 book value computation.                          book value computation.
</TABLE>
<PAGE>




                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 1999
<PAGE>


                                 C O N T E N T S


                                                                        Page

INDEPENDENT AUDITOR'S REPORT                                              F1

FINANCIAL STATEMENTS
  Consolidated Balance Sheets                                             F2
  Consolidated Statements of Income                                       F3
  Consolidated Statements of Changes in Stockholders' Equity              F4
  Consolidated Statements of Cash Flows                                   F5
  Notes to Consolidated Financial Statements                        F6 - F28

<PAGE>


                                                                         Page F1




                          INDEPENDENT AUDITOR'S REPORT


Board of Directors and Stockholders
Highlands Bankshares, Inc., and Subsidiaries
Abingdon, Virginia

We have audited the accompanying consolidated balance sheets of Highlands
Bankshares, Inc. and Subsidiaries as of December 31, 1999, 1998 and 1997 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Highlands
Bankshares, Inc. and Subsidiaries as of December 31, 1999, 1998 and 1997 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.


                                                    CERTIFIED PUBLIC ACCOUNTANTS

468 East Main Street
Abingdon, VA 24210
February 4, 2000
<PAGE>
                   HIGHLANDS BANKSHARES, INC. AND SUBSIDIARIES
                                                                         Page F2
                           CONSOLIDATED BALANCE SHEETS
                        December 31, 1999, 1998 and 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                ASSETS                                                    1999               1998                1997
                                                                      ---------           ---------          ---------
<S>                                                                   <C>                 <C>                <C>
 Cash and due from banks (Note 18)                                    $  13,988           $   9,324          $   7,712
 Federal funds sold                                                           -               1,670              7,213
                                                                      ---------           ---------          ---------
                Total Cash and Cash Equivalents                          13,988              10,994             14,925

 Investment securities available for sale (Note 2)                       70,798              51,355             41,963
 Loans, net of allowance for loan losses of $2,494,
   $2,008 and $1,636 in 1999, 1998 and 1997,
   respectively (Notes 3 and 4)                                         259,184             231,363            190,369
 Premises and equipment, net (Note 5)                                     9,425               8,270              7,062
 Interest receivable                                                      2,155               1,875              1,495
 Other assets (Notes 6 and 10)                                            2,798               3,907              2,422
                                                                      ---------           ---------          ---------
                Total Assets                                          $ 358,348           $ 307,764          $ 258,236
                                                                      =========           =========          =========
              LIABILITIES AND STOCKHOLDERS' EQUITY
 Deposits (Note 7)
      Noninterest bearing                                             $  39,504           $  36,187          $  30,930
      Interest bearing                                                  266,689             236,154            205,716
                                                                      ---------           ---------          ---------
                Total Deposits                                          306,193             272,341            236,646
                                                                      ---------           ---------          ---------
 Federal funds purchased                                                  3,187                 503                  -
 Interest, taxes and other liabilities                                    2,461               2,378              2,174
 Other short term borrowings (Note 8)                                     8,000                   -                  -
 Long-term debt (Note 9)                                                 10,599               6,763              2,614
 Capital securities (Note 10)                                             7,500               7,500                  -
                                                                      ---------           ---------          ---------
                                                                         31,747              17,144              4,788
                                                                      ---------           ---------          ---------
                Total Liabilities                                       337,940             289,485            241,434
                                                                      ---------           ---------          ---------
 STOCKHOLDERS' EQUITY
      Common stock (Notes 12 and 14)                                      3,280               3,116              3,081
      Additional paid-in capital                                          5,768               5,265              5,271
      Retained Earnings                                                  11,979               9,998              8,346
      Accumulated other comprehensive income (loss)                        (619)               (100)               104
                                                                      ---------           ---------          ---------
                Total Stockholders' Equity                               20,408              18,279             16,802
                                                                      ---------           ---------          ---------
                Total Liabilities and Stockholders' Equity            $ 358,348           $ 307,764          $ 258,236
                                                                      =========           =========          =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
<PAGE>
                   HIGHLANDS BANKSHARES, INC. AND SUBSIDIARIES
                                                                         Page F3
                        CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 1999, 1998 and 1997
                                 (In thousands)
<TABLE>
<CAPTION>
 INTEREST INCOME                                                           1999               1998                1997
                                                                      ---------           ---------          ---------
<S>                                                                        <C>                 <C>                <C>
      Loans receivable and fees on loans                               $ 21,873            $ 19,618           $ 16,249
      Securities available for sale                                       3,733               3,057              2,363
      Federal funds sold                                                     65                 222                169
                                                                      ---------           ---------          ---------
            Total Interest Income                                        25,671              22,897             18,781
                                                                      ---------           ---------          ---------

 INTEREST EXPENSE
     Deposits                                                            12,810              12,336             10,099
     Federal funds purchased                                                 89                  58                 29
     Other borrowed funds                                                   573                 342                176
     Long-term debt                                                         695                 665                 17
                                                                      ---------           ---------          ---------
           Total interest expense                                        14,167              13,401             10,321
                                                                      ---------           ---------          ---------

           Net interest income                                           11,504               9,496              8,460

 ALLOWANCE FOR LOAN LOSSES                                                1,418               1,230              1,002
                                                                      ---------           ---------          ---------

           Net interest income after allowance for loan losses           10,086               8,266              7,458
                                                                      ---------           ---------          ---------

 NON-INTEREST INCOME
      Securities gains (losses), net                                        117                 359                 10
      Service charges on deposit accounts                                   706                 545                514
      Other service charges, commissions and fees                           344                 324                186
      Other operating income, rents                                         186                 139                132
                                                                      ---------           ---------          ---------
             Total Non-Interest Income                                    1,353               1,367                842
                                                                      ---------           ---------          ---------

 NON-INTEREST EXPENSES
      Salaries and employee benefits (Note 13)                            4,417               3,785              3,004
      Occupancy expense of bank premises                                    498                 441                334
      Furniture and equipment expense                                     1,072                 903                703
      Other operating expenses (Note 20)                                  2,200               1,833              1,341
                                                                      ---------           ---------          ---------
             Total Non-Interest Expenses                                  8,187               6,962              5,382
                                                                      ---------           ---------          ---------
             Income Before Income Taxes                                   3,252               2,671              2,918

      Income Tax Expense (Note 6)                                         1,121                 896                966
                                                                      ---------           ---------          ---------

             Net Income                                                $  2,131            $  1,775           $  1,952
                                                                      =========           =========          =========

 Earnings Per Common Share (Note 12)                                   $   0.85            $   0.72           $   0.79
                                                                      =========           =========          =========

 Earnings Per Common Share - assuming dilution                         $   0.84            $   0.69           $   0.76
                                                                      =========           =========          =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
<PAGE>
                   HIGHLANDS BANKSHARES, INC. AND SUBSIDIARIES
                                                                         Page F4
                      CONSOLIDATED STATEMENTS OF CHANGES IN
                              STOCKHOLDERS' EQUITY
                                   Years Ended
                        December 31, 1999, 1998 and 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                       Common Stock          Additional                    Other         Total
                                                 -----------------------      Paid-in      Retained    Comprehensive  Stockholders'
                                                 Shares        Par Value      Capital      Earnings        Income         Equity
                                                 ------        ---------      -------      --------        ------         ------
<S>                                               <C>          <C>           <C>          <C>              <C>           <C>
 Balance, December 31, 1996                       2,444        $ 3,054       $ 5,187      $  6,394         $ (18)        $ 14,617
                                                                                                                         --------
 Comprehensive income:
      Net income                                      -              -             -         1,952             -            1,952
      Change in unrealized gain
        (loss) on securities available
        for sale, net of deferred
        income tax expense of $63                     -              -             -             -           122              122
      Less: reclassification adjustment               -              -             -             -             -                -
                                                                                                                         --------
          Total comprehensive income                  -              -             -             -             -            2,074
                                                                                                                         --------
      Common stock issued for
         stock options exercised, net                20             27            84             -             -              111
                                                -------        -------       -------      --------        -------        --------
 Balance, December 31, 1997                       2,464        $ 3,081       $ 5,271      $  8,346         $ 104         $ 16,802
                                                                                                                         --------
 Comprehensive income:
      Net income                                      -              -             -         1,775             -            1,775
      Change in unrealized gain
        (loss) on securities available
        for sale, net of deferred
        income tax benefit of $105                    -              -             -             -          (180)            (180)
      Less: reclassification adjustment               -              -             -             -           (24)             (24)
                                                                                                                         --------
          Total comprehensive income                  -              -             -             -             -            1,571
                                                                                                                         --------
      Common stock issued for
         stock options exercised, net                28             35            (6)            -             -               29
      Cash dividend                                   -              -             -          (123)            -             (123)
                                                -------        -------       -------      --------        -------        --------
 Balance, December 31, 1998                       2,492        $ 3,116       $ 5,265      $  9,998        $ (100)        $ 18,279
                                                                                                                         --------
 Comprehensive income:
      Net income                                      -              -             -         2,131             -            2,131
      Change in unrealized gain
        (loss) on securities available
        for sale, net of deferred
        income tax benefit of $268                    -              -             -             -          (508)            (508)
      Less: reclassification adjustment               -              -             -             -           (11)             (11)
                                                                                                                         --------
          Total comprehensive income                  -              -             -             -             -            1,612
                                                                                                                         --------
      Common stock issued for
         stock options exercised, net               132            164           503             -             -              667
      Cash dividend                                   -              -             -          (150)            -             (150)
                                                -------        -------       -------      --------        -------        --------
 Balance, December 31, 1999                       2,624        $ 3,280       $ 5,768      $ 11,979        $ (619)        $ 20,408
                                                =======        =======       =======      ========        =======        ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
<PAGE>
                   HIGHLANDS BANKSHARES, INC. AND SUBSIDIARIES
                                                                         Page F5
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1999, 1998, and 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                      1999               1998             1997
                                                                                    -------            -------          -------

 CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                 <C>                <C>              <C>
      Net income                                                                    $ 2,131            $ 1,775          $ 1,952
      Adjustments to reconcile net income to net cash
        provided by operating activities:
           Allowances for loan losses                                                 1,418              1,230            1,002
           Provision for deferred income taxes                                           14                (15)            (124)
           Depreciation and amortization                                                663                529              328
           Net realized gains on available for sale securities                         (117)              (359)             (10)
           Net amortization on securities                                               330                540              190
           Increase in interest receivable                                             (280)              (380)            (224)
           (Increase) decrease in other assets                                        1,087             (1,076)          (1,593)
           Increase in interest, taxes and other
             liabilities                                                                 69                204              452
                                                                                    -------            -------          -------
                Net Cash Provided by Operating Activities                             5,315              2,448            1,973
                                                                                    -------            -------          -------
 CASH FLOWS FROM INVESTING ACTIVITIES:
      Securities available for sale:
           Proceeds from sale of securities                                           7,624             18,427            5,589
           Proceeds from maturities of debt securities                               21,439             27,412            9,536
           Purchase of securities                                                   (49,238)           (55,706)         (25,740)
      Net increase in loans                                                         (29,239)           (42,224)         (37,492)
      Premises and equipment expenditures                                            (1,796)            (1,722)          (2,800)
                                                                                    -------            -------          -------
                Net Cash Used in Investing Activities                               (51,210)           (53,813)         (50,907)
                                                                                    -------            -------          -------
 CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase in certificates of deposit                                        13,787             12,397           35,683
      Net increase in demand, savings and other deposits                             20,065             23,298           11,492
      Increase in federal funds purchased                                             2,684                503                -
      Proceeds from issuance of short-term borrowings                                 8,000                  -                -
      Repayment of short-term borrowings                                                  -                  -             (143)
      Proceeds from issuance of long-term debt                                        4,000              6,125              840
      Repayment of long-term debt                                                      (164)            (1,976)             (12)
      Proceeds from issuance of junior subordinated
        debt securities                                                                   -              7,500                -
      Capital securities issuance cost                                                    -               (319)             (68)
      Cash dividends paid                                                              (150)              (123)               -
      Proceeds from issuance of common stock                                            667                 29              111
                                                                                    -------            -------          -------
                Net Cash Provided by Financing Activities                            48,889             47,434           47,903
                                                                                    -------            -------          -------
                Net increase (decrease) in cash and cash equivalents                  2,994             (3,931)          (1,031)

 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                      10,994             14,925           15,956
                                                                                    -------            -------          -------

 CASH AND CASH EQUIVALENTS AT END OF YEAR                                          $ 13,988           $ 10,994         $ 14,925
                                                                                    =======            =======          =======

 SUPPLEMENTAL DISCLOSURE OF NON-CASH
   TRANSACTIONS:

      Unrealized gain (loss) in value of securities available for
        sale (net of tax effects of  $(268), $(105), and $63, at
        December 31, 1999, 1998 and 1997, respectively)                              $ (519)            $ (204)          $ 122
                                                                                    =======            =======          =======
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION:
 CASH PAID DURING THE YEAR FOR:
      INTEREST                                                                    $ 13,346           $ 13,280          $ 9,802
                                                                                    =======            =======          =======
      Income taxes                                                                 $ 1,150              $ 952          $ 1,011
                                                                                    =======            =======          =======

</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                         Page F6
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  BASIS OF PRESENTATION AND CONSOLIDATION
                  ---------------------------------------

                  The accompanying consolidated financial statements include the
                  accounts of Highlands Bankshares, Inc., (the "Parent Company")
                  and its wholly-owned subsidiaries, Highlands Union Bank (the
                  "Bank") and Highlands Capital Trust I (the "Trust"). The
                  statements also include Highlands Union Insurance Services,
                  Inc., (the "Insurance Services"), a wholly-owned subsidiary of
                  the Bank. All significant intercompany balances and
                  transactions have been eliminated in consolidation.

                  NATURE OF OPERATIONS
                  --------------------

                  Highlands Bankshares, Inc., and Subsidiaries (the "Company")
                  operates in Abingdon, Virginia and surrounding Southwest
                  Virginia, under the laws of the Commonwealth of Virginia. The
                  Company was organized December 29, 1995. Highlands Union Bank,
                  its wholly-owned subsidiary, began banking operations on April
                  27, 1985. The Bank operates under a state bank charter and
                  provides full banking services. As a state bank, the Bank is
                  subject to regulation by the Federal Reserve Board and the
                  Virginia State Bureau of Financial Institutions. Highlands
                  Capital Trust I, a wholly-owned subsidiary became effective on
                  January 14, 1998. The nature of the trust is described more
                  fully in Note 7. Highlands Union Insurance Services, Inc., a
                  wholly-owned subsidiary of the Bank became effective October
                  8, 1999. The entity will be used to sell insurance through
                  Virginia Bankers Insurance Services, LLC.

                  CASH AND CASH EQUIVALENTS
                  -------------------------

                  For purposes of the consolidated statements of cash flows,
                  cash and cash equivalents include cash and balances due from
                  banks and federal funds sold, all of which mature within
                  ninety days.

                  SECURITIES AVAILABLE FOR SALE
                  -----------------------------

                  Securities classified as available for sale are those debt
                  securities that the Company intends to hold for an indefinite
                  period of time, but not necessarily to maturity. Any decision
                  to sell a security classified as available for sale would be
                  based on various factors, including significant movements in
                  interest rates, changes in the maturity mix of the Company's
                  assets and liabilities, liquidity needs, regulatory capital
                  considerations, and other similar factors.

                  Securities available for sale are carried at fair value.
                  Unrealized gains or losses are reported as increases or
                  decreases in stockholders' equity, net of the related deferred
                  tax effect. Realized gains or losses are recorded on the trade
                  date and are determined on the basis of the cost of specific
                  securities sold. Realized gains or losses are included in
                  earnings. Premiums and discounts are recognized in interest
                  income using the interest method over the period to maturity.

                  LOANS
                  -----

                  The Company grants mortgage, commercial and consumer loans to
                  customers. A substantial portion of the loan portfolio is
                  represented by mortgage loans throughout Southwest Virginia.
                  The ability of the Company's debtors to honor their contracts
                  is dependent upon the real estate and general economic
                  conditions in this area.


                                  (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                         Page F7
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  Loans that management has the intent and ability to hold for
                  the foreseeable future or until maturity or pay-off generally
                  are reported at their outstanding unpaid principal balances
                  adjusted for charge-offs, the allowance for loan losses, and
                  any deferred fees or costs on originated loans. Interest
                  income is accrued on the unpaid balance. Loan origination
                  fees, net of certain direct origination costs, are deferred
                  and amortized to income over the estimated lives of the loans
                  using the straight-line method. The aforementioned method is
                  not materially different from the interest method.

                  The accrual of interest on loans is discontinued at the time
                  the loan is 90 days delinquent unless the credit is
                  well-secured and in process of collection. Credit card loans
                  and other personal loans are typically charged off no later
                  than 180 days past due. In all cases, loans are placed on
                  nonaccrual or charged-off at an earlier date if collection of
                  principal or interest is considered doubtful.

