<PAGE>

                      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, 2000                               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, 2000, there were 2,636,924 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, 2000.

(2)  Part III incorporates by reference from the registrant's proxy statement
     for its Annual Meeting of Stockholders scheduled for May 9, 2001.

(3)  Part IV incorporates by reference from:  (i) the registrant's Annual Report
     to Stockholders for the fiscal year ended December 31, 2000, and (ii) the
     registrant's proxy statement for its Annual Meeting of Stockholders
     scheduled for May 9, 2001.

The exhibit index is located on page 26.

                                       2

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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, 2000, the Corporation had total assets of $405,212,000,
deposits of $346,315,000, and net worth of $24,183,000.

     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 and
Tennessee. The Corporation also lends funds to retail banking customers by means
of home equity and installment loans, and originates residential construction
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, 2000. 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, 2000 include: cash in
bank of approximately $551 thousand; building and land with a net book value of
approximately $1.4 million; approximately $3.7 million in loan participations
from the subsidiary bank; approximately $151 thousand in investment securities;
approximately $383 thousand in other assets; and its investment in subsidiaries,
approximately $25.6 million. The Corporation's only material liability is the
note payable on the trust preferred debentures issued in January of 1998, $7.5
million.

                                       3

<PAGE>

     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, 2000 and is anticipated to become fully
operational during 2001. This entity will be used to sell insurance services
through the Bankers' Insurance, LLC.

     As of December 31, 2000 the Corporation operates seven full service and one
express facility throughout Washington County, Virginia, the City of Bristol,
Virginia, Marion, Virginia, Glade Spring, Virginia, and Rogersville, Tennessee.
The Corporation also operates twenty-three off-site ATM's throughout the service
areas listed above as well as Russell County and Wythe County, Virginia. On
January 16, 2001 the Bank opened a full service branch located in Boone, North
Carolina.

     The results of operations for the fiscal years ended December 31, 2000,
1999, and 1998 ("fiscal year 2000", "fiscal year 1999" and "fiscal year 1998",
respectively) reflect the Corporation's strategies of expanding its community
banking operations.

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 Bank'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 4% lifetime cap over the
initial rate of the loan is included in the one, three and five year adjustable
rate mortgages.

     The Bank'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 Bank'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 Bank'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 Bank'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.

                                       4

<PAGE>

     It is generally the Bank'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 Bank 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 2000 the Bank'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 Bank 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 Bank 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 36.93% of the loan portfolio as of December 31, 2000.

Construction and Commercial Real Estate Lending
-----------------------------------------------

     The Bank 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, 2000 outstanding construction loans (net of
undisbursed funds) totaled $4,083,000. 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 Bank 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 $64,734,000 or 22.18% of total loans held for investment at December 31,
2000.

     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.

                                       5

<PAGE>

Consumer lending
----------------

     The Bank 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 Bank 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, 2000 were
$70,402,000.

Commercial and agriculture non-real estate loans
------------------------------------------------

     The Bank 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 Bank. Agriculture loans are
generally secured by machinery, equipment, other miscellaneous assets or
unsecured in keeping with the underwriting standards of the Bank. 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 $36,541,000 at
December 31, 2000 and the outstanding balance of non-real estate agriculture
loans was $3,214,000 at December 31, 2000.

                                  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, 2000 the Corporation's mortgage-backed securities portfolio had a
carrying value of $61,002,000 or 15.05% of total assets compared to $51,099,000
or 14.26% of total assets at December 31, 1999. Amortized costs of mortgage-
backed securities were $61,094,000 at December 31, 2000 and $51,594,000 for the
comparable 1999 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.

     The Corporation also holds investments in CMO's with a market value at
December 31, 2000 of $1,406,000 and amortized cost of $1,421,000 compared to a
market value of $11,170,000 and amortized cost of $11,240,000 at December 31,
1999.

     The Corporation held no investments in United States Treasury Notes for the
comparable periods ending December 31, 2000 and December 31, 1999.

                                       6

<PAGE>

     The Corporation had $4,084,000 and $4,206,000 in United States Government-
sponsored Agency Obligations at December 31, 2000 and 1999 respectively. These
investments represent approximately 1.01% and 1.17% 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, 2000 and 1999
respectively; Federal Home Loan Bank Stock of $1,533,400 and $1,245,100 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 $13,816,000
and $2,258,000 as of December 31, 2000 and 1999 respectively. These investments
represented approximately 3.41% and 0.63% 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 that 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 banks, 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

                                       7

<PAGE>

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.

The following table sets forth the various types of accounts offered by the
Corporation at December 31, 2000:

                             Weighted
                             Average            Minimum   Amount
                             Interest           Balance     In         % of
Type of Account              Rate       Term    Deposit   Thousands    Total
---------------              ----       ----    -------   ---------    -----

Checking Account             0.00%      none    $100.00   $ 45,343     13.09%
Interest Checking            3.52       none     100.00     19,248      5.56
Passbook Accounts            4.01       none      25.00     45,754     13.21
Money Market
    Deposit Accounts         3.79       none     500.00      6,449      1.86
Christmas Club Accts         4.00       none       5.00         72      0.02
Individual Retirement
    Accounts                 6.54       various  500.00     34,054      9.83
Certificates of Deposit
    Accounts                 5.99       various  500.00    195,395     56.42
                                                          --------     -----

Totals                                                    $346,315    100.00%
                                                          --------    ------

     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)                                2000      1999      1998
--------------                                ----      ----      ----

Increase (decrease) in deposits before
   interest credited back to accounts     $ 30,493  $ 22,698  $ 28,880
Interest credited back to accounts           9,629    11,154     6,815
                                          --------  --------  --------

Net increase in deposits                    40,122    33,852    35,695
                                          --------  --------  --------

Total deposits at year end                $346,315  $306,193  $272,341
                                          --------  --------  --------

                                       8
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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 advances have from time to 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 its
correspondent banks. At December 31, 2000 the Bank had approximately $83,356,000
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)                            2000     1999     1998
--------------                            ----     ----     ----

Advances from FHLB                     $23,357  $18,500  $ 6,643
Guaranteed preferred beneficial
  interests in corporation's junior
  subordinated debt securities           7,500    7,500    7,500
Other borrowings                           312       99      120
                                       -------  -------  -------
          Total borrowings             $31,169  $26,099  $14,263


                                   Employees
                                   ---------

     The Corporation at December 31, 2000, had 178 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.

                                       9
<PAGE>

                                 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 Bankers' Insurance, LLC. The subsidiary should become fully operational
during 2001.

                         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.

     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 its 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 its 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

                                       10
<PAGE>

change in applicable law or regulation may have a material effect on the
business of the Corporation and its 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) 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.

                                       11
<PAGE>

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, 2000 to be classified as
"well 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

                                       12
<PAGE>

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 institutions 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.

     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

                                       13
<PAGE>

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 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 twenty taxable 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 of the Corporation, exclusive of the Bank.

     See Note 5 to the Consolidated Financial Statements, included as part of
the Annual Report to Stockholders, for additional information regarding the
income taxes of the Company.

                                       14
<PAGE>

Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
--------------------------------------------------------------------------------
Interest Differential
---------------------

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                    2000                             1999                          1998
                                                                      (Dollars in Thousands)

                                         Average              Yield/      Average              Yield/   Average              Yield/
                                         Balance   Interest    Rate       Balance   Interest    Rate    Balance   Interest    Rate
                                         -------   --------    ----       -------   --------    ----    -------   --------    ----
<S>                                     <C>        <C>        <C>       <C>         <C>        <C>     <C>        <C>        <C>
ASSETS
Interest earning assets
(taxable-equivalent
basis (1):

Loans (net of un-
earned discount) (2)                    $ 277,115  $ 25,077    9.05%    $ 246,687    $ 21,873   8.87%  $ 213,069   $ 19,618    9.21%
Securities (3)                             80,315     5,218    6.69        64,475       3,733   5.79      56,757      3,057    5.39
Federal funds sold                          1,834       123    6.68         1,446          65   4.50       4,250        222    5.22
                                        ---------  --------    ----     ---------    --------   ----   ---------   --------    ----
Total interest-earning
assets                                  $ 359,264  $ 30,418    8.51%    $ 312,608    $ 25,671   8.22%  $ 274,076   $ 22,897    8.35%
                                        ---------  --------    ----     ---------    --------   ----   ---------   --------    ----
  LIABILITIES
Interest-bearing
liabilities:

Interest bearing dep.                   $ 283,484  $ 15,610    5.51%    $ 255,385    $ 12,810   5.02%  $ 226,142   $ 12,336    5.46%
Other interest-bearing
liabilities                                31,169     2,090    6.71        19,262       1,357   7.05      13,933      1,065    7.64
                                        ---------  --------    ----     ---------    --------   ----   ---------   --------    ----
Total interest-bearing
liabilities                             $ 314,653  $ 17,700    5.63%    $ 274,647    $ 14,167   5.16%  $ 240,075   $ 13,401    5.58%
                                        ---------  --------    ----     ---------    --------   ----   ---------   --------    ----
Net interest income                                $ 12,718                          $ 11,504                      $  9,406
Net margin on int.
earning assets on a
tax equivalent basis                                           3.59%                            3.70%                          3.46%
Average interest
spread                                                         2.89%                            3.06%                          2.77%
</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


          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
rates. Dollar changes have been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                               2000 Compared to 1999                             1999 Compared to 1998

                                    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)
----------------------               ------           ----           ----------         ------            ----         ----------
<S>                              <C>              <C>               <C>            <C>               <C>              <C>
INTEREST INCOME
Securities....................      $  1,000         $  485           $   1,485       $     449         $     227      $     676
Federal funds sold......                  17             41                  58            (146)              (11)          (157)
Loans..........................        2,699            505                3,204           2,979              (724)        2,255
                                    --------         -------          ----------      ----------        ----------     ---------
Total Income Change                 $  3,716         $ 1,031          $    4,747      $    3,282        $     (508)    $   2,774
                                    --------         -------          ----------      ----------        ----------     ---------

INTEREST EXPENSE
Savings and time
 deposits....................       $  1,410         $ 1,390          $    2,800      $    1,469        $     (995)    $     474
Other interest-bearing
 liabilities..................           838            (105)                733             374               (82)          292
                                    --------         -------          ----------      ----------        ----------     ---------
Total Expense Change                $  2,248         $ 1,285          $    3,533      $    1,843        $   (1,077)    $     766
                                    --------         -------          ----------      ----------        ----------     ---------
Increase (Decrease) in
 Net Interest Income                $  1,468         $  (254)         $    1,214      $    1,439        $      569     $  2,008
                                    --------         -------          ----------      ----------        ----------     ---------
</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, 2000.