                  All interest accrued but not collected for loans that are
                  placed on nonaccrual or charged off is reversed against
                  interest income. The interest on these loans is accounted for
                  on the cash-basis or cost-recovery method, until qualifying
                  for return to accrual. Loans are returned to accrual status
                  when all the principal and interest amounts contractually due
                  are brought current and future payments are reasonably
                  assured.

                  ALLOWANCE FOR LOAN LOSSES
                  -------------------------

                  The allowance for loan losses is established as losses are
                  estimated to have occurred through a provision for loan losses
                  charged to earnings. Loan losses are charged against the
                  allowance when management believes the uncollectibility of a
                  loan balance is confirmed. Subsequent recoveries, if any, are
                  credited to the allowance.

                  The allowance for loan losses is evaluated on a regular basis
                  by management and is based upon management's periodic review
                  of the collectibility of the loans in light of historical
                  experience, the nature and volume of the loan portfolio,
                  adverse situations that may affect the borrower's ability to
                  repay, estimated value of any underlying collateral and
                  prevailing economic conditions. This evaluation is inherently
                  subjective as it requires estimates that are susceptible to
                  significant revision as more information becomes available.

                  A loan is considered impaired when, based on current
                  information and events, it is probable that the Company will
                  be unable to collect the scheduled payments of principal or
                  interest when due according to the contractual terms of the
                  loan agreement. Factors considered by management in
                  determining impairment include payment status, collateral
                  value, and the probability of collecting scheduled principal
                  and interest payments when due. Loans that experience
                  insignificant payment delays and payment shortfalls generally
                  are not classified as impaired. Management determines the
                  significance of payment delays and payment shortfalls on a
                  case-by-case basis, taking into consideration all of the
                  circumstances surrounding the loan and the borrower, including
                  the length of the delay, the reasons for the delay, the
                  borrower's prior payment record, and the amount of the
                  shortfall in relation to the principal and interest owed.
                  Impairment is measured on a loan by loan basis by either the
                  present value of expected future cash flows discounted at the
                  loan's effective interest rate, the loan's obtainable market
                  price, or the fair value of the collateral if the loan is
                  collateral dependent.

                                  (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                         Page F8
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  PREMISES AND EQUIPMENT
                  ----------------------

                  Land is carried at cost. Premises and equipment are stated at
                  cost less accumulated depreciation. Depreciation is computed
                  on the straight-line method over estimated useful lives.
                  Maintenance and repairs are charged to current operations
                  while improvements are capitalized. Disposition gains and
                  losses are reflected in current operations.

                  INTANGIBLE ASSETS
                  -----------------

                  Capital issue costs relating to the junior subordinated debt
                  securities are stated at cost less accumulated amortization.
                  Amortization is computed on the straight-line method over the
                  life of the securities - 30 years.

                  INCOME TAXES
                  ------------

                  Under the asset and liability method, deferred income taxes
                  are recognized for the tax consequences of "temporary
                  differences" by applying enacted statutory tax rates to the
                  differences between the financial statement carrying amounts
                  and the tax bases of existing assets and liabilities. Under
                  SFAS No. 109, the effect on deferred taxes of a change in tax
                  rates is recognized in income in the period that includes the
                  enactment date.

                  EARNINGS PER COMMON SHARE
                  -------------------------

                  Earnings per common share are calculated based on the weighted
                  average outstanding shares during the year. Earnings per
                  common share assuming dilution are calculated based on the
                  weighted average outstanding shares during the year plus
                  common stock equivalents at year end.

                  USE OF ESTIMATES
                  ----------------

                  In preparing consolidated financial statements in conformity
                  with generally accepted accounting principles, management is
                  required to make estimates and assumptions that affect the
                  reported amounts of assets and liabilities as of the date of
                  the balance sheet and reported amounts of revenue and expenses
                  during the reporting period. Actual results could differ from
                  those estimates. Material estimates that are particularly
                  susceptible to significant change in the near term relate to
                  the determination of the allowance for loan losses, and the
                  valuation of foreclosed real estate, deferred tax assets and
                  trading activities.

                  BUSINESS SEGMENTS
                  -----------------

                  The Company reports its activities as a single business
                  segment. In determining the appropriateness of segment
                  definition, the Company considers components of the business
                  about which financial information is available and regularly
                  evaluated relative to resource allocation and performance
                  assessment.

                  RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
                  ----------------------------------------------------

                  Certain reclassifications have been made to the 1998 and 1997
                  financial statements to conform with the 1999 financial
                  statement presentation. Such reclassifications had no effect
                  on net income as previously reported.
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                         Page F9
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE  2. INVESTMENT SECURITIES

                  Debt and equity securities have been classified in the
                  consolidated statements of financial condition according to
                  management's intent. The amortized cost and market value of
                  securities classified as available for sale are as follows:
<TABLE>
<CAPTION>
                                                                                      1999
                                                         -----------------------------------------------------------

                                                                             Gross          Gross
                                                           Amortized      Unrealized      Unrealized         Fair
                                                              Cost           Gains          Losses           Value
                                                         ------------    ------------     -----------     ----------
                         <S>                                  <C>              <C>             <C>            <C>
                  U.S. Government agencies and
                    corporations                          $   4,334        $      -       $     128       $   4,206
                  State and political subdivisions            2,473               -             215           2,258
                  Collateralized Mortgage Obligations        11,240               60            130          11,170
                  Mortgage Backed securities                 51,594               62            557          51,099
                  Other securities                            2,095               -              30           2,065
                                                           --------        ---------       --------      - --------

                                                           $ 71,736        $     122       $  1,060        $ 70,798
                                                           ========        =========       ========        ========
<CAPTION>
                                                                                       1998
                                                         -----------------------------------------------------------

                                                                            Gross          Gross
                                                           Amortized     Unrealized      Unrealized        Fair
                                                              Cost          Gains          Losses          Value
                                                         ------------    ------------     -----------     ----------
                         <S>                                  <C>              <C>             <C>            <C>
                  U.S. Government agencies and
                    corporations                          $   3,250       $      14      $        -       $   3,264
                  State and political subdivisions              754               5               -             759
                  Collateralized Mortgage Obligations         7,886              22              35           7,873
                  Mortgage Backed securities                 38,288              40             197          38,131
                  Other securities                            1,328               -               -           1,328
                                                           --------       ---------      ----------        --------

                                                           $ 51,506       $      81      $      232        $ 51,355
                                                           ========       =========      ==========        ========
<CAPTION>
                                                                                       1997
                                                         -----------------------------------------------------------
                                                                            Gross         Gross
                                                           Amortized     Unrealized      Unrealized         Fair
                                                              Cost          Gains         Losses            Value
                                                         ------------    ------------     -----------     ----------
                         <S>                                  <C>              <C>             <C>            <C>
                  U.S. Treasury securities                $   1,493     $        10   $           -      $   1,503
                  U.S. Government agencies and
                    corporations                              1,500               -              14          1,486
                  State and political subdivisions              939              33               -            972
                  Collateralized Mortgage Obligations         3,987               -              12          3,975
                  Mortgage Backed securities                 32,788             141               -         32,929
                  Other securities                            1,098               -               -          1,098
                                                         ----------   -------------  --------------     ----------

                                                           $ 41,805      $      184    $         26       $ 41,963
                                                           ========      ==========    ============       ========
</TABLE>
                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F10
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

                                 (In thousands)


         NOTE 2.  INVESTMENT SECURITIES (CONTINUED)

                  Investment securities available for sale with a carrying value
                  of $17,141, $4,787, and $3,571 at December 31, 1999, 1998 and
                  1997 respectively, and a market value of $16,955, $4,783, and
                  $3,595 at December 31, 1999, 1998 and 1997 were pledged as
                  collateral on public deposits and for other purposes as
                  required or permitted by law.

                  Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB)
                  stock with a carrying value of $1,541, $1,246 and $1,029 at
                  December 31, 1999, 1998 and 1997, respectively are included in
                  the caption "Other Securities". These investments are
                  considered to be restricted as the Company is required by FHLB
                  and FRB to hold these investments, and the only market for
                  this stock is the issuing agency.

                  The amortized cost and estimated fair value of securities
                  available for sale at December 31, 1999 by contractual
                  maturity are shown below. Expected maturities may differ from
                  contractual maturities, because borrowers may have the right
                  to call or prepay obligations with or without call or
                  prepayment penalties.
<TABLE>
<CAPTION>
                                                                                                 Approximate
                                                                                Amortized           Market
                                                                                   Cost             Value
                                                                              ----------        ----------
                              <S>                                                  <C>               <C>
                           Due in one year or less                            $        -        $        -
                           Due after one year through five years                   2,000             1,955
                           Due after five years through ten years                  2,555             2,454
                           Due after ten years                                     2,252             2,055
                                                                             -----------       -----------
                                                                                   6,807             6,464

                           Mortgage-backed securities                             62,834            62,269
                           Other securities                                        2,095             2,065
                                                                            ------------       -----------
                                                                              $   71,736         $  70,798
                                                                              ==========         =========


                  For the years ended December 31, 1999, 1998 and 1997, proceeds
                  from sale of securities amounted to $7,624, $18,427 and
                  $5,589, respectively. Gross realized gains and losses on
                  investment securities available for sale are as follows:
<CAPTION>
                                                                            1999             1998              1997
                                                                            ----             ----              ----

                           <S>                                               <C>             <C>                <C>
                           Realized gains                               $    117        $     369          $     34
                           Realized losses                              $  (   - )      $ (    10)         $ (   24)
</TABLE>
                  The tax benefit (provision) applicable to these net realized
                  gains and losses amounted to $40, $122, and $3, respectively.
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F11
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE  3. LOANS

                  The composition of the net loans is as follows:
<TABLE>
<CAPTION>
                                                                           1999             1998              1997
                                                                       ---------        ---------         --------

                    <S>                                                    <C>              <C>               <C>
                  Commercial                                           $  27,072        $  24,240         $  24,404
                  Real estate                                            163,459          136,339           104,899
                  Installment                                             68,097           70,137            59,798
                  Other                                                    3,215            2,821             3,139
                                                                       ---------        ---------         ---------
                                                                         261,843          233,537           192,240
                                                                       ---------        ---------         ---------

                  Deduct:
                  Unearned discount                                            7               31               127
                  Allowance for loan losses                                2,494            2,008             1,636
                  Net deferred loan fees                                     158              135               108
                                                                       ---------        ---------         ---------
                                                                           2,659            2,174             1,871
                                                                       ---------        ---------         ---------

                                                                       $ 259,184        $231,363           $190,369
                                                                       =========        =========         =========


                  The following is a summary of information pertaining to impaired loans:

                                                                                      December 31,
                                                                       -------------------------------------------

                                                                           1999             1998              1997
                                                                       ---------        ---------         --------
                           <S>                                               <C>             <C>                <C>
                  Impaired loans without a
                     valuation allowance                               $   1,152        $   1,396         $     888
                  Impaired loans with a valuation
                     Allowance                                                 -                -                 -
                                                                       ---------        ---------         ---------
                  Total impaired loans                                 $   1,152        $   1,396         $     888
                                                                       ========= -      =========         =========

                  Valuation allowance related to
                      impaired loans                                   $     155        $     190         $      45
                                                                       =========        =========         =========
<CAPTION>
                                                                                  Years ended December 31,
                                                                       --------------------------------------------
                                                                           1999             1998              1997
                                                                       ---------        ---------         ---------
                           <S>                                               <C>             <C>                <C>
                  Average investment in
                      impaired loans                                   $   1,111        $   1,011         $     310
                                                                       =========        =========         =========
                  Interest income recognized
                     on impaired loans                                 $       -        $       -         $       -
                                                                       =========        =========         =========
</TABLE>
                  No additional funds are committed to be advanced in connection
                  with impaired loans.

                  Loans have been pledged as part of the floating blanket lien
                  to secure Federal Home Loan Bank advances. (Note 15)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F12
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE  4. ALLOWANCE FOR LOAN LOSSES

                  Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
                                                                            1999             1998              1997
                                                                            ----             ----              ----
                           <S>                                               <C>             <C>                <C>
                  Balance, beginning                                    $  2,008         $  1,636          $  1,072
                  Provisions charged to
                   operations                                              1,418            1,230             1,002
                  Loans charged to reserve                                (1,094)          (1,057)             (512)
                  Recoveries                                                 162              199                74
                                                                        --------         --------          --------

                  Balance, ending                                       $  2,494         $  2,008          $  1,636
                                                                        ========         ========          ========


         NOTE  5.  PREMISES AND EQUIPMENT

                  Premises and equipment, stated at cost, are comprised of the
following:
<CAPTION>
                                                                            1999             1998              1997
                                                                            ----             ----              ----
                           <S>                                               <C>             <C>                <C>
                  Land                                                  $  2,391         $  1,870           $ 1,847
                  Bank premises                                            5,884            5,374             4,445
                  Equipment                                                3,719            2,954             2,184
                                                                        --------         --------          --------
                                                                          11,994           10,198             8,476
                  Less accumulated
                   depreciation                                            2,569            1,928             1,414
                                                                        --------         --------          --------

                                                                        $  9,425         $  8,270           $ 7,062
                                                                        ========         ========           =======
</TABLE>
                  Depreciation expense is $641, $514, and $321 for 1999, 1998
and 1997, respectively.
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F13
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE  6. INCOME TAXES

                  The components of the net deferred tax asset, included in
other assets, are as follows:
<TABLE>
<CAPTION>
                                                                           1999            1998               1997
                                                                       ---------        ---------         --------
                           <S>                                               <C>             <C>                <C>
                  Deferred tax assets:
                  Allowance for loan loss                              $     626        $     532         $     471
                  Deferred compensation                                        4               73                84
                  Net unrealized loss on securities available
                     for sale                                                319               51                 -
                                                                       ---------        ---------         ---------
                                                                             949              656               555
                                                                       ---------        ---------         ---------
                  Deferred tax liability:
                  Depreciation                                         (     235)       (     195)        (     160)
                  Net unrealized gain on securities available
                     for sale                                          (       -)       (       -)        (      54)
                                                                        --------         --------          --------
                                                                       (     235)       (     195)        (     214)
                                                                        --------         --------          --------

                  Net deferred tax asset                               $     714        $     461         $     341
                                                                       =========        =========         =========


                  The components of income tax expense (benefit) related to
continuing operations are as follows:
<CAPTION>
                                                                           1999             1998              1997
                                                                       ---------        ---------         --------
                           <S>                                               <C>             <C>                <C>
                  Federal:
                    Current                                            $   1,107        $     911         $   1,090
                    Deferred                                                  14        (      15)        (     124)
                                                                       ---------         --------          --------

                        Total                                          $   1,121        $     896         $     966
                                                                       =========        =========         =========


                  The Bank's income tax expense differs from the statutory
federal rate of 34% as follows:
<CAPTION>
                                                                           1999             1998              1997
                                                                       ---------        ---------         --------
                           <S>                                               <C>             <C>                <C>
                  Statutory rate applied to
                     earnings before income taxes                      $   1,106        $     908         $     992
                  Tax exempt interest                                  (      22)       (      53)        (      10)
                  Other, net                                                  37               41         (      16)
                                                                       ---------        ---------          --------

                                                                       $   1,121        $     896         $     966
                                                                       =========        =========         =========

         NOTE  7.  DEPOSITS

                  The composition of deposits is as follows:
<CAPTION>
                                                                           1999             1998              1997
                                                                       ---------        ---------         --------
                           <S>                                               <C>             <C>                <C>
                  Noninterest bearing demand                          $   39,504       $   36,187        $   30,930
                  Interest bearing demand                                 26,074           21,936            15,065
                  Savings deposits                                        44,751           35,640            26,808
                  Time deposits, in amounts of
                     $100,000 or more                                     47,922           41,302            37,890
                  Other time deposits                                    147,942          137,276           125,953
                                                                      ----------       ----------        ----------

                                                                      $  306,193       $  272,341        $  236,646
                                                                      ==========       ==========        ==========
</TABLE>
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F14
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE 7.  DEPOSITS (CONTINUED)

                  The remaining maturities of time deposits at December 31, 1999
are as follows:

                  2000                                               $   124,601
                  2001                                                    43,920
                  2002                                                     9,700
                  2003                                                     8,631
                  2004                                                     6,156
                  Thereafter                                               2,856
                                                                     -----------

                                                                     $   195,864
                                                                     ===========

         NOTE 8.  OTHER SHORT-TERM BORROWINGS

                  Borrowed funds consist of Federal Home Loan Bank advances
                  which are secured by a floating blanket lien on a specific
                  class of mortgage loans of the Bank.