<TABLE>
<CAPTION>
                                                                      (Dollars in Thousands)
                                              One Year    Five Years
                           Within One         Through       Through      After Ten               Total Book      Market
                              Year           Five Years    Ten Years       Years       Yield        Value        Value
                              ----           ----------    ---------       -----       -----        -----        -----
<S>                        <C>               <C>           <C>           <C>        <C>          <C>          <C>
U.S. Gov Agency               $   136        $    4,217    $   1,759     $ 60,380       6.53%    $  66,600    $  66,492
State & Muni's                     -0-              986          952       11,878       7.71        13,403       13,816
Other                              -0-               -0-          -0-       2,324       8.14         2,384        2,324
                              -------        ----------    ---------     --------    -------     ---------    ---------
TOTAL                         $   136        $    5,203    $   2,711     $ 74,582       6.72     $  82,387    $  82,632
                              -------        ----------    ---------     --------    -------     ---------    ---------
</TABLE>

                                       16
<PAGE>

Loan Portfolio
--------------

          The table below classifies loans, net of unearned income, by major
category and percentage distribution at December 31, 2000 for each of the past
three years:

<TABLE>
<CAPTION>
                                      December 31,
                                 (Dollars in thousands)
                       2000                    1999                   1998

Description     Amount    Percentage    Amount    Percentage    Amount    Percentage
-----------    ---------  ----------   ---------  ----------   ---------  ----------
<S>            <C>        <C>          <C>        <C>          <C>        <C>

Commercial      $ 36,541       12.52%   $ 27,055       10.34%   $ 24,235       10.38%
Real Estate      181,931       62.33     163,317       62.41     136,184       58.37
Consumer          70,211       24.05      68,091       26.02      70,132       30.05
Other              3,214        1.10       3,215        1.23       2,821        1.20
                --------      ------    --------      ------    --------      ------
  Total         $291,897      100.00%   $261,678      100.00%   $233,372      100.00%
                --------      ------    --------      ------    --------      ------
</TABLE>

          The following table shows the maturity of loans outstanding, inclusive
of contractual amortization as of December 31, 2000. Loans are classified based
upon the period in which the final payment is due.

<TABLE>
<CAPTION>
                                                December 31, 2000
                                              (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>       <C>
Commercial          $14,182       $ 8,369   $ 11,300    $  905   $ 1,785   $   -0-    $ 36,541
Real Estate          21,819         7,666     67,062     6,408    27,793    51,183     181,931
Consumer             22,617         1,242     44,589        22     1,733         8      70,211
Other                   870         1,137      1,044        86        77       -0-       3,214
                    -------       -------   --------    ------   -------   -------    --------
Total               $59,488       $18,414   $123,995    $7,421   $31,388   $51,191    $291,897
                    -------       -------   --------    ------   -------   -------    --------

</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

                                       17
<PAGE>

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, 2000, 1999 and 1998, non-accrual loans amounted
to $929,000, $1,152,000 and $1,396,000, respectively. Interest income lost on
non-accruing loans was approximately $121,000, $136,000, and $146,000 for
December 31, 2000, 1999, and 1998 respectively.


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:

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                        (Dollars in Thousands)
                                                          2000              1999          1998
                                                          ----              ----          ----
<S>                                                   <C>               <C>            <C>
Allowance for loan losses at
 beginning of year                                     $   2,494         $  2,008       $  1,636

Loans charged off:
    Commercial                                                69              357            270
    Real Estate                                               -0-              27             -0-
    Consumer                                                 925              710            787
    Other                                                     -0-              -0-            -0-
                                                       ----------        ---------      ---------
    Total                                              $     994         $  1,094       $  1,057
                                                       ----------        ---------      ---------
Recoveries of loans previously charged off:
    Commercial                                         $       6               97             41
    Real Estate                                               -0-              -0-            -0-
    Consumer                                                 167               65            158
    Other                                                     -0-              -0-            -0-
                                                       ----------        ---------      ---------
    Total                                              $     173         $    162       $    199
                                                       ----------        ---------      ---------
Net loans charged off                                  $     821         $    932       $    858
Provision for loan losses                                  1,277            1,418          1,230
                                                       ----------        ---------      ---------
Allowance for loan losses end of year                  $   2,950         $  2,494       $  2,008
                                                       ----------        ---------      ---------
Average total loans (net of unearned income)           $ 277,115         $246,687       $213,069
Total loans (net of unearned income) at year-end       $ 291,897         $261,678       $233,372

Ratio of net charge-offs to average loans                  0.296%           0.378%         0.403%
Ratio of provision for loan losses to average loans        0.461%           0.575%         0.577%
Ratio of provision for loan losses to net charge-off     155.542%         152.146%       143.357%
Allowance for loan losses to year-end loans                1.011%           0.953%         0.860%
</TABLE>

                                       18
<PAGE>

Allocation of the allowance for loan losses
-------------------------------------------

  The following table provides an allocation of the allowance for loan losses as
of December 31, 2000

                          Year Ended December 31, 2000
                       Percent of Loans on each category

                             (Dollars in Thousands)

                    Allowance for    Percentage of        Percentage of
                    Loan Loss        Total Loan Loss      Total Loans
                    ----------       ---------------      -----------
Commercial          $   739                 25.06%               12.52%
Real Estate             174                  5.89                62.33
Consumer              2,033                 68.93                24.05
Other                     4                  0.12                 1.10
                    --------         ------------         -------------
 Total              $ 2,950                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)

                                             2000       1999       1998

                                         --------   --------   --------
Non-interest bearing demand deposits     $ 45,343   $ 39,504   $ 36,187
Interest bearing demand deposits           25,697     26,074     21,936
Savings deposits                           45,826     44,751     35,640
Time deposits                             229,449    195,864    178,578
                                         --------   --------   --------
   Total Deposits                        $346,315   $306,193   $272,341
                                         --------   --------   --------


  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)

                                 2000               1999             1998
                            Amount    Rate    Amount    Rate    Amount    Rate
                           ---------  ----   ---------  ----   ---------  ----

Non-interest bearing       $ 42,228  0.00%   $ 38,651  0.00%   $ 33,671  0.00%
   demand deposits
Interest-bearing demand      25,636  3.52      24,728  3.59      18,239  3.60
   deposits                  47,474  4.01      44,506  4.00      32,681  4.00
Savings deposits            210,374  6.08     186,151  5.45     175,222  5.92
Time deposits              --------          --------          --------

   Total                   $325,712          $294,036          $259,813
                           --------          --------          --------





                                       19
<PAGE>

     The remaining maturities of time deposits at December 31, 2000 are as
follows (in thousands) :

     Maturity

     3 months or less.................................... $  53,876
     Over 3 through 12 months............................   114,665
     Over 12 months......................................    60,908
                                                          ---------

        Total                                             $ 229,449
                                                          ---------

Interest Rate Sensitivity Analysis
----------------------------------

     The following table provides the maturities of investment securities,
loans, and deposits as of December 31, 2000, and measures the interest rate
sensitivity gap for each range of maturity indicated: The amounts below also
reflect various prepayment assumptions.

                               December 31, 2000
                            (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                    $     136         $    5,203           $   77,293        $   82,632
    Fed Funds Sold                               2,782                 -0-                  -0-            2,782
    Loans                                       77,902            131,416               82,579           291,897
Noninterest-bearing
    Other Assets                                12,510                 -0-              15,391            27,901
                                             ---------         ----------           ----------        ----------
Total Assets
                                             $  93,330         $  136,619           $  175,263        $  405,212
                                             ---------         ----------           ----------        ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
    All Interest-bearing Deposits            $ 170,753         $   68,753           $   61,466        $  300,972
    Other Interest-bearing Liab.                 5,184             12,352               13,633            31,169
Noninterest-bearing
    Demand Deposit Non-Interest                     -0-                -0-              45,343            45,343
    Other Liabilities                            3,387                 -0-                 158             3,545
    Shareholders' Equity                            -0-                -0-              24,183            24,183
                                             ---------         ----------           ----------        ----------

Total Liabilities and Shareholders Equity    $ 179,324         $   81,105           $  144,783        $  405,212
                                             ---------         ----------           ----------        ----------

Interest Rate Sensitivity GAP                $ (85,994)        $   55,514           $   30,480        $       -0-
</TABLE>


                                       20
<PAGE>

Return on Equity and Assets
---------------------------

      The following table highlights certain ratios for the periods indicated:

                                                 Year Ended December 31,
                                                       (Percentage)

                                                 2000      1999      1998
Net income to:                                   ----      ----      ----
   Average total assets                          0.78      0.64      0.61
   Average shareholders' equity                 13.69     11.13     10.06

Dividend payout ratio(dividends declared per
   share divided by net income per share)        0.06      0.07      0.07

Average shareholders' equity to average total
   assets ratio                                  5.71      5.71      6.02


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

                                       21
<PAGE>

of trust. The balance on the note as of December 31, 2000 was approximately
$73,000. Also during 1998, the Bank initiated an off premises ATM program. This
program has continued to expand to include 23 offsite ATMs 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, one in Wythe County,
Virginia and one in Hawkins County, Tennessee. 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
Department. The office space not currently being used by the Bank is being
leased to other businesses. This property is free of any liens. On September 23,
2000, the Bank closed on the purchase of a branch office of a bank in
Rogersville, Tennessee. This purchase included all deposit accounts,
approximately $3.9 million, overdraft protection accounts, approximately $54
thousand, specified furniture and equipment, approximately $7 thousand, and the
building and real estate, approximately $639 thousand. The branch office is a
one-story masonry and concrete structure constructed in 1985. The branch is
located at 410 Highway 66 South in Rogersville, Tennessee. This building is
being used as a Highlands Union Bank full service facility with three drive-thru
lanes and a drive-up ATM. The Bank has also purchased a tract of land located at
1250 Volunteer Parkway in Bristol, Tennessee for future expansion. The land is
approximately 1.08 +/-Acres and is currently zoned B-3. This property is free of
any liens. The Bank also purchased a tract of land located off of Highway 11W in
Bristol, Tennessee, known as Bristol West Development, for future expansion. The
land is approximately 1/2 acre and is currently zoned B-3. This property is free
of any liens. The Bank also purchased a lot in Boone, North Carolina for a
branch site. This 1.293 acre tract is located on Highway 105 in the Town of
Boone. During 2000 the Bank began construction of a two-story brick building
that will open as a full service branch of the Bank in January of 2001. The
Seller of this property originally financed $250,000 of the purchase price of
the land. The balance of this note as of December 31, 2000 was approximately
$237 thousand

     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.

                                       22
<PAGE>

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, 2000.

                                   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, 2000 the Corporation has approximately 1,130
stockholders of record. The Corporation acts as its 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 its 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 2000. 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 2000

                                                           Quarterly
                                                           ---------
                                 High          Low          Average
                                 ----          ---          -------
First Quarter                   $24.00        $22.00         $22.71

Second Quarter                  $27.00        $24.00         $19.40

Third Quarter                   $25.00        $25.00         $25.00

Fourth Quarter                  $25.00        $25.00         $25.00

     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, operating costs, overall financial condition and
capital requirements and upon general business conditions.  The Corporation
declared and paid cash dividends of $185,000 or $0.07 per share during 2000.

     At December 31, 2000, there were approximately 1,130 holders of the
Corporation's common stock (based on the number of record holders as of that
date).