         NOTE 9. LONG-TERM DEBT

                  At December 31, Highlands Bankshares Inc. and Subsidiaries had
                  the following long-term debt agreements:
<TABLE>
<CAPTION>
                                                                                           1999             1998            1997
                                                                                           ----             ----            ----
                           <S>                                                              <C>             <C>              <C>
                  Note payable Federal Home Loan Bank dated June 6, 1996 for
                  $1,000 with an annual interest rate of 6.07%, due June 8,
                  1998. The note requires annual interest payments. The loan is
                  secured by a floating blanket lien on a specific class of
                  mortgage loans of the Bank.                                           $     -          $     -          $  1,000


                  Note payable Federal Home Loan Bank dated June 6, 1996 for
                  $1,000 with an annual interest rate of 7.02%, due June 6,
                  2003. The note requires semi-annual installments of $71 plus
                  interest. The loan is secured by a floating blanket lien on a
                  specific class of mortgage loans of the Bank.                             500              643               786
</TABLE>
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F15
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE 9. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
                                                                                        1999             1998              1997
                                                                                        ----             ----              ----

                           <S>                                                              <C>             <C>              <C>
                  Note payable Federal Home Loan Bank dated March 26, 1998 for
                  $6,000 with an annual interest rate of 5.51%, due March 26,
                  2008. The note requires quarterly interest payments and has an
                  early conversion option at March 26, 2003. The loan is secured
                  by a floating blanket lien on a specific class of mortgage
                  loans of the Bank.                                                    6,000            6,000               -

                  Note payable Federal Home Loan Bank dated August 13, 1999, for
                  $4,000 with an annual interest rate of 6.385%, due August 31,
                  2009. The note requires quarterly interest payments and has an
                  early conversion option at August 13, 2004. The loan is
                  secured by a floating blanket lien on a specific class of
                  mortgage loans of the Bank.                                           4,000                -               -

                  Note payable resulting from a seller-financing transaction
                  dated September 10, 1998 for $125 with an annual interest rate
                  of 8.50%, due September 10, 2003. The note requires monthly
                  installments of principal and interest of $3. The loan is
                  secured by a first deed of trust on real estate.                         99              120               -

                  Note payable to Company's Subsidiary (amount participated with
                  other financial institutions only) dated March 4, 1997 for
                  $900 with an annual interest rate of 8.25%, due March 4, 2002.
                  The note requires monthly installments of $8 with a balloon
                  payment at maturity. The loan is secured by a first deed of
                  trust on a commercial building.                                           -                -             828
                                                                                   -------------   --------------    --------------

                  Total long-term debt                                             $   10,599        $   6,763       $   2,614
                                                                                   =============   ==============    ==============
</TABLE>
                  Principal maturities of long-term debt at December 31, 1999
are as follows:

                  2000                                                       166
                  2001                                                       168
                  2002                                                       171
                  2003                                                        94
                  2004                                                         -
                  Thereafter                                              10,000
                                                                      ----------

                                                                       $  10,599
                                                                      ==========

<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F16
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In Thousands)

         NOTE 10. CAPITAL SECURITIES

                  On January 21, 1998, Highlands Capital Trust I, a statutory
                  business trust (the "Trust") created by the Parent Company,
                  issued $7,500 of 9.25% Capital Securities which will mature on
                  January 15, 2028. The principal asset of the Trust is $7,500
                  of the Parent Company's junior subordinated debt securities
                  with like maturities and like interest rates to the Capital
                  Securities. Additionally, the Trust has issued 9,000 shares of
                  common securities to the Parent Company. The 9.25% Capital
                  Securities had $7,500 outstanding at December 31, 1999 and an
                  estimated fair value of $7,511. The related junior
                  subordinated debt securities had an estimated fair value of
                  $7,511.

                  The Capital Securities, the assets of the Trust and the common
                  securities issued by the Trust are redeemable in whole or in
                  part on or after January 15, 2008, or at any time in whole but
                  not in part from the date of issuance on the occurrence of
                  certain events.

                  The Capital Securities may be included in Tier I capital up to
                  25% of capital before inclusion for regulatory capital
                  adequacy determination purposes. The remaining 75% of the
                  Capital Securities may be included in Tier II capital.
                  Distributions to the holders of the Capital Securities are
                  included in interest expense.

                  The obligations of the Parent Company with respect to the
                  issuance of the Capital Securities constitute a full and
                  unconditional guarantee by the Parent Company of the Trust's
                  obligations with respect to the Capital Securities.

                  Subject to certain exceptions and limitations, the Parent
                  Company may elect from time to time to defer junior
                  subordinated debt securities interest payments, which would
                  result in a deferral of distribution payments on the related
                  Capital Securities.

                  Capital issue costs totaling $378 and related accumulated
                  amortization of $21 as of December 31, 1999, are included in
                  other assets. Amortization of these costs and interest expense
                  related to the Trust are $10 and $685, respectively for 1999.


         NOTE 11. OPERATING LEASES

                  The following is a schedule by years of future minimum rental
                  payments required under operating leases that have initial or
                  remaining noncancelable terms in excess of one year as
                  follows:

                  Year ending December 31:

                    2000                                               $     318
                    2001                                                     207
                    2002                                                     207
                    2003                                                     207
                                                                      ----------

                  Total minimum payments required                      $     939
                                                                       =========

                  Total operating lease expense was $297, $342, and $330 for
                  December 31, 1999, 1998 and 1997 respectively.


                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F17
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 11. OPERATING LEASES (CONTINUED)

                  The Company owns several buildings for use by its'
                  subsidiaries, and leases the remaining space. The following is
                  a schedule by years of future minimum rental payments due to
                  be received under operating leases that have initial or
                  remaining noncancelable terms in excess of one year as
                  follows:

                  Year Ending December 31:

                    2000                                               $      61
                    2001                                                      28
                    2002                                                       8
                                                                       ---------

                  Total minimum payments required                      $      97
                                                                       =========

                  Total operating lease income was $122, $90 and $90 for
                  December 31, 1999, 1998 and 1997, respectively.


         NOTE 12. COMMON STOCK, STOCK SPLIT, AND EARNINGS PER COMMON SHARE

                  On April 22, 1999, the Board authorized a 2 for 1 stock split
                  to be distributed to all shareholders of record as of April 1,
                  1999. As a result, authorized shares increased from 10,000,000
                  to 20,000,000 and par value decreased from $2.50 to $1.25 per
                  share. All references in the financial statements to number of
                  shares, per share amounts and market prices of the Company's
                  common stock have been retroactively restated to reflect the
                  increased number of common shares outstanding.

                  Earnings per common share is computed using the weighted
                  average outstanding shares as of December 31. The stock
                  options (Note 14) have a dilutive effect on earnings per
                  share.

                  The following is a reconciliation of the numerators and the
                  denominators of the basic and diluted earnings per common
                  share computation:
<TABLE>
<CAPTION>

                                                                                          1999
                                                                      --------------------------------------------
                                                                         Income           Shares         Per-Share
                                                                      (Numerator)    (Denominator)         Amount
                                                                      -----------    -------------         ------

                   <S>                                                  <C>               <C>                <C>
                  Net income                                           $   2,131
                                                                       =========
                  Basic Earnings per Common Share
                    Income available to common
                    stockholders                                           2,131            2,521      $     .85
                                                                                                       =========
                  Effect of Dilutive Stock options
                    outstanding                                               -                21
                                                                       ---------        ---------
                  Diluted Earnings per Common Share
                    Income available to common
                    stockholders + assumed conversions                 $   2,131            2,542      $     .84
                                                                       =========          =======      =========
</TABLE>
                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F18
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 12. COMMON STOCK, STOCK SPLIT, AND EARNINGS PER COMMON SHARE
(CONTINUED)
<TABLE>
<CAPTION>
                                                                                          1998
                                                                      --------------------------------------------
                                                                         Income           Shares         Per-Share
                                                                      (Numerator)    (Denominator)         Amount
                                                                      -----------    -------------         ------

                   <S>                                                  <C>               <C>                <C>
                  Net income                                          $    1,775
                                                                      ==========
                  Basic Earnings per Common Share
                    Income available to common
                    stockholders                                           1,775            2,472   $       .72
                                                                                                    ===========
                  Effect of Dilutive Stock options
                    outstanding                                                -               92
                                                                      ----------        ---------
                  Diluted Earnings per Common Share
                    Income available to common
                    stockholders + assumed conversions                $    1,775            2,564   $       .69
                                                                      ==========          =======   ===========

<CAPTION>
                                                                                          1997
                                                                      --------------------------------------------
                                                                         Income           Shares         Per-Share
                                                                      (Numerator)    (Denominator)         Amount
                                                                      -----------    -------------         ------
                   <S>                                                  <C>               <C>                <C>
                  Net income                                          $    1,952
                                                                      ==========
                  Basic Earnings per Common Share
                    Income available to common
                    stockholders                                           1,952            2,456   $       .79
                                                                                                    ===========
                  Effect of Dilutive Stock options
                    outstanding                                                -              102
                                                                      ----------         --------
                  Diluted Earnings per Common Share
                    Income available to common
                    stockholders + assumed conversions                $    1,952            2,558   $       .76
                                                                      ==========         ========   ===========
</TABLE>
         NOTE 13. PROFIT SHARING AND RETIREMENT SAVINGS PLAN

                  From January 1, 1986 to June 30, 1997, the Bank provided a
                  profit sharing plan covering substantially all employees with
                  over one year of service. The plan provided for contributions
                  in such amounts as the Board of Directors determined annually,
                  but not in excess of the amount permitted under the Internal
                  Revenue Code as a deductible expense. The Bank accrued to the
                  plan $120 for the year ended December 31, 1996, which
                  represents approximately 6% of qualifying salaries and wages
                  of the Bank.