                                       23
<PAGE>

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>
                                         2000        1999            1998        1997            1996
                                         ----        ----            ----        ----            ----
<S>                                   <C>          <C>            <C>            <C>            <C>
Income Statement Amounts:

    Gross interest income             $  30,418    $ 25,671       $ 22,897       $ 18,781      $ 14,612
    Gross interest expense               17,700      14,167         13,401         10,321         7,822
    Net interest income                  12,718      11,504          9,496          8,460         6,790
    Provision for possible loan
      Losses                              1,277       1,418          1,230          1,002           374
    Net interest income after
      provision                          11,441      10,086          8,266          7,458         5,416
    Other operating income                2,480       1,353          1,367            842           644
    Other operating expense               9,713       8,187          6,962          5,382         4,439
    Income before income taxes
      and other items                     4,208       3,252          2,671          2,918         2,621
    Income taxes                          1,229       1,121           896             966           857
    Income before cumulative
      effect of change in
      accounting principles               2,979       2,131          1,775          1,952         1,764
    Cumulative effect of change
      in accounting principles               -0-         -0-            -0-            -0-           -0-
    Net income                        $   2,979    $  2,131       $  1,775       $  1,952         1,764

Per Share Data (1):

    Net income per share              $    1.13    $   0.85       $   0.72       $   0.80      $   0.72
    Cash dividends per share               0.07        0.06           0.05             -0-           -0-
    Book value (at year end)               9.17        7.77           7.33           6.82          5.98

Balance Sheet Amounts (at year-end):

    Total assets                      $ 405,212    $358,348       $307,764       $258,236      $207,739
    Total loans (net of unearned
      income)                           291,897     261,678        233,371        192,005       154,951
    Total deposits                      346,315     306,193        272,341        236,646       189,471
    Long-term debt                       18,669      10,599          6,763          2,614            -0-
     Guaranteed preferred
      beneficial interests in
      junior subordinated debt
      securities                          7,500       7,500          7,500            -0-           -0-
    Total equity                         24,183      20,408         18,279         16,802        14,617
</TABLE>

     (1)  Adjusted for 1999 and 1995 two-for-one stock splits, 1992 25% stock
dividend and 1990 20% stock dividend.



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, 2000.

                                       24
<PAGE>

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, 2000.

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 2001 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
2001 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 2001 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 2001 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,
               2000, 1999 and 1998

                                       25
<PAGE>

               Consolidated Statements of Operations for each of the years in
               the three year period ended December 31, 2000

               Consolidated Statements of Stockholder's Equity for each of the
               years in the three year period ended December 31, 2000

               Consolidated Statements of Cash Flows for each of the years in
               the three year period ended December 31, 2000

               Notes to Consolidated Financial Statements for December 31, 2000,
               1999 and 1998

               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.

                                       26
<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:  February 4, 2001                 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 26, 2001.

          Signature                          Title
          ---------                          -----

/s/ James D Morefield     03-26-01
----------------------------------
James D. Morefield        Date          Chairman of the Board, and Director


/s/ James D. Morre, Jr.   03-26-01
----------------------------------
Dr. James D. Moore, Jr.   Date          President


/s/ J. Carter Lambert     03-26-01
----------------------------------
J. Carter Lambert         Date          Vice Chairman


/s/ Samuel L. Neese       03-26-01
----------------------------------
Samuel L. Neese           Date          Executive Vice President, and Chief
                                        Executive Officer

/s/ James T. Riffe        03-26-01
----------------------------------
James T. Riffe            Date          Executive Vice President and Cashier


/s/ William E. Chaffin    03-26-01
----------------------------------
William E. Chaffin        Date          Director


/s/ V. D. Kendrick        03-26-01
----------------------------------
V.D. Kendrick             Date          Director


/s/ Clydes B. Kiser       03-26-01
----------------------------------
Clydes B. Kiser           Date          Director


/s/ Charles P. Olinger    03-26-01
----------------------------------
Charles P. Olinger        Date          Director


/s/ William J. Singleton  03-26-01
----------------------------------
William J. Singleton      Date          Director


/s/ H. Ramsey White, Jr.  03-26-01
----------------------------------
Dr. H. Ramsey White, Jr.  Date          Director

                                       27
<PAGE>

                             FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
Results of Operations                                 2000             1999             1998            2000/1999     1999/1998
                                                   (In Thousands except share and per share data)                 Percentage Change
<S>                                                   <C>              <C>              <C>             <C>           <C>
Net Interest Income                                   $ 12,718         $ 11,504         $  9,496            10.55%        21.15%
Net Income (Loss)                                        2,979            2,131            1,775            39.79         20.06

Financial Condition at Year-End

Assets                                                $405,212         $358,348         $307,764            13.08%        16.44%
Loans                                                  291,895          261,678          233,371            11.55         12.13
Securities                                              82,631           70,798           51,355            16.71         37.86
Deposits                                               346,315          306,193          272,341            13.10         12.43
Stockholders' Equity                                    24,183           20,408           18,279            18.50         11.65
Shares Outstanding                                       2,637            2,624            2,494             0.50          5.21

Significant Ratios

Return on average assets                                  0.78%            0.64%            0.61%           21.88%         4.92%
Return on average equity                                 13.69            11.13            10.06            23.00         10.64
Average stockholders' equity to
    average assets                                        5.71             5.71             6.02             0.00         (5.15)
Allowance for loan losses as a
    percentage of total loans                             1.01             0.95             0.86             6.32         10.47
Non-performing loans to total loans                       0.51             0.63             0.87           (19.05)       (27.59)

Per Share Data
Based on weighted-average shares
    outstanding
Net Income                                            $   1.13         $   0.85         $   0.72            32.94%        18.06%
Stockholders' equity (book value)
    per shares outstanding at
    year-end                                              9.17             7.77             7.33            18.03          6.00
</TABLE>
<PAGE>

April 2, 2001



Dear Shareholders:

The Year 2000 was not only the beginning of a new century, it was also a year of
unusual significance and importance for Highlands Bankshares, Inc., and its
subsidiary company, Highlands Union Bank.  2000 was a year of record earnings,
extended boundaries, new services, and continued growth and expansion for your
company.

Results of operation for 2000 reflect an increase in assets of $46,865,000, or
13.08 percent; gross loans increased by $30,217,000, or 11.55 percent; and
deposits increased by $40,122,000, or 13.10 percent.  It was another record year
for earnings.  Net income was $2,979,000 or an increase of  39.79 percent.
Return on equity was 13.69 percent compared to 11.13 percent in 1999, or an
increase of 23 percent.  Return on assets was .78 percent compared to .64
percent in 1999, or an increase of 21.88 percent.  Earnings per share were $1.13
compared to $0.85 in 1999, or an increase of 32.9 percent. Shareholders' equity
(book value) per share outstanding at year end was $9.17 compared to $7.77 at
year end 1999, or an increase of 18.03 percent.

As you can see, the growth experienced by your company in previous years
continued markedly  in 2000.  Additionally, we are pleased to report that
Highlands Union's market share continued to increase in each of the communities
we serve.

Stretching the Boundaries
One of the highlights of the year was Highlands Union's breaking of geographic
barriers - into two new states, Tennessee and North Carolina.  In June, we
announced that the bank had entered into an agreement to purchase the
Rogersville, Tenn., branch of First Vantage Bank.  This purchase was completed
September 23, 2000.  The new location is now successfully operating as Highlands
Union Bank.  Under Tennessee law, this acquisition gives Highlands Union Bank
the ability to expand into other Tennessee markets.

In addition to the expansion into Tennessee, Highlands Union Bank received
approval on its application to open a branch bank in Boone, N.C.  The
construction of this branch bank was completed in December 2000 and the bank is
now successfully operating as Highland Union Bank.

We are extremely proud of these new locations and the professional staffs
operating them.

These new offices and new venues provide exciting opportunities for growth.  Not
only does the past year's expansion gives us two new communities to serve, it
give us two new states to serve, as well.  Barriers have been crossed.  Your
company is now operating in three states: Virginia, Tennessee, and North
Carolina.

Insuring Customer Needs
Not only has Highlands Union crossed geographic barriers in 2000, but it has
crossed business boundaries, as well. Recent law changes make it possible for
banks to sell insurance products.  In 2000, Highlands Union Bank joined a
consortium of over 60 Virginia Banks for the purpose of acquiring and operating
insurance agencies.
<PAGE>

In the future, this will allow your bank to market and sell insurance products,
such as homeowners, automobile, commercial, and life insurance.  This new
product line should provide additional avenues for enhancing your company's
earnings.

Although these new ventures are very exciting, we continue to focus on serving
our customers, both existing and new, in the manner that they deserve and have
come to expect at Highlands Union Bank.  We continue to focus on providing
friendly personal service, convenient hours, state-of-the-art technology,
expanded ATM networks, full financial services and much more.

Looking and Moving Forward
We look forward to the many new opportunities now available to your company as
the result of initiatives begun in 2000 - a solid market share in the existing
markets, new markets to serve and new products and services to offer.  In the
coming year, we will continue to seek new ways to enhance earnings for our
shareholders.

It has been a particularly eventful year for Highlands Union and Highlands
Bankshares. It has been an exciting year to be leading the company to greater
heights and into new "states of growth."

On behalf of the Directors, Officers and Employees of Highlands Bankshares, Inc,
and Highlands Union Bank, we thank our customers, shareholders and friends for
your continued confidence and support as we grow and move forward.

Sincerely,



_________________________________        ______________________________________
     Samuel L. Neese                                 James T. Riffe
     Chief Executive Officer              Cashier and Chief Operating Officer
<PAGE>

                     COMPARISON OF RESULTS OF OPERATIONS
                FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

Net interest income for the year ended December 31, 2000 increased 10.55%,
approximately $1.21 million over 1999. Average interest earning assets increased
$46.8 million from 1999 to 2000 while average interest bearing liabilities
increased $40.01 million. The yield on average interest earning assets for the
year ended December 31, 2000 was 8.51% compared with 8.22% for the comparable
1999 period. The 2000 yield on average loans increased by 18 basis points to
9.05% as compared to the 1999 period yield of 8.87%. The 2000 yield on average
investments increased .90% to 6.69% from December 31, 1999 to 2000. The yield on
average interest bearing liabilities increased 47 basis points during 2000 to
5.63% as compared to 5.16% during 1999. Net income for the year-ended 2000 was
$2.98 million, an increase of 39.79% over the 1999 period. The Company's change
in methodology of assessing overdraft fees had a significant impact on income
for the year 2000. Income tax expense for 2000 increased 9.67% to $1,229
thousand as compared to $1,121 thousand for the 1999 period.

                     COMPARISON OF RESULTS OF OPERATIONS
                FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

Net interest income for the year ended December 31, 1999 increased 21.15%,
approximately $2.01 million over 1998. Average interest earning assets increased
$38.4 million from 1998 to 1999 while average interest bearing liabilities
increased $34.6 million. The yield on average interest earning assets for the
year ended December 31, 1999 was 8.22% compared with 8.35% for the comparable
1998 period. The 1999 yield on average loans decreased by 34 basis points to
8.87% as compared to the 1998 period yield of 9.21%. The 1999 yield on average
investments increased .40% to 5.79% from December 31, 1998 to 1999. The yield on
average interest bearing liabilities decreased 42 basis points during 1999 to
5.16% as compared to 5.58% during 1998. Net income for the year-ended 1999 was
$2.13 million, an increase of 20.06% over the 1998 period. Income tax expense
for 1999 increased 25% to $1,121 thousand as compared to $896 thousand for the
1998 period.
<PAGE>

                            COMPARISON OF FINANCIAL
                    CONDITION AT DECEMBER 31, 2000 AND 1999

Total assets at December 31, 2000 totaled $405.2 million compared to $358.3
million at December 31, 1999. This 13.08% growth in assets was primarily due to
the large volume of loans originated. Total loans increased 11.55% or $30.2
million over the comparable 1999 period. The security portfolio increased 16.71%
to $82.6 million during 2000 as contrasted to the 1999 period. Total deposits
increased to $346.3 million or 13.10% from 1999's level of $306.2 million.
Stockholders' Equity increased 18.50% during 2000. The Financial Accounting
Standards Board's (FASB) Statement on Accounting Standards No. 115 was
implemented during 1994. FASB's SAS 115 required that all securities classified
as "Available for Sale" be adjusted to market value through the use of a
valuation account and any unrealized (paper) gains or losses be run through the
Stockholders' Equity section of the balance sheet. The effect of SAS 115 caused
a decrease in Stockholders' Equity at December 31, 1999 of $619 thousand, net of
the related deferred tax. As of December 31, 2000, the Corporation's security
portfolio had $162 thousand in unrealized gains, net of deferred taxes. The
Corporation notes that it does have the ability and intent to carry to maturity
the existing $82.6 million of "available for sale" securities.


        COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND 1998

Total assets at December 31, 1999 totaled $358.3 million compared to $307.8
million at December 31, 1998. This 16.44% growth in assets was primarily due to
the large volume of loans originated. Total loans increased 12.13% or $28.3
million over the comparable 1998 period. The security portfolio increased 37.86%
to $70.8 million during 1999 as contrasted to the 1998 period. Total deposits
increased to $306.2 million or 12.43% from 1998's level of $272.3 million.
Stockholders' Equity increased 11.65% during 1999. The Financial Accounting
Standards Board's (FASB) Statement on Accounting Standards No. 115 was
implemented during 1994. FASB's SAS 115 required that all securities classified
as "Available for Sale" be adjusted to market value through the use of a
valuation account and any unrealized (paper) gains or losses be run through the
Stockholders' Equity section of the balance sheet. The effect of SAS 115 caused
a decrease in Stockholders' Equity at December 31, 1998 of $100 thousand, net of
the related deferred tax. As of December 31, 1999, the Corporation's security
portfolio had $619 thousand in unrealized losses, net of deferred taxes. The
Corporation notes that it does have the ability and intent to carry to maturity
the existing $70.8 million of "available for sale" securities.
<PAGE>

                      COMPARISON OF SIGNIFICANT RATIOS AT
                          DECEMBER 31, 2000 AND 1999

Return on average assets increased to .78% for the year-ended December 31, 2000
as compared to .64% for the comparable 1999 period.  The continued growth in
assets, the absorption of the operational costs from the new branch openings,
the costs and interest expense related to the trust preferred securities, and
the addition of over 1.2 million to the allowance for loan loss account all had
a significant impact to this performance ratio. Non Interest Income for the year
2000 increased by approximately 1.13 million over  the prior year. Return on
average equity increased from 11.13% at December 31, 1999 to 13.69% at year-end
1999.  Average Stockholders' Equity to average assets remained at 5.71% at
December 31, 2000.  Non-performing loans to total loans decreased to .51% as of
December 31, 2000 as compared to .63% for the comparable 1999 period.  Allowance
for loan losses as a percentage of total loans increased 6.32% to 1.01% at
December 31, 2000.


        COMPARISON OF SIGNIFICANT RATIOS AT DECEMBER 31, 1999 AND 1998

Return on average assets increased to .64% for the year-ended December 31, 1999
as compared to .61% for the comparable 1998 period. The continued growth in
assets, the absorption of the operational costs from the new branch openings,
the costs and interest expense related to the trust preferred securities, and
the addition of over 1.4 million to the allowance for loan loss account all had
a significant impact to this performance ratio. Return on average equity
increased from 10.06% at December 31, 1998 to 11.13% at year-end 1999. Average
Stockholders' Equity to average assets declined to 5.71% at December 31, 1999
from 6.02% at December 31, 1998. Non-performing loans to total loans decreased
to .63% as of December 31, 1999 as compared to .87% for the comparable 1998
period. Allowance for loan losses as a percentage of total loans increased
10.47% to .95% at December 31, 1999. The decrease in average Stockholders'
Equity to average assets is primarily attributable to the enormous amount of
growth which the Corporation sustained during 1999.
<PAGE>

  COMPARISON OF PER SHARE DATA FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

Net income per share, on a weighted average basis, increased 32.94% to $1.13 at
December 31, 2000 as compared to $.85 for the comparable 1999 period. Book value
per share of common stock increased by 18.03% to $9.17 per share as compared to
$7.77 at December 31, 1999. The Corporation had approximately $162 thousand in
unrealized gains as of December 31, 2000, net of deferred taxes, due to FASB's
SAS 115 which affected the book value computation.


  COMPARISON OF PER SHARE DATA FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

Net income per share, on a weighted average basis, increased 18.1% to $.85 at
December 31, 1999 as compared to $.72 for the comparable 1998 period. Book value
per share of common stock increased by 6.0% to $7.77 per share as compared to
$7.33 at December 31, 1998. The Corporation had approximately $619 thousand in
unrealized losses as of December 31, 1999, net of deferred taxes, due to FASB's
SAS 115 which affected the book value computation.
<PAGE>

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                         CONSOLIDATED FINANCIAL REPORT

                               DECEMBER 31,200O
<PAGE>

                                C O N T E N T S


                                                                         Page

INDEPENDENT AUDITOR'S REPORT                                               Fl

FINANCIAL STATEMENTS                                                       F2
 Consolidated Balance Sheets                                               F3
 Consolidated Statements of Income                                         F4
 Consolidated Statements of Changes in Stockholders' Equity                F5
 Consolidated Statements of Cash Flows                                 F6-F31
 Notes to Consolidated Financial Statements
<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, 2000, 1999 and 1998 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Highlands Bankshares, Inc.'s management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Highlands
Bankshares, Inc. and Subsidiaries as of December 31, 2000, 1999 and 1998 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

1969 Lee Highway
Bristol, VA 24201
January 31, 2001
<PAGE>

                                                                         Page F2


                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       December 31,2000, 1999 and 1998
                                (In thousands)


<TABLE>
<CAPTION>
         ASSETS                                                          2000               1999               1998
                                                                  ----------------     ---------------    -------------
<S>                                                               <C>                  <C>                <C>
Cash and due from banks (Note 17)                                 $       12,510        $    13,988       $     9,324
Federal funds sold                                                         2,782                                1,670
                                                                  ----------------     ---------------    -------------
         Total Cash and Cash Equivalents                                  15,292             13,988            10,994

Investment securities available for sale (Note 2)                         82,632             70,798            51,355
Loans, net of provision for loan losses of $2,950,
  $2,494, and $2,008 in 2000, 1999, and 1998,
  respectively (Note 3 and 14)                                           288,947            259,184           231,363
Premises and equipment, net (Note 4)                                      12,454              9,425             8,270
Interest receivable                                                        2,965              2,155             1,875
Other assets (Notes 5 and 9)                                               2,922              2,798             3,907
                                                                  ----------------     ---------------    -------------
         Total Assets                                             $      405,212        $   358,348       $   307,764
                                                                  ================     ===============    =============

     LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6)
  Noninterest bearing                                             $       45,343        $    39,504       $    36,187
  Interest bearing                                                       300,972            266,689           236,154
                                                                  ----------------     ---------------    -------------
         Total Deposits                                                  346,315            306,193           272,341
                                                                  ----------------     ---------------    -------------

Federal funds purchased                                                        -              3,187               503
Interest, taxes and other liabilities                                      3,545              2,461             2,378
Other short term borrowings (Note 7)                                       5,000              8,000                 -
Long-term debt (Note 8)                                                   18,669             10,599             6,763
Capital securities (Note 9)                                                7,500              7,500             7,500
                                                                  ----------------     ---------------    -------------
                                                                          34,714             31,747            17,144
                                                                  ----------------     ---------------    -------------

         Total Liabilities                                               381,029            337,940           289,485
                                                                  ----------------     ---------------    -------------
STOCKHOLDERS' EQUITY
  Common stock (Notes 11 and 13)                                           3,296              3,280             3,116
  Additional paid-in capital                                               5,952              5,768             5,265
  Retained Earnings                                                       14,773             11,979             9,998
  Accumulated other comprehensive income (loss)                              162               (619)             (100)
                                                                  ----------------     ---------------    -------------
         Total Stockholders' Equity                                       24,183             20,408            18,279
                                                                  ----------------     ---------------    -------------
         Total Liabilities and Stockholders' Equity               $      405,212        $   358,348       $   307,764
                                                                  ================     ===============    =============
</TABLE>

 The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.
<PAGE>

                                                                         Page F3

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                 Years Ended December 31, 2000, 1999 and 1998
                                (In thousands)

<TABLE>
<CAPTION>
INTEREST INCOME                                                2000         1999       1998
                                                            ----------    --------   --------
<S>                                                         <C>           <C>        <C>
  Loans receivable and fees on loans                        $   25,077    $ 21,873   $ 19,618
  Securities available for sale:
     Taxable                                                     4,691       3,667      2,902
     Tax-exempt                                                    527          66        155
  Federal funds sold                                               123          65        222
                                                            ----------    --------   --------
     Total Interest Income                                      30,418      25,671     22,897
                                                            ----------    --------   --------
INTEREST EXPENSE
  Deposits                                                      15,610      12,810     12,336
  Federal funds purchased                                           62          89         58
  Other borrowed funds                                           1,310         573        342
  Long-term1 debt                                                  718         695        665
                                                            ----------    --------   --------
     Total interest expense                                     17,700      14,167     13,401
                                                            ----------    --------   --------
     Net interest income                                        12,718      11,504      9,496

PROVISION FOR LOAN LOSSES                                        1,277       1,418      1,230
                                                            ----------    --------   --------
     Net interest income after provision for loan losses        11,441      10,086      8,266
                                                            ----------    --------   --------

NON-INTEREST INCOME
  Securities gains (losses), net                                   (95)        117        359
  Service charges on deposit accounts                            1,949         706        545
  Other service charges, commissions and fees                      490         344        324
  Other operating income, rents                                    136         186        139
                                                            ----------    --------   --------
     Total Non-Interest Income                                   2,480       1,353      1,367
                                                            ----------    --------   --------
NON-INTEREST EXPENSES
  Salaries and employee benefits (Note 12)                       5,220       4,417      3,785
  Occupancy expense of bank premises                               983         752        487
  Furniture and equipment expense                                  894         864        903
  Other operating expenses (Note 19)                             2,616       2,154      1,787
                                                            ----------    --------   --------
     Total Non-Interest Expenses                                 9,713       8,187      6,962
                                                            ----------    --------   --------
     Income Before Income Taxes                                  4,208       3,252      2,671

  Income Tax Expense (Note 5)                                    1,229       1,121        896
                                                            ----------    --------   --------
     Net Income                                             $    2,979    $  2,131   $  1,775
                                                            ==========    ========   ========
Earnings Per Common Share (Note 11)                         $     1.13    $   0.85   $   0.72
                                                            ==========    ========   ========
Earnings Per Common Share - assuming dilution               $     1.12    $   0.84   $   0.69
                                                            ==========    ========   ========
</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' EQUlTY
                 Years Ended December 31, 2000, 1999 and 1998
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                               Accumulated
                                                                  Additional                     Other          Total
                                         Common Stock              Paid-in        Retained   Comprehensive   Stockholders'
                                         ------------
                                      Shares        Par Value      Capital        Earnings      Income1e         Equity
                                      ------        ---------      -------        --------      -------         ------
<S>                                  <C>            <C>           <C>             <C>        <C>             <C>
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
  net of income tax benefit of $8          -                -             -              -           (24)           (24)
                                                                                                             ----------
     Total comprehensive income            -                -             -              -             -          1,571
                                                                                                             ----------
 Common stock issued for
  stock options exercised                 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,
  net of income tax benefit of $4          -                -             -              -           (11)           (11)
                                                                                                             ----------
     Total comprehensive income            -                -             -              -             -          1,612
                                                                                                             ----------
 Common stock issued for
  stock options exercised                132              164           503              -             -            667
 Cash dividend                             -                -             -           (150)            -           (150)
                                       -----        ---------     ---------       --------   -----------     ----------
Balance, December 31, 1999             2,624        $   3,280     $   5,768       $ 11,979   $      (619)    $   20,408
                                                                                                             ----------
Comprehensive income:
 Net income                                -                -             -          2,979             -          2,979
 Change in unrealized gain
  (loss) on securities available
  for sale, net of deferred
  income tax expense of $402               -                -             -              -           878            878
 Less: reclassification adjustment,
  net of income tax benefit of $33         -                -             -              -           (97)           (97)
                                                                                                             ----------
     Total comprehensive income           -                -             -              -             -          3,760
                                                                                                             ----------
 Common stock issued for
  stock options exercised                 13               16           184              -             -            200
 Cash dividend                             -                -             -           (185)            -           (185)
                                       -----        ---------     ---------       --------   -----------     ----------
Balance, December 31, 2000             2,637        $   3,296     $   5,952       $ 14,773   $       162     $   24,183
                                       -----        ---------     ---------       --------   -----------     ----------
</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, 2000, 1999 and 1998
                                (In thousands)