                  On July 1, 1997, the Bank converted its existing profit
                  sharing plan to a 401(K) saving plan. The plan is available to
                  substantially all employees meeting minimum eligibility
                  requirements. The Bank makes a 2% contribution to all
                  employees exclusive of employee contributions and employer
                  matching. Employees may elect to make voluntary contributions
                  to the plan up to 15% of their base pay. The Bank matches 50%
                  of the employee's initial 6% contribution; therefore, the
                  maximum employer contribution per employee could be 3% of base
                  pay. The cost of Bank contributions under the savings plan was
                  $137 and $115, in 1999 and 1998 respectively.
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F19
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE 14. STOCK OPTION PLAN

                  In 1996, Highlands Bankshares, Inc., adopted a non-qualified
                  stock incentive option plan, which is identical to and
                  replaced the plan adopted by Highlands Union Bank in 1986, for
                  key employees, officers, and directors and reserved 150,000
                  shares of common stock for issuance thereunder. The exercise
                  price of each option equals the market price of the Company's
                  stock on the date of grant and an option's maximum term is ten
                  years.

                  Shares under options which are canceled are available for
                  subsequent grant. Option prices are determined by the Board of
                  Directors, but shall not be less than the greater of the par
                  value of such stock or 100% of the book value of such stock as
                  shown by the Company's last published statement prior to
                  granting of the option. Proceeds received upon exercise of
                  options are credited to common stock, to the extent of par
                  value of the related shares, and the balance is credited to
                  surplus.

                  A summary of the status of the Company's stock option plan is
presented below:
<TABLE>
<CAPTION>
                                                              1999                   1998                   1997
                                                   -------------------  ---------------------  --------------------
                                                   Weighted             Weighted              Weighted
                                                   Average              Average               Average
                                                   Exercise Number of   Exercise   Number of  Exercise     Number of
                                                    Price    Shares       Price     Shares     Price        Shares
                                                   -------- ---------   ---------   ------    ---------     ------
                         <S>                           <C>        <C>     <C>         <C>        <C>         <C>
                  Options outstanding January 1     $  7.64     174,685   $  4.60     155,586  $   3.51      152,748
                  Granted                             19.00      26,650     15.15      47,500     11.50       23,300
                  Exercised                            6.66    (132,213)     2.40     (28,401)     3.69      (20,462)
                                                               --------               -------                -------

                  Options outstanding December 31   $ 14.76      69,122   $  7.64     174,685  $   4.60      155,586
                                                              =========               =======                =======


                  Options exercisable at year-end   $ 14.76      69,122   $  7.64    174,685   $   4.60      155,586
                  Weighted-average fair
                     value of options granted
                     during the year                $ 19.00               $ 15.15               $ 11.50


                  Information pertaining to options outstanding at December 31,
1999 is as follows:
<CAPTION>
                                                   Options Outstanding                        Options Exercisable
                                          ---------------------------------------------     -----------------------
                                                           Weighted
                                                           Average            Weighted                    Weighted
                                                          Remaining           Average                      Average
                       Range of             Number       Contractual          Exercise        Number       Exercise
                  Exercise  Prices        Outstanding        Life              Price        Exercisable      Price
                  --------  ------        -----------    -------------       ----------     -----------      -----
                   <S>       <C>               <C>            <C>               <C>             <C>           <C>
                  $3.08  -  $4.17              3,301       4.97 years        $  4.14           3,301      $   4.14
                    7.50  -  11.50            15,026       7.75                10.52          15,026         10.52
                  14.25  -  19.00             50,795       9.81                16.71          50,795         16.71
                                             -------                                         -------

                  Outstanding at
                     end of year              69,122       9.13 years         $14.76          69,122        $14.76
                                             =======                                         =======
</TABLE>
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F20
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE 15. COMMITMENTS AND CONTINGENCIES

                  The Bank is party to various financial instruments with
                  off-balance sheet risk arising in the normal course of
                  business to meet the financing needs of their customers. Those
                  financial instruments include commitments to extend credit and
                  standby letters of credit. These commitments include standby
                  letters of credit of approximately $1,088, $859, and $2,408,
                  unfunded commitments under lines of credit of $19,067, $16,655
                  and $12,297 and commitments to grant loans of $695, $1,325,
                  and $458 for the years ended December 31, 1999, 1998 and 1997,
                  respectively. These instruments contain various elements of
                  credit and interest rate risk in excess of the amount
                  recognized in the statements of financial condition.

                  The Bank's exposure to credit loss, in the event of
                  non-performance by the other party to the financial instrument
                  for commitments to extend credit and standby letters of
                  credit, is the contractual amount of those instruments. The
                  Bank uses the same credit policies in making commitments and
                  conditional obligations that they do for on-balance sheet
                  instruments.

                  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. The commitments for equity lines of credit
                  may expire without being drawn upon. Therefore, the total
                  commitment amounts do not necessarily represent future cash
                  requirements. The amount of collateral obtained, if it is
                  deemed necessary by the Company, is based on management's
                  credit evaluation of the customer.

                  Unfunded commitments under lines of credit, revolving credit
                  lines and overdraft protection agreements are commitments for
                  possible future extensions of credit to existing customers.
                  These lines of credit are uncollateralized and usually do not
                  contain a specified maturity date and may not be drawn upon to
                  the total extent to which the Company is committed.

                  Standby letters of credit are conditional commitments issued
                  by the Company to guarantee the performance of a customer to a
                  third party. Those letters of credit are primarily issued to
                  support public and private borrowing arrangements. Essentially
                  all letters of credit issued have expiration dates within one
                  year. The credit risk involved in issuing letters of credit is
                  essentially the same as that involved in extending loan
                  facilities to customers. The Company generally holds
                  collateral supporting those commitments if deemed necessary.

                  The Bank has made arrangements with and has available from
                  other corresponding banks, approximately $76,179 of unused
                  lines of credit to fund any necessary cash requirements. The
                  Bank has $18,500 of Federal Home Loan Bank advances
                  outstanding as of December 31, 1999. A specific class of
                  mortgage loans with a balance of $91,999 at December 31, 1999
                  were pledged to the FHLB as collateral.

         NOTE 16. FAIR VALUES OF FINANCIAL INSTRUMENTS

                  The fair value of a financial instrument is the current amount
                  that would be exchanged between willing parties, other than in
                  a forced liquidation. Fair value is best determined based upon
                  quoted market prices. However, in many instances, there are no
                  quoted market prices for the Company's various financial
                  instruments. 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. Accordingly,
                  the fair value estimates may not be realized in an immediate
                  settlement

                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F21
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)

         NOTE 16. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

                  of the instrument. SFAS 107 excludes certain financial
                  instruments and all nonfinancial instruments from its
                  disclosure requirements. Accordingly, the aggregate fair value
                  amounts presented may not necessarily represent the underlying
                  fair value of the Company.

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

                  CASH AND CASH EQUIVALENTS
                  -------------------------

                  The carrying amount reported in the balance sheets for cash
                  and short-term investments approximates fair value.

                  SECURITIES AVAILABLE FOR SALE
                  -----------------------------

                  Fair values for securities, excluding Federal Home Loan Bank
                  stock, are based on quoted market prices. The carrying value
                  of Federal Home Loan Bank stock approximates fair value based
                  on the redemption provisions of the Federal Home Loan Bank.

                  LOANS
                  -----

                  The fair values of loans represent the amount at which the
                  loans of the Bank could be exchanged on the open market, as
                  determined based on the current lending rate for similar types
                  of lending arrangements discounted over the remaining life of
                  the loans.

                  DEPOSITS
                  --------

                  The fair values of deposits represent the amount at which the
                  liabilities of the Bank could be exchanged on the open market,
                  as determined based on the incremental borrowing rate of the
                  Bank for similar types of borrowing arrangements.

                  FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS
                  -------------------------------------------------------

                  The carrying amounts of federal funds purchased, borrowings
                  under repurchase agreements, and other short-term borrowings
                  maturing within ninety days approximate their fair values.
                  Fair values of other short-term borrowings are estimated using
                  discounted cash flow analyses based on the Company's current
                  incremental borrowing rates for similar types of borrowing
                  arrangements.

                  LONG-TERM DEBT AND CAPITAL SECURITIES
                  -------------------------------------

                  Rates currently available to the Company for debt with similar
                  terms and remaining maturities are used to estimate fair value
                  of existing debt.


                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F22
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 16. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

                  OFF-BALANCE-SHEET INSTRUMENTS
                  -----------------------------

                  The amount of off-balance sheet commitments to extend credit,
                  standby letters of credit, and financial guarantees, is
                  considered equal to fair value. Because of the uncertainty
                  involved in attempting to assess the likelihood and timing of
                  commitments being drawn upon, coupled with the lack of an
                  established market and the wide diversity of fee structures,
                  the Company does not believe it is meaningful to provide an
                  estimate of fair value that differs from the given value of
                  the commitment.

                  The carrying amounts and fair values of the Company's
                  financial instruments at December 31 were as follows:
<TABLE>
<CAPTION>
                                                           1999                    1998                   1997
                                                 --------------------      ------------------    -------------------
                                                 Carrying       Fair      Carrying      Fair     Carrying      Fair
                                                 Amount         Value      Amount       Value     Amount       Value
                                                 ------         -----      ------       -----     ------       -----
<S>                                             <C>          <C>         <C>         <C>         <C>        <C>
                  Cash and cash equivalents     $ 13,988     $ 13,988    $  10,994   $  10,994   $  14,925  $  14,925
                  Securities available for sale   70,798       70,798       51,355     51,355       41,963     41,963
                  Loans, net                     259,184      257,737      231,363    234,290      190,369    195,020
                  Deposits                      (306,193)    (306,019)    (272,341)  (273,551)    (236,646)  (237,429)
                  Federal funds purchased         (3,187)      (3,187)        (503)      (503)          -          -
                  Other Short-term borrowings     (8,000)      (8,144)           -          -            -          -
                  Long-term debt                 (10,599)      (9,947)      (6,763)    (6,767)      (2,614)    (2,448)
                  Capital securities              (7,500)      (7,511)      (7,500)    (7,923)           -          -
</TABLE>
         NOTE 17. RELATED PARTY TRANSACTIONS

                  In the normal course of business, the Bank has made loans to
                  its' directors and officers and their affiliates. All loans
                  and commitments made to such officers and directors and to
                  companies in which they are officers or have significant
                  ownership interest have been made on substantially the same
                  terms, including interest rates and collateral, as those
                  prevailing at the time for comparable transactions with
                  unrelated persons, and did not, in the opinion of management,
                  involve more than normal credit risk or present other
                  unfavorable features. The activity of such loans are
                  approximately as follows:


                                                  1999         1998        1997
                                                -------      -------     ------

                  Balance, beginning           $ 6,657      $ 5,766     $ 5,541
                  Loan additions                 4,698        3,652       3,889
                  Amounts collected            ( 3,588)     ( 2,761)    ( 3,664)
                                               -------      -------     -------

                  Balance, ending              $ 7,767      $ 6,657     $ 5,766
                                               =======      =======     =======

                  Unused Commitments          $    315     $    410    $    216
                                              ========     ========    ========
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F23
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 18. RESTRICTIONS ON CASH

                  The Bank is required to maintain reserve balances in cash with
                  the Federal Reserve Bank. The total of those reserve balances
                  at December 31, 1999, 1998 and 1997 were $2,109, $1,239 and
                  $1,034, respectively.


         NOTE 19. UNDIVIDED PROFITS AND CAPITAL

                  Banking laws and regulations limit the amount of dividends
                  that may be paid without prior approval of the Bank's
                  regulatory agency. Under that limitation, the Company could
                  have declared dividends of $4,256, $2,939 and $3,534 in 1999,
                  1998 and 1997 respectively. The Company paid dividends of $150
                  and $123 or $.12/share and $.10/share in 1999 and 1998,
                  respectively. The Company declined to pay cash dividends for
                  1997, in order to maintain the capital necessary to support
                  the present rate of growth.

                  The Company and the Bank are subject to various regulatory
                  capital requirements administered by its primary regulator,
                  the Federal Reserve Board. Failure to meet the minimum
                  regulatory capital requirements can initiate certain mandatory
                  and possible additional discretionary actions by regulators,
                  that if undertaken, could have a direct material effect on the
                  Company and Bank and the consolidated financial statements.
                  Under the regulatory capital adequacy guidelines and the
                  regulatory framework for prompt corrective action, the Company
                  and the Bank must meet specific capital guidelines involving
                  quantitative measures of their assets, liabilities, and
                  certain off-balance-sheet items as calculated under regulatory
                  accounting practices. The capital amounts and classification
                  under the prompt corrective action guidelines are also subject
                  to qualitative judgments by the regulators about components,
                  risk weightings, and other factors. Prompt corrective action
                  provisions are not applicable to bank holding companies.

                  Quantitative measures established by regulation to ensure
                  capital adequacy require the Company and the Bank to maintain
                  minimum amounts and ratios of total risk-based capital and
                  Tier I capital to risk-weighted assets (as defined in the
                  regulations), and Tier I capital to adjusted total assets (as
                  defined). Management believes, as of December 31, 1999, 1998,
                  and 1997, that the Company and the Bank met all the capital
                  adequacy requirements to which they are subject.

                  The Company received notification from the Federal Reserve
                  Bank dated December 17, 1999 that as of September 30, 1999 the
                  Bank was categorized as well capitalized under the regulatory
                  framework for prompt corrective action. To remain categorized
                  as well capitalized, the Bank will have to maintain minimum
                  total risk-based, Tier I risk-based, and Tier I leverage
                  ratios as disclosed in the table below. There are no
                  conditions or events since the most recent notification that
                  management believes have changed the Bank's category.


                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F24
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 19. UNDIVIDED PROFITS AND CAPITAL (CONTINUED)

                  The Parent company's actual and required capital amounts and
ratios are as follows:
<TABLE>
<CAPTION>
                                                                                                            To be Well Capitalized
                                                                                                          under the Prompt
                                                                                       For Capital         Corrective Action
                                                                 Actual           Adequacy Purposes          Provisions
                                                           Amount      Ratio      Amount       Ratio     Amount      Ratio
                                                           ------      -----      ------       -----     ------      -----
                               <S>                          <C>         <C>         <C>         <C>        <C>        <C>
                  As of December 31, 1999:
                     Total Risk-Based Capital
                          (to Risk-Weighted Assets)        $31,015    2.88%    $19,265      =>8.0%    $24,081    =>10.0%
                     Tier I Capital
                          (to Risk-Weighted Assets)         28,036   11.64%      9,632      =>4.0%     14,449     =>6.0%
                     Tier I Capital
                          (to Adjusted Total Assets)        28,036    7.88%     14,236      =>4.0%     17,795     =>5.0%


                  As of December 31, 1998:
                     Total Risk-Based Capital
                          (to Risk-Weighted Assets)        $27,887   12.79%    $17,447      =>8.0%    $21,808    =>10.0%
                     Tier I Capital
                          (to Risk-Weighted Assets)         24,505   11.24%      8,723      =>4.0%     13,085     =>6.0%
                     Tier I Capital
                          (to Adjusted Total Assets)        24,505    8.09%     12,112      =>4.0%     15,140     =>5.0%


                  As of December 31, 1997:
                     Total Risk-Based Capital
                          (to Risk-Weighted Assets)        $18,334    9.91%    $14,800      =>8.0%    $18,500    =>10.0%
                     Tier I Capital
                          (to Risk-Weighted Assets)         16,698    9.03%      7,400      =>4.0%     11,100     =>6.0%
                     Tier I Capital
                          (to Adjusted Total Assets)        16,698    6.68%      9,994      =>4.0%     12,492     =>5.0%
</TABLE>
                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F25
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 19. UNDIVIDED PROFITS AND CAPITAL (CONTINUED)