<TABLE>
<CAPTION>
                                                           2000         1999           1998
                                                           ----         ----           ----
<S>                                                    <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                            $     2,979   $     2,131    $     1,775
  Adjustments to reconcile net income  to net cash
  provided by operating activities:
    Provision for loan losses                                1,277         1,418          1,230
    Provision for deferred income taxes                       (369)          253            120
    Depreciation and amortization                              774           663            529
    Net realized (gains) losses on available for sale           95          (117)          (359)
     securities
    Net amortization on securities                             184           330            540
    Increase in interest receivable                           (810)         (280)          (380)
    (Increase) decrease in other assets                       (174)        1,101         (1,196)
    Increase in interest, taxes and other
     liabilities                                             1,084            83            204
                                                       -----------   -----------    -----------
       Net Cash Provided by Operating Activities             5,040         5,582          2,463
                                                       -----------   -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Securities available for sale:
    Proceeds from ale of debt securities                     4,979         7,624         18,427
    Proceeds from maturities of debt securities             11,490        21,439         27,412
    Purchase of debt securities                            (27,399)      (49,505)       (55,721)
  Net increase in loans                                    (31,040)      (29,239)       (42,224)
  Premises and equipment expenditures                       (3,786)       (1,796)        (1,722)
                                                       -----------   -----------    -----------
       Net Cash Used in Investing Activities               (45,756)      (51,477)       (53,828)
                                                       -----------   -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in time deposits                             33,585        17,286         14,735
  Net increase in demand, savings and other deposits         6,537        16,566         20,960

  Increase (decrease) in federal funds purchased            (3,187)        2,684            503
  Proceeds from issuance of short-term borrowings            5,000         8,000              -
  Repayment of short-term borrowings                        (8,000)            -              -
  Proceeds from issuance of long-term debt                   8,250         4,000          6,125
  Repayment of long-term debt                                 (180)         (164)        (1,976)
  Proceeds from issuance of junior subordinated
   debt securities                                               -             -          7,500
  Capital securities issuance cost                               -             -           (319)
  Cash dividends paid                                         (185)         (150)          (123)
  Proceeds from exercise of common stock options                200           667             29
                                                       -----------   -----------    -----------
   Net Cash Provided by Financing Activities                42,020        48,889         47,434
                                                       -----------   -----------    -----------
   Net increase (decrease) in cash and cash equivalents      1,304         2,994         (3,931)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR              13,988        10,994         14,925
                                                       -----------   -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR               $    15,292   $    13,988    $    10,994
                                                       ===========   ===========    ===========

SUPPLEMENTAL DISCLOSURE OF  NON-CASH
 TRANSACTIONS:

 Unrealized gain (loss) in value of securities
  available for sale (net of tax effects of
  $402, $(268), and  $(105), at December 31,
  2000, 1999, and 1998, respectively)                  $       781   $      (519)   $      (204)
                                                       ===========   ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:
Cash paid during the year for:
  Interest                                             $    17,306   $    13,346    $    13,280
                                                       ===========   ===========    ===========
  Income taxes                                         $     1,348   $     1,150    $       952
                                                       ===========   ===========    ===========
</TABLE>

 The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.
<PAGE>

                                                                         Page F6


                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (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. The
          accounting and reporting policies of Highlands Bankshares, Inc. and
          Subsidiaries (the "Company") conform to generally accepted accounting
          principals and to predominate practices within the banking industry.

          Nature of Operations
          --------------------

          The Company operates in Abingdon, Virginia, and surrounding Southwest
          Virginia and Eastern Tennessee, 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 a
          full line of financial services to individuals and businesses. Their
          primary lending products include mortgage, consumer and commercial
          loans, and their primary deposit products are checking, savings, and
          certificates of deposit. Additionally, they broker various investment
          vehicles through their financial services department. As a state bank
          and a member of the Federal Reserve Bank of Richmond, the Bank is
          subject to regulation by the Virginia State Bureau of Financial
          Institutions, the Federal Deposit Insurance Corporation, and the
          Federal Reserve Bank. 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 9. 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
          Bankers Insurance 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 amortized 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.

                                          (Continued)
<PAGE>

                                                                         Page F7

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)

Note 1.   Summary of Significant Accounting Policies (Continued)

          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.

          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

                                          (Continued)
<PAGE>

                                                                         Page F8

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)

Note 1.   Summary of Significant Accounting Policies (Continued)

          Allowance for Loan Losses (Continued)
          -------------------------

          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. Interest income is recognized on impaired loans.

          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.

          In 2000 the Company purchased a branch of First Vantage Bank in
          Rogersville, Tennessee and paid an applicable deposit premium. The
          premium was recorded as Goodwill and is stated at cost less
          accumulated amortization. Amortization is computed on the
          straight-line method over 15 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.

                                          (Continued)
<PAGE>

                                                                         Page F9

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)

 Note 1.  Summary of Significant Accounting Policies (Continued)

          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 1999 and 1998
          financial statements to conform with the 2000 financial statement
          presentation. Such reclassifications had no effect on net income as
          previously reported.


Note 2.   Investment Securities Available For Sale

          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 available for sale
          are as follows:


<TABLE>
<CAPTION>
                                                              2000
                              ------------------------------------------------------------------
                                                      Gross              Gross
                               Amortized           Unrealized          Unrealized       Fair
                                cost                  Gains              Losses         Value
                              -------------      --------------      -------------    ----------
<S>                           <C>                <C>                 <C>              <C>
U.S. Government agencies and
  corporations                   $   4,085       $        -             $     1       $   4,084
State and political
  subdivisions                      13,403              413                   -          13,816
Collateralized mortgage
  obligations                        1,421                -                  15           1,406
Mortgage back securities            61,094                -                  92          61,002
Other securities                     2,384                -                  60           2,324
                              -------------      --------------      -------------    ----------
                                 $  82,387       $      413             $   168       $  82,632
                              ============       ==============      =============    ==========

<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 back securities           51,594             62                  557             51,099
Other securities                    2,095              -                   30              2,065
                              ------------       --------------      -------------    ----------
                                  $71,736         $  122             $  1,060          $  70,798
                              ============       ==============      =============    ==========
</TABLE>

                                  (Continued)
<PAGE>

                                                                        Page Fl0


                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              December 31, 2000
                                (In thousands)


Note 2.   Investment Securities Available for Sale (Continued)


<TABLE>
<CAPTION>
                                                                       1998
                                          ------------------------------------------------------------
                                                                Gross           Gross
                                            Amortized        Unrealized      Unrealized       Fair
                                             cost              Gains           Losses         Value
                                          -----------       -----------      ----------    -----------
         <S>                              <C>               <C>              <C>           <C>
         U.S. Government agencies
           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
                                          ========          =========        ==========    ===========
 </TABLE>

          Investment securities available for sale with a carrying value of
          $7,072, $17,141, and $4,787 at December 31, 2000, 1999 and 1998
          respectively, and a market value of $7,516, $16,955, and $4,783 at
          December 31, 2000, 1999 and 1998 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 $1,829, $1,541 and $1,246 at December 31,
          2000, 1999 and 1998, 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, 2000 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            3,458         3,481
                      Due after five years through ten years           2,040         2,031
                      Due after ten years                             11,990        12,388
                                                                   ---------     ---------
                                                                      17,488        17,900

                      Mortgage-backed securities                      62,515        62,408
                      Other securities                                 2,384         2,324
                                                                   ---------     ---------
                                                                   $  82,387     $  82,632
                                                                   =========     =========
</TABLE>

                                  (Continued)
<PAGE>

                                                                        Page Fll

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 200O
                                (In thousands)


Note 2.   Investment Securities Available for Sale (Continued)

          For the years ended December 31, 2000, 1999 and 1998, proceeds from
          sale of securities were $4,979, $7,624 and $18,427, respectively.
          Gross realized gains and losses on investment securities available for
          sale were as follows:


<TABLE>
<CAPTION>
                                                                    2000           1999             1998
                                                                  -------        --------         ---------
<S>                                                               <C>            <C>              <C>
                        Realized gains                             $   2          $   117          $    369
                        Realized losses                            $ (97)         $    (0)         $    (10)
                        Tax (benefit) provision                    $ (32)         $    40          $    120

Note 3.   Loans

          The composition of net loans is  as follows:

                                                                      2000         1999             1998
                                                                 -----------     --------         ----------
                        Commercial                               $  36,541        $ 27,072         $  24,240
                        Real estate                                181,931         163,459           136,339
                        Installment                                 70,402          68,097            70,137
                        Other                                        3,214           3,215             2,821
                                                                 ---------       ---------        ----------
                                                                   292,088         261,843           233.537
                                                                 ---------       ---------        ----------
                        Deduct:
                        Unearned discount                                4               7                31
                        Allowance for loan losses                    2,950           2,494             2,008
                        Net deferred loan fees                         187             158               135
                                                                 ---------       ---------        ----------
                                                                     3,141           2,659             2,174
                                                                 ---------       ---------        ----------

                                                                 $ 288,947        $259,184         $ 231,363
                                                                 =========       =========        ==========

                        Activity in the allowance for loan losses is as follows:

                                                                    2000           1999              1998
                                                                 ---------       ---------        ----------
                        Balance, beginning                       $   2,494        $  2,008         $   1,636
                        Provision charged to operations              1,277           1,418             1,230
                        Loans charged to reserve                      (994)         (1,094)           (1,057)
                        Recoveries                                     173             162               199
                                                                 ---------       ---------        ----------

                        Balance, ending                          $   2,950        $  2,494         $   2,008
                                                                 =========       =========        ==========
</TABLE>

                                  (Continued)
<PAGE>

                                                                        Page F12

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 3.   Loans (Continued)

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

<TABLE>
<CAPTION>
                                                                            December 31
                                                                 ----------------------------------
                                                                   2000        1999           1998
                                                                 --------    --------     ---------
<S>                                                              <C>         <C>          <C>
          Impaired loans without a
            valuation allowance                                  $    727    $  1,152     $   1,396
          Impaired loans with a valuation
            allowance                                                 202           -             -
                                                                 --------    --------     ---------
          Total impaired loans                                   $    929    $  1,152     $   1,396
                                                                 ========    ========     =========
          Valuation allowance related to
            impaired loans                                       $    202    $      -     $       -
                                                                 ========    ========     =========
          Average investment in
            impaired loans                                       $  1,109    $  1,111     $   1,011
                                                                 ========    ========     =========
          Interest income recognized
            on impaired loans                                    $      -    $      -     $       -
                                                                 ========    ========     =========

          No additional funds are committed to be advanced in connection with impaired
          loans.