                  The Bank's actual and required capital amounts and ratios are
as follows:
<TABLE>
<CAPTION>
                                                                                                       To be Well Capitalized
                                                                                                          under the Prompt
                                                                                      For Capital         Corrective Action
                                                                 Actual           Adequacy Purposes          Provisions
                                                           Amount      Ratio      Amount       Ratio     Amount      Ratio
                                                           ------      -----      ------       -----     ------      -----
                               <S>                          <C>         <C>         <C>         <C>        <C>        <C>
          As of December 31, 1999:
             Total Risk-Based Capital
               (to Risk-Weighted Assets)                  $24,898      10.49%     $18,995      =>8.0%     $24,744    =>10.0%
             Tier I Capital
               (to Risk-Weighted Assets)                   22,410       9.44%       9,498      =>4.0%      14,247    => 6.0%
             Tier I Capital
               (to Adjusted Total Assets)                  22,410       6.40%      14,010      =>4.0%      17,512    => 5.0%


          As of December 31, 1998:
             Total Risk-Based Capital
               (to Risk-Weighted Assets)                  $21,241      10.15%     $17,232      =>8.0%     $21,054    =>10.0%
             Tier I Capital
               (to Risk-Weighted Assets)                   19,865       9.22%       8,616      =>4.0%      12,924    => 6.0%
             Tier I Capital
               (to Adjusted Total Assets)                  19,865       6.69%      11,875      =>4.0%      14,844    => 5.0%


          As of December 31, 1997:
             Total Risk-Based Capital
               (to Risk-Weighted Assets)                  $17,874       9.74%     $14,686      =>8.0%     $18,358    =>10.0%
             Tier I Capital
               (to Risk-Weighted Assets)                   16,238       8.85%       7,343      =>4.0%      11,015    => 6.0%
             Tier I Capital
               (to Adjusted Total Assets)                  16,238       6.53%       9,942      =>4.0%      12,427    => 5.0%


         NOTE 20. OTHER OPERATING EXPENSES

                  Other operating expenses consist of the following:
<CAPTION>
                                                                          1999              1998               1997
                                                                        -------           -------           -------

                          <S>                                               <C>              <C>               <C>
                  Professional services                                $     220        $     228         $     230
                  FDIC insurance                                              32               67                24
                  Postage and freight                                        322              287               287
                  Regulatory agency assessments                               52               45                40
                  Supplies                                                   268              216               183
                  Bank stock tax                                             167              146               151
                  Other                                                    1,139              844               426
                                                                       ---------        ---------         ---------

                                                                       $   2,200        $   1,833         $   1,341
                                                                       =========        =========         =========
</TABLE>
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F26
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 21. SUBSEQUENT EVENTS

                  In January 2000, the Company purchased an option on real
                  estate in Boone, NC for $15. The Company has 120 days to
                  purchase the property for an additional $880 before the option
                  expires. The property will be used as a future expansion site
                  of the Company.


         NOTE 22. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

                  The condensed financial statements below relate to Highlands
                  Bankshares, Inc., as of December 31, 1999, 1998 and 1997 and
                  for the years then ended. Highlands Bankshares, Inc., was
                  formed December 29, 1995 and exchanged common stock for the
                  common stock of Highlands Union Bank.

                  CONDENSED BALANCE SHEETS
                  ------------------------
<TABLE>
<CAPTION>
                                                                           1999             1998              1997
                                                                       ---------        ---------         --------
                    <S>                                                     <C>             <C>               <C>
                  ASSETS
                    Cash                                              $      887      $       202      $          1
                    Investment securities available
                      for sale                                             1,059            2,480                 -
                    Loans, net of allowance for loan losses
                      of $6                                                2,552                -                 -
                    Federal funds sold                                         -            1,670                 -
                    Investments in subsidiaries                           21,794           19,772            16,343
                    Premises and equipment, net                            1,381            1,402             1,276
                    Other assets                                             381              406                86
                                                                     -----------      -----------      ------------

                            Total Assets                                $ 28,054         $ 25,932          $ 17,706
                                                                        ========         ========          ========

                  LIABILITIES AND STOCKHOLDERS' EQUITY
                    Interest, taxes and other
                       liabilities                                    $      146       $      153       $        23
                    Long-term debt                                             -                -               886
                    Capital securities                                     7,500            7,500                 -
                                                                       ---------       ----------     -------------
                            Total Liabilities                              7,646            7,653               909
                                                                       ---------       ----------        ----------

                  STOCKHOLDERS' EQUITY
                    Common stock                                           3,280            3,116             3,081
                    Additional paid-in capital                             5,768            5,265             5,271
                    Retained earnings                                     11,979            9,998             8,341
                    Accumulated other comprehensive income (loss)         (  619)         (   100)              104
                                                                       ---------       ----------        ----------

                            Total Stockholders' Equity                    20,408           18,279            16,797
                                                                       ---------       ----------     -------------
                              Total Liabilities and
                             Stockholders' Equity                       $ 28,054         $ 25,932          $ 17,706
                                                                        ========         ========          ========
</TABLE>
                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F27
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 22. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)

                  CONDENSED STATEMENTS OF INCOME
                  ------------------------------
<TABLE>
<CAPTION>
                                                                          1999              1998              1997
                                                                      ----------         ----------       --------
                    <S>                                                    <C>                <C>              <C>
                  Revenues                                           $     427          $     373        $     102
                  Long-term debt interest expense                            -            (    9)           (   61)
                  Capital securities expense                              (685)           (  672)               -
                  Operating expense                                       (155)           (   68)           (   57)
                                                                     ---------         ----------       ----------
                                                                          (413)           (  376)           (   16)

                  Income tax (expense) benefit                             140                128                5
                  Equity in undistributed earnings of subsidiary         2,404              2,023            1,963
                                                                       -------           --------         --------

                  Net income                                          $  2,131           $  1,775         $  1,952
                                                                      ========           ========         ========
</TABLE>



                                   (Continued)
<PAGE>
                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F28
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                 (In thousands)


         NOTE 22. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)

                  CONDENSED STATEMENTS OF CASH FLOWS
                  ----------------------------------
<TABLE>
<CAPTION>
                                                                                 1999            1998           1997
                                                                               ----------    -------------    -----------
                            <S>                                                   <C>              <C>             <C>
                  CASH FLOWS FROM OPERATING ACTIVITIES:
                    Net income                                                $  2,131        $   1,775       $    1,952
                    Adjustments to reconcile net income to
                     net cash provided by operating activities:
                        Allowance for loan losses                                    6                -
                        Depreciation and amortization                               47               42               25
                        Provision for deferred income taxes                     (    1)          (    3)               -
                        Equity in undistributed earnings of
                         Subsidiary                                             (2,404)          (2,023)          (1,963)
                        Net amortization on securities                              20               25                -
                        (Increase) decrease in other assets                        (93)          (  110)          (   69)
                        Increase (decrease) in other liabilities                    (6)             130               25
                                                                               ----------    -------------    -----------
                        Net cash provided by operating activities               (  300)          (  164)          (   30)
                                                                               ----------    -------------    -----------
                  CASH FLOWS FROM INVESTING ACTIVITIES:
                   Securities available for
                    sale:
                        Proceeds from sale of securities                         1,360            1,072                -
                        Purchase of securities                                       -           (3,586)               -
                    Net (increase) decrease in federal funds sold                1,670           (1,670)               -
                    Net (increase) in loans                                     (2,558)               -                -
                    Premises and equipment expenditures                             (4)          (  152)          (1,154)
                                                                               ----------    -------------    -----------
                        Net cash provided by investing activities                  468           (4,336)          (1,154)
                                                                               ----------    -------------    -----------
                  CASH FLOWS FROM FINANCING ACTIVITIES:
                    Proceeds from issuance of long-term debt                         -                -              900
                    Repayment of long-term debt                                      -           (  886)          (   14)
                    Proceeds from issuance of junior subordinated-
                      debt securities                                                -            7,500                -
                    Capital securities issuance cost                                 -           (  319)          (   68)
                    Cash dividends paid                                           (150)          (  123)               -
                    Proceeds from issuance of common stock                         667               29              111
                    Purchase of subsidiary stock                                     -           (1,500)          (   75)
                                                                               ----------    -------------    -----------

                        Net cash provided by financing activities                  517            4,701              854
                                                                               ----------    -------------    -----------
                        Net increase (decrease) in cash and cash equivalents       685              201           (  330)

                    CASH AND CASH EQUIVALENTS
                      AT BEGINNING OF YEAR                                         202                1              331
                                                                               ----------    -------------    -----------
                    CASH AND CASH EQUIVALENTS
                       AT END OF YEAR                                          $   887         $    202        $       1
                                                                               ==========    =============    ===========
</TABLE>