Note 4.   Premises and Equipment

          Premises and equipment are comprised of the following:

                                                                    2000        1999          1998
                                                                 --------    --------     ---------
          Land                                                   $  4,120    $  2,391     $   1,870
          Bank premises                                             6,475       5,770         5,369
          Equipment                                                 4,391       3,719         2,954
                                                                 --------    --------     ---------
                                                                   14,986      11,880        10,193
          Less accumulated
            depreciation                                            3,326       2,569         1,928
                                                                 --------    --------     ---------
                                                                   11,660       9,311         8,265

          Construction in Progress                                    794         114             5
                                                                 --------    --------     ---------
                                                                 $ 12,454    $  9,425     $   8,270
                                                                 ========    ========     =========

          Depreciation expense was $757, $641, and $514 for 2000, 1999 and 1998, respectively.

          Construction in progress for 2000 consists of the costs for a banking branch in
          Boone, North Carolina.
</TABLE>
<PAGE>

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F13
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 5. Income Taxes

        The components of the net deferred tax asset, included in other assets,
are as follows:

<TABLE>
<CAPTION>
                                                              2000          1999           1998
                                                            --------      --------       --------
        <S>                                                 <C>           <C>            <C>
        Deferred tax assets:
        Allowance for loan loss                              $   735       $   626         $   532
        Deferred compensation                                      4             4              73
        Net unrealized loss on securities available
          for sale                                                 -           319              51
                                                             -------       -------         -------
                                                                 739           949             656
                                                             -------       -------         -------
        Deferred tax liability:
        Depreciation                                            (311)         (235)           (195)
        Net unrealized gain on securities available
          for sale                                               (83)           (0)             (0)
                                                             -------       -------         -------
                                                                (394)         (235)           (195)
                                                             -------       -------         -------

        Net deferred tax asset                               $   345       $   714         $   461
                                                             =======       =======         =======
</TABLE>

        The components of income tax expense (benefit) related to continuing
operations are as follows:

<TABLE>
<CAPTION>
                                                              2000          1999           1998
                                                            --------      --------       --------
        <S>                                                 <C>           <C>            <C>
        Federal:
         Current                                            $  1,262       $ 1,107         $   911
         Deferred                                                (33)           14             (15)
                                                            --------       -------         -------
          Total                                             $  1,229       $ 1,121         $   896
                                                            ========       =======         =======
</TABLE>

        The Bank's income tax expense differs from the statutory federal rate of
        34% as follows:

<TABLE>
<CAPTION>
                                                              2000          1999           1998
                                                            --------      --------       --------
        <S>                                                 <C>           <C>            <C>
        Statutory rate applied to
          earnings before income taxes                      $  1,431      $  1,106        $   908
        Tax exempt interest                                     (179)          (22)           (53)
        Other, net                                               (23)           37             41
                                                            --------      --------        -------
                                                            $  1,229      $  1,121        $   896
                                                            ========      ========        =======
</TABLE>
<PAGE>

                  HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F14
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 6. Deposits

        The composition of deposits is as follows:

<TABLE>
<CAPTION>
                                                       2000          1999            1998
                                                     --------      --------        --------
        <S>                                          <C>           <C>             <C>
        Noninterest bearing demand                   $ 45,343      $ 39,504        $ 36,187
        Interest bearing demand                        25,697        26,074          21,936
        Savings deposits                               45,826        44,751          35,640
        Time deposits, in amounts of
        $100,000 or more                               55,054        47,922          41,302
        Other time deposits                           174,395       147,942         137,276
                                                     --------      --------        --------
                                                     $346,315      $306,193        $272,341
                                                     ========      ========        ========
</TABLE>

        The remaining maturities of time deposits at December 31, 2000 are as
        follows:

        2001                                           $168,541
        2002                                             39,596
        2003                                              9,640
        2004                                              4,604
        2005                                              6,119
        Thereafter                                          949
                                                       --------
                                                       $229,449
                                                       ========

Note 7. Other Short-Term Borrowings

        Other short-term borrowings in the balance sheet 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. These notes carry an
        interest rate of 6.17%.

Note 8. Long-Term Debt

        At December 31, Highlands Bankshares, Inc. and Subsidiaries had the
        following long-term debt agreements:

                                                       2000     1999     1998
                                                      ------   ------   ------
        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.          $  357   $ 500    $ 643

                                (Continued)
<PAGE>

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F15
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 8. Long-Term Debt (Continued)

                                                       2000     1999     1998
                                                     -------  -------  -------

        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  $ 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 13,
        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    4,000        -


        Note Payable to Federal Home Loan Bank
        dated March 3, 2000 for $8,000 with an
        annual interest rate of 6.28%, due March
        3, 2010. The note requires quarterly
        interest payments and has an early
        conversion option at March 3, 2002. The
        loan is secured by a floating blanket lien
        on a specific class of mortgage loans of
        the bank.                                      8,000        -        -


        Other notes payable resulting from seller-
        financing transactions for $375 with
        annual interest rates ranging from 8.0% to
        8.50%, and due dates ranging from 2003-
        2010. The notes require monthly
        installments of principal and interest of
        $6. The loans are secured by a first deed
        of trust on real estate.                     $   312  $    99  $   120
                                                     -------  -------  -------

        Total long-term debt                         $18,669  $10,599  $ 6,763
                                                     =======  =======  =======

                                  (Continued)
<PAGE>

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F16
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In Thousands)


Note 8. Long-Term Debt (Continued)

        Principal maturities of long-term debt at December 31, 2000 are as
        follows:

        2001                                  $    184
        2002                                     8,190
        2003                                     6,115
        2004                                     4,023
        2005                                        24
        Thereafter                                 133
                                              --------
                                              $ 18,669
                                              ========

Note 9. Capital Securities

        On January 21, 1998, Highlands Capital Trust I, 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, 2000, and an estimated fair value
        of $7,240. The related junior subordinated debt securities had an
        estimated fair value of $7,240.

        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 for regulatory
        capital adequacy determination purposes up to 25% of Tier I capital
        after its inclusion. The portion of the Capital Securities not
        considered as Tier I capital 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 interest payments on the junior
        subordinated debt securities, which would result in a deferral of
        distribution payments on the related Capital Securities.
<PAGE>

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F17
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 200O
                                (In Thousands)


Note 10. 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:

         2001                                         $   207
         2002                                             207
         2003                                             207
                                                      -------
         Total minimum payments required              $   621
                                                      =======

         Total operating lease expense was $337, $297 and $342 for December 31,
         2000, 1999 and 1998 respectively.

         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:

         2001                                         $   23
         2002                                              3
                                                      ------
         Total minimum payments required              $   26
                                                      ======

         Total operating lease income was $69, $122 and $90 for December 31,
         2000, 1999 and 1998, respectively.


Note 11. 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. Shares issued and
         outstanding at December 31, 2000, 1999 and 1998 were 2,632, 2,521 and
         2,472, respectively. 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. Outstanding stock options (Note
         13) have a dilutive effect on earnings per share, and are determined
         using the treasury stock method.

                                  (Continued)
<PAGE>
                                                                        Page F18

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 200O
                                (In thousands)


Note 11. Common Stock, Stock Split, and Earnings Per Common Share (Continued)

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

<TABLE>
<CAPTION>
                                                                           2000
                                                   ----------------------------------------------------
                                                      Income             Shares              Per-Share
                                                    (Numerator)       (Denominator)            Amount
                                                   ------------      --------------         -----------
<S>                                                <C>               <C>                    <C>
Basic Earnings per Common Share
 Income available to common stockholders              $ 2,979            2,632               $    1.13
                                                                                             =========
 Effect of Dilutive Stock options outstanding               -                23
                                                      -------           ------
Diluted Earnings per Common Share
 Income available to common
 stockholders plus assumed conversions                $ 2,979            2,655               $    1.12
                                                      =======           ======               =========

<CAPTION>
                                                                           1999
                                                   ----------------------------------------------------
                                                      Income             Shares              Per-Share
                                                   (Numerator)        (Denominator)           Amount
                                                   ----------------------------------------------------
<S>                                                <C>                <C>                    <C>
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 plus assumed conversions                $ 2.131            2,542               $    .84
                                                      =======           ======               ========

<CAPTION>
                                                                           1998
                                                    --------------------------------------------------
                                                      Income             Shares              Per-Share
                                                    (Numerator)      (Denominator)            Amount
                                                    --------------------------------------------------
<S>                                                 <C>              <C>                     <C>
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 plus assumed conversions                $ 1,775            2,564               $    .69
                                                      =======           ======               ========
</TABLE>

<PAGE>
                                                                        Page F19

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 200O
                                (In thousands)


Note 12. Profit Sharing and Retirement Savings Plan

         The Bank has a 401(K) savings plan available to substantially all
         employees meeting minimum eligibility requirements. The Bank makes a 2%
         profit sharing 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. In
         addition to the 2% profit sharing contribution, the Bank matches 50% of
         the employee's initial 6% contribution; therefore, the maximum employer
         matching contribution per employee could be 3% of base pay. The cost of
         Bank contributions under the savings plan was $150, $137 and $115, in
         2000, 1999 and 1998 respectively.


Note 13. Stock Option Plan

         In 1996, Highlands Bankshares, Inc., adopted a non-qualified stock
         incentive option plan, for key employees, officers, and directors and
         reserved 150,000 shares of common stock for issuance thereunder. The
         plan is identical to and replaced the plan previously adopted by
         Highlands Union Bank.

         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. Option exercise prices are determined by the Board of
         Directors based on recent open market sales, 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. Shares under options
         which are canceled are available for subsequent grant.

         The Company applies APB Opinion 25 and related Interpretations in
         accounting for the stock option plan. Accordingly, no compensation cost
         has been recognized. Had compensation cost for the Corporation's stock
         option plan been determined based on the fair value at the grant dates
         for awards under the plan consistent with the method prescribed by FASB
         Statement No. 123, the Company's net income and earnings per share
         would have been adjusted to the pro forma amounts indicated below:

                                                  Years Ended December 31,
                                             ---------------------------------
                                               2000        1999         1998
                                             -------      -------      -------
     Net income               As reported    $ 2,979      $ 2,131      $ 1,775
                              Pro forma      $ 2,797      $ 1,875      $ 1,568

     Earnings per share       As reported    $  1.13      $   .85      $   .72
                              Pro forma      $  1.06      $   .74      $   .63

     Earnings per share -     As reported    $  1.12      $   .84      $   .69
     Assuming dilution        Pro forma      $  1.05      $   .74      $   .61

                                  (Continued)
<PAGE>
                                                                        Page F20

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 200O
                                (In thousands)


Note 13. Stock Option Plan (Continued)

         The pro forma amount shown above reflects the options granted during
         the year discounted using the expected life, expected volatility and
         risk-free interest rates as shown below. The fair value of each option
         grant is estimated on the date of grant using the Black-Scholes option-
         pricing model with the following weighted-average assumptions:

                                         Years Ended December 31,
                                     -------------------------------
                                       2000       1999        1998
                                     --------   --------    --------
         Expected life               10 years   10 years    10 years
         Expected volatility         7.16%     61.73%       13.33%
         Risk-free interest rate     6.25%      6.1%         5.5%

         A summary of the status of the Company's option plan is presented
         below:

<TABLE>
<CAPTION>
                                                2000                    1999                       1998
                                       --------------------    ---------------------     -----------------------
                                       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     $14.76      69,122        7.64       174,685      $  4.60       155,586
     Granted                            23.50      25,300       19.00        26,650        15.15        47,500
     Exercised                          15.24     (13,148)       5.04      (132,213)        1.03       (28,401)
                                                  -------                  --------                    -------
     Options outstanding and
      exercisable at December 31       $17.40      81,274      $14.76        69,122      $  7.64       174,685
                                                  =======                  ========                    =======
     Weighted-average fair
      value of options granted
      during the year                  $23.50                  $19.00                    $ 15.15
</TABLE>

     Information pertaining to options at December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                         Options Outstanding  and Exercisable
                       ----------------------------------------
                                       Weighted
                                        Average        Weighted
                                       Remaining       Average
        Range of          Number      Contractual      Exercise
     Exercise Prices   Outstanding       Life           Price
     ---------------   -----------    -----------     ---------
<S>                    <C>            <C>             <C>
     $4.17 - $7.50       6,196        4.56 years     $  6.10
     11.50 - 15.50      33,849        7.33             14.16
     19.00 - 23.50      41,229        9.03             21.76
                       -------
     Outstanding at
      end of year       81,274        7.98 years     $ 17.40
                       =======
</TABLE>
<PAGE>

                                                                        Page F21

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)

Note 14. 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 of approximately $1,901,
     $1,088, and $859, unfunded commitments under lines of credit of $23,689,
     $19,067 and $16,655 and commitments to grant loans of $2,632, $458, and
     $1,325 for the years ended December 31, 2000, 1999 and 1998, 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 Banks 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 $83,356 of unused lines of credit to
     fund any necessary cash requirements. The Bank has $23,357 of Federal Home
     Loan Bank advances outstanding as of December 31, 2000. A specific class of
     mortgage loans with a balance of $99,064 at December 31, 2000 were pledged
     to the FHLB as collateral.


<PAGE>
                                                                        Page F22

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 15. 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 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, short-term
     investments and federal funds sold approximates fair value.

     Securities Available for Sale
     -----------------------------

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

     Loans
     -----

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

     Deposits
     --------

     The fair value of deposits represent the amount at which the deposit
     liabilities of the Bank could be exchanged on the open market, based upon
     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.

                                  (Continued)
<PAGE>
                                                                        Page F23

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)

Note 15. Fair Values of Financial Instruments (Continued)

     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.

     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>
                                           2000                   1999                     1998
                                ----------------------   ---------------------   ----------------------
                                 Carrying       Fair      Carrying     Fair       Carrying       Fair
                                  Amount        Value      Amount      Value       Amount        Value
                                -----------   --------   ---------   ---------   ---------     --------
<S>                              <C>         <C>         <C>         <C>         <C>         <C>
Cash and cash equivalents         $  15,292  $  15,292   $  13,988   $  13,988   $  10,994   $   10,994
Securities available for sale        82,632     82,632      70,798      70,798      51,355       51,355
Loans, net                          288,947    286,306     259,184     257,737     231,363      234,290
Deposits                           (346,315)  (346,888)   (306,193)   (306,019)   (272,341)    (273,551)
Federal funds purchased                   -          -      (3,187)     (3,187)       (503)       ( 503)
Other short-term borrowings          (5,000)    (5,110)     (8,000)     (8,144)          -            -
Long-term debt                      (18,669)   (18,066)    (10,599)     (9,947)     (6,763)      (6,767)
Capital securities                   (7,500)    (7,240)     (7,500)    ( 7,511)     (7,500)      (7,923)
</TABLE>

Note 16. 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:

                               2000           1999        1998
                             -------       --------     --------

Balance, beginning           $ 7,767       $  6,657     $  5,766
Additions                      3,839          4,698        3,652
Reductions                    (3,327)        (3,588)      (2,761)
                             -------       --------     --------
Balance, ending              $ 8,279       $  7,767     $  6,657
                             =======       ========     ========
Unused Commitments           $   555       $    315     $    410
                             =======       ========     ========

Deposits from related parties held by the Bank at December 31, 2000 were $2,354.


<PAGE>

                                                                        Page F24

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)

Note 17. 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, 2000,
     1999 and 1998 were $2,763, $2,109 and $1,239, respectively.

Note 18. 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 $5,064, $4,256 and
     $2,939 in 2000, 1999 and 1998 respectively. The Company paid dividends of
     $184, $150 and $123 or $.07 per share, $.06 per share and $.05 per share in
     2000, 1999 and 1998, respectively.

     The Company and the Bank are subject to various regulatory capital
     requirements administered by its primary regulator, the Federal Reserve
     Bank of Richmond. 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 31,2000, 1999, and 1998,
     that the Company and the Bank met all the capital adequacy requirements to
     which they are subject.

     Based on the Federal Reserve Bank's regulatory framework for prompt
     corrective action, the Company and Bank are considered to be well
     capitalized for all required ratios. To remain categorized as well
     capitalized, the Bank will have to maintain minimum total risk-based
     capital to risk-weighted assets, Tier I capital to risk-weighted assets,
     and Tier I capital to adjusted total assets ratios as disclosed in the
     table below. There are no conditions or events since the most recent
     notification that management believes have changed the Company's category.

                                  (Continued)
<PAGE>
                                                                        Page F25

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 200O
                                (In thousands)



Note 18. Undivided Profits and Capital (Continued)

         The  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, 200O:
  Total Risk-Base Capital
   (to Risk-Weighted Assets)                 $34,116      12.38%     $  12,907      8.0%     $ 27,384         10.0%
  Tier I Capital
   (to Risk-Weighted Assets)                  31,167      11.31%        10,954      4.0%       16,430          4.0%
  Tier I Capital
   (to Adjusted Total Assets)                 31,167       7.32%        17,026      4.0%       21,283          5.0%

As of December 31, 1999:
  Total Risk-Base Capital
   (to Risk-Weighted Assets)                 $31,015      12.88%     $  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-Base 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%
</TABLE>

                                  (Continued)


<PAGE>
                                                                        Page F26
                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 18. 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, 200O:
  Total Risk-Based Capital
   (to Risk-Weighted Assets)            $ 28,098    10.40%   $ 21,623        8.0%      $ 27,029       10.0%
  Tier I Capital
   (to Risk-Weighted Assets)              25,167     9.31%     10,812        4.0%        16,217        6.0%
  Tier 1 Capital
   (to Adjusted Total Assets)             25,167     6.37%     15,083        4.0%        19,753        5.0%

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 TotalAssets)              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%
</TABLE>

Note 19. Other Operating Expenses

         Other operating expenses that exceed 1% of the total of interest income
         and other income presented separately consist of the following:

                                              2000          1999          1998
                                            --------      --------      --------
         Postage and freight                $    305      $    322      $    287
                                            ========      ========      ========


<PAGE>
                                                                        Page F27

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 20. Condensed Parent Company Financial Statements

     The condensed financial statements below relate to Highlands Bankshares,
     Inc., as of December 31, 2000, 1999 and 1998 and for the years then ended.
     Equity in undistributed earnings of subsidiary includes the change in
     unrealized gains or losses on securities, net of tax.

     CONDENSED BALANCE SHEETS
     ------------------------

<TABLE>
<CAPTION>
                                                         2000        1999        1998
                                                       -------     -------     -------
     <S>                                               <C>         <C>         <C>
     ASSETS
      Cash                                             $   551     $   887     $   202
      Investment securities available
       for sale                                            151       1,059       2,480
      Loans, net of allowance for loan losses
       of $18 and $6 in 2000 and 1999, respectively      3,728       2,552           -
      Federal funds sold                                     -           -       1,670
      Investment in subsidiaries                        25,624      21,794      19,772
      Premises and equipment, net                        1,394       1,381       1,402
      Other assets                                         383         381         406
                                                       -------     -------     -------
        Total Assets                                   $31,831     $28,054     $25,932
                                                       =======     =======     =======

     LIABILITIES AND STOCKHOLDERS' EQUITY
      Interest, taxes and other
       liabilities                                     $   148     $   146     $   153
      Capital securities                                 7,500       7,500       7,500
                                                       -------     -------     -------
        Total Liabilities                                7,648       7,646       7,653
                                                       -------     -------     -------
     STOCKHOLDERS' EQUITY
      Common stock                                       3,296       3,280       3,116
      Additional paid-in capital                         5,952       5,768       5,265
      Retained earnings                                 14,935      11,363       9,904
      Accumulated other comprehensive income (loss)          -          (3)         (6)
                                                       -------     -------     -------

        Total Stockholders' Equity                      24,183      20,408      18,279
                                                       -------     -------     -------

        Total Liabilities and
        Stockholders' Equity                           $31,831     $28,054     $25,932
                                                       =======     =======     =======
</TABLE>

                                  (Continued)
<PAGE>
                                                                        Page F28

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              December 31, 2000
                                (In thousands)


Note 20. Condensed Parent Company Financial Statements (Continued)

         CONDENSED STATEMENTS OF INCOME
         ------------------------------
<TABLE>
<CAPTION>
                                                                 2000        1999        1998
                                                               --------    --------    --------
         <S>                                                   <C>         <C>         <C>
         Dividends from Subsidiary                             $    300    $      -    $      -
         Interest income                                            314         264         214
         Other income                                               154         163         159
         Long-term debt interest expense                              -           -          (9)
         Capital securities expense                                (696)       (685)       (672)
         Operating expense                                         (146)       (155)        (68)
                                                               --------    --------    --------
                                                                    (74)       (413)       (376)

         Income tax benefit                                          25         140         128
         Equity in undistributed earnings of subsidiary           3,806       1,882       1,723
                                                               --------    --------    --------
         Net income                                            $  3,757    $  1,609    $  1,475
                                                               ========    ========    ========
</TABLE>

                                  (Continued)
<PAGE>
                                                                        Page F29

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)

Note 20. Condensed Parent Company Financial Statements (Continued)

         CONDENSED STATEMENTS OF CASH FLOWS
         ----------------------------------

<TABLE>
<CAPTION>
                                                                      2000          1999         1998
                                                                    --------      --------     --------
         <S>                                                        <C>           <C>          <C>
         CASH FLOWS FROM OPERATING ACTIVITIES:
          Net income                                                $  3,757      $  1,609     $  1,475
          Adjustments to reconcile net income to
          net cash provided by operating activities:
            Allowance for loan losses                                     12             6            -
            Depreciation and amortization                                 40            47           42
            Provision for deferred income taxes                            7            (1)          (3)
            Equity in undistributed earnings of subsidiary            (3,806)       (1,882)      (1,723)
            Net amortization on securities                                 2            20           25
            (Increase) decrease in other assets                          (45)          (93)        (110)
            Increase (decrease) in other liabilities                       2            (6)         130
                                                                    --------      --------     --------

            Net cash used in operating activities                        (31)         (300)        (164)
                                                                    --------      --------     --------

         CASH FLOWS FROM INVESTING ACTIVITIES:
          Securities available for sale:
            Proceeds from sale of securities                             819             -            -
            Proceeds from maturities of securities                        91         1,360        1,072
            Purchase of securities                                         -             -       (3,586)
          Net (increase) decrease in federal funds sold                    -         1,670       (1,670)
          Net increase in loans                                       (1,188)       (2,558)           -
          Premises and equipment expenditures                            (42)           (4)        (152)
                                                                    --------      --------     --------

            Net cash provided by (used in)
             investing activities                                       (320)          468       (4,336)
                                                                    --------      --------     --------

         CASH FLOWS FROM FINANCING ACTIVITIES:
          Repayment of long-term debt                                      -             -         (886)
          Proceeds from issuance of junior subordinated-
           debt securities                                                 -             -        7,500
          Capital securities issuance cost                                 -             -         (319)
          Cash dividends paid                                           (185)         (150)        (123)
          Proceeds from issuance of common stock                         200           667           29
          Purchase of subsidiary stock                                     -             -       (1,500)
                                                                    --------      --------     --------

           Net cash provided by financing activities                      15           517        4,701
                                                                    --------      --------     --------

           Net increase (decrease) in cash and cash
            equivalents                                                 (336)          685          201

         CASH AND CASH EQUIVALENTS
          AT BEGINNING OF YEAR                                           887           202            1
                                                                    --------      --------     --------

         CASH AND CASH EQUIVALENTS
          AT END OF YEAR                                            $    551      $    887     $    202
                                                                    ========      ========     ========
</TABLE>

                                  (Continued)
<PAGE>

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F30
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 21. Quarterly Data (Unaudited)

<TABLE>
<CAPTION>
                                                                         2000
                                                   ------------------------------------------------
                                                   March 31       June 30       Sept 30      Dec 31
                                                   --------       -------       -------     -------
<S>                                                <C>            <C>           <C>         <C>
Interest Income                                    $  6,975       $ 7,425       $ 7,830     $ 8,188
Interest Expense                                     (3,921)       (4,253)       (4,643)     (4,883)
                                                   --------       -------       -------     -------

Net interest income                                   3,054         3,172         3,187       3,305
Provision for loan losses                              (362)         (314)         (297)       (304)
                                                   --------       -------       -------     -------
Net interest income after provision for
 possible loan losses                                 2,692         2,858         2,890       3,001
Other income                                            473           635           662         710
Other expenses                                       (2,227)       (2,335)       (2,465)     (2,686)
                                                   --------       -------       -------     -------

Income before income taxes                              938         1,158         1,087       1,025
Income taxes                                           (300)         (342)         (321)       (266)
                                                   --------       -------       -------     -------

Net income                                         $    638       $   816       $   766     $   759
                                                   ========       =======       =======     =======

Earnings per common share:
 Basic                                             $    .24       $   .31       $   .29     $   .30
                                                   ========       =======       =======     =======
 Diluted                                           $    .24       $   .31       $   .27     $   .29
                                                   ========       =======       =======     =======

<CAPTION>
                                                                        1999
                                                   ------------------------------------------------
                                                   March 31       June 30       Sept 30      Dec 31
                                                   --------       -------       -------     -------
<S>                                                <C>            <C>           <C>         <C>
Interest Income                                    $  6,044       $ 6,228       $ 6,579     $ 6,820
Interest Expense                                     (3,317)       (3,444)       (3,619)     (3,787)
                                                   --------       -------       -------     -------

Net interest income                                   2,727         2,784         2,960       3,033
Provision for loan losses                              (369)         (327)         (415)       (307)
                                                   --------       -------       -------     -------
Net interest income after provision for
 possible loan losses                                 2,358         2,457         2,545       2,726
Other income                                            313           337           439         264
Other expenses                                       (1,966)       (2,045)       (2,053)     (2,123)
                                                   --------       -------       -------     -------

Income before income taxes                              705           749           931         867
Income taxes                                           (239)         (250)         (307)       (325)
                                                   --------       -------       -------     -------

Net income                                         $    466       $   499       $   624     $   542
                                                   ========       =======       =======     =======

Earnings per common share:
 Basic                                             $    .18       $   .20       $   .25     $   .21
                                                   ========       =======       =======     =======
 Diluted                                           $    .17       $   .19       $   .23     $   .20
                                                   ========       =======       =======     =======
</TABLE>

                                  (Continued)
<PAGE>

                 HIGHLANDS BANKSHARES, INC., AND SUBSIDIARIES
                                                                        Page F31
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000
                                (In thousands)


Note 21. Quarterly Data (Unaudited) (Continued)

<TABLE>
<CAPTION>
                                                                         1998
                                                   ------------------------------------------------
                                                   March 31       June 30       Sept 30      Dec 31
                                                   --------       -------       -------     -------
<S>                                                <C>            <C>           <C>         <C>
Interest Income                                    $  5,331       $ 5,684       $ 5,890     $ 5,992
Interest Expense                                     (3,127)       (3,393)       (3,467)     (3,414)
                                                   --------       -------       -------     -------

Net interest income                                   2,204         2,291         2,423       2,578
Provision for loan losses                              (302)         (303)         (351)       (274)
                                                   --------       -------       -------     -------
Net interest income after provision for
 possible loan losses                                 1,902         1,988         2,072       2,304
Other income                                            283           259           371         454
Other expenses                                       (1,583)       (1,638)       (1,812)     (1,929)
                                                   --------       -------       -------     -------

Income before income taxes                              602           609           631         829
Income taxes                                           (201)         (208)         (181)       (306)
                                                   --------       -------       -------     -------

Net income                                         $    401       $   401       $   450     $   523
                                                   ========       =======       =======     =======

Earnings per common share:
 Basic                                             $    .16       $   .17       $   .18     $   .21
                                                   ========       =======       =======     =======
 Diluted                                           $    .15       $   .17       $   .17     $   .20
                                                   ========       =======       =======     =======
</TABLE>
<PAGE>

                          HIGHLANDS BANKSHARES, INC.
                                       &
                             HIGHLANDS UNION BANK

                              BOARD OF DIRECTORS

                                J.D. Morefield
                                   Chairman


J. Carter Lambert                       Dr. James D. Moore, Jr.
Vice Chairman                           President

William E. Chaffin                      E. Craig Kendrick
Clydes B. Kiser                         Charles P. Olinger
William J. Singleton                    Dr. H. Ramsey White, Jr., DDS



                   Additional Highlands Union Bank Directors

Samuel L. Neese                         James T. Riffe
Executive V.P. & CEO                    Executive V.P. & COO
<PAGE>

                          HIGHLANDS BANKSHARES, INC.
                                       &
                             HIGHLANDS UNION BANK


                               BOARD COMMITTEES


Loan Committee             Audit Committee          Investment Committee
--------------             ---------------          --------------------
William E. Chaffin         E. Craig Kendrick        J.D. Morefield
J.D. Morefield             J. Carter Lambert        James D. Moore, Jr.
James D. Moore, Jr.        Charles P. Olinger       Charles P. Olinger
Charles P. Olinger         H. Ramsey White, Jr.
H. Ramsey White, Jr.       William E. Chaffin
                           William J. Singleton

Personnel/Compensation    Appraisal Committee       Building Committee
----------------------    -------------------       ------------------
Clydes B. Kiser           E. Craig Kendrick         E. Craig Kendrick
J. Carter Lambert         J.D. Morefield            Clydes B. Kiser
J.D. Morefield            J. Carter Lambert         J.D. Morefield
Charles P. Olinger        Samuel L. Neese           James D. Moore, Jr.
H. Ramsey White, Jr.      C.B. Hale                 William E. Chaffin
                          William J. Singleton


                          HIGHLANDS BANKSHARES, INC.
                                   OFFICERS

Dr. James D. Moore, Jr.    Samuel L. Neese             James T. Riffe
President                  Executive Vice President,   Executive Vice President,
                           Chief Executive Officer     Chief Operating Officer

Gary L. Dutton             Robert M. Little, Jr.       James R. Edmondson
Senior Vice President,     Secretary & Controller      Assistant Controller
Senior Loan Officer

W. Clark Hutton            Melinda S. Bishop           Monica M. Anderson
Senior Vice President,     Senior Internal Auditor     Internal Auditor
Credit Review Officer






<PAGE>

                             HIGHLANDS UNION BANK
                                   OFFICERS

                           James D. Moore, Jr., M.D.
                                   President

     Samuel L. Neese                                  James T. Riffe
     Executive Vice President,                        Executive Vice President,
     Chief Executive Officer                          Chief Operations Officer

<TABLE>
<S>                             <C>
C. B. Hale                      Business Development Officer, CRA Outreach Officer
W. Clark Hutton                 Senior Vice President, Credit Review Officer
Gary L. Dutton                  Senior Vice President, Senior Loan Officer
C. Wayne Perry                  Vice President, Branch Administrator, Compliance Officer, CRA Officer
Tim L. Robinson                 Vice President, Senior Loan Officer City of Bristol
Robert M. Little, Jr.           Controller, Stock Registrar
James R. Edmondson              Vice President, Accounting
James Anderson                  Vice President, Branch Manager
Ron W. Dickenson                Vice President, Commercial Loan Officer
Christine S. Eldreth            Vice President, Manager of Commercial Loan Operations
Edward T. Farmer                Vice President, Operations Officer, P. C. Coordinator
Curtis B. Fleenor               Vice President, Manager of Main Office Consumer Lending
Charles E. Holmes               Vice President, Mortgage Loan Officer
C. Bryan Lawson                 Manager Financial Services, Financial Services Officer
Beth A. Morefield               Vice President, Dealer Finance Manager
M. Suleen Reeder                Vice President, Mortgage Loan Officer, Manager of Mortgage Loan Operations
David O. Rhea                   Vice President, Commercial Loan Officer
Darlene M. Rose                 Vice President, Manager of Consumer Loan Operations
Marie F. Shy                    Vice President, Branch Manager, Training Officer
Malinda W. Pickett              Vice President, Branch Manager
Mark B. Redman                  Vice President, Branch Manager, Assistant Bank Security Officer
Karen White                     Human Resources Officer
Monica M. Anderson              Internal Auditor
Christopher Arquette            Assistant Vice President / Loan Officer
Melinda S. Bishop               Senior Internal Auditor
Janice M. Eldreth               Assistant Vice President, Assistant Operations Officer
Mark W. Farris                  Assistant Vice President, Loan Officer
Robin G. Frost                  Assistant Vice President, Branch Manager
Jon Hermes                      Assistant Vice President, Branch Manager
Cathy L. Holley                 Assistant Vice President, Mortgage Loan Operations Officer
Robert M. Howard                Bank Security Officer and Facilities Manager
Wayne M. Largen                 Assistant Vice President, Branch Manager
Donna Layne                     Assistant Vice President, Assistant Branch Manager
Edna M. Moore                   Assistant Vice President, Mortgage Loan Officer, Manager
                                Secondary Market Mortgages
Tina L. Puckett                 Branch Officer / Main and West Abingdon Branches
Mary Jane Robinson              Assistant Vice President, Student Loan Officer
Beverly A. Sharrett             Assistant Vice President, Assistant Branch Manager,
                                Consumer Loan Officer
William Kirk Sproles, Jr.       Consumer Loan Officer
Rhonda Starkey                  Collections Officer, Collections Supervisor
Beth W. Stone                   Assistant Branch Manager, Consumer Loan Officer
Sally G. Stringer               Electronic Banking Officer
Brenda D. Williams              Assistant Vice President, Dealer Loan Officer
Beverly R. Woods                Consumer Loan Officer, Credit Card Supervisor
Jo Ann Vincill                  Business Development Officer
Linda Younce                    Branch Operations Supervisor / Consumer Loan Officer
</TABLE>

                                       1