SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                                  FORM 10-KSB

        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934

For fiscal year ended December 31, 1998      Commission file number:  0-16761

                          Highlands Bankshares, Inc.
            (Exact name of registrant as specified in its charter)

              West Virginia                              55-0650743
     (State or other jurisdiction of                  (I.R.S. Employer
     incorporation or organization)                  Identification No.)

                P. O. Box 929, Petersburg, West Virginia  26847
              (Address of principal executive offices) (Zip Code)

        Issuer's telephone number including area code:  (304) 257-4111

          Securities registered pursuant to Section 12(b) of the Act:
                                     None

          Securities registered pursuant to Section 12(g) of the Act:

                             Common Stock - $5 Par

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

    Check if there is no  disclosure  of  delinquent  filers in  response  to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will
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-KSB or any amendment to this Form 10-KSB. [X]

    Issuer's revenues for its most recent fiscal year:  $16,507,000

    State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of March 9, 1999 - $28,769,808

    State the number of shares  outstanding  of each of the issuer's  classes
of common equity,  as of the latest  practicable  date: As of March 1, 1999 -
501,898

                     DOCUMENTS INCORPORATED BY REFERENCE:

    Proxy Statement of Highlands  Bankshares,  Inc. filed via Form DEF 14A on
March 24, 1999.

                           LOCATION OF EXHIBIT INDEX

    The index of exhibits is contained in Part IV herein on pages 46-47.

    TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT  YES         NO   X  


<PAGE> 2

                               FORM 10-KSB INDEX


                                                                       Page
Part I

Item  1.  Description of Business                                        3
          General
          Services Offered by the Banks
          Employees
          Competition
          Regulation and Supervision

Item  2.  Description of Property                                        4

Item  3.  Legal Proceedings                                              5

Item  4.  Results of Votes of Security Holders                           5


Part II

Item  5.  Market for Registrant's Common Equity and
          Related Stockholder Matters                                    5

Item  6.  Management's Discussion and Analysis of Financial
          Condition and Results of Operation                             6

Item  7.  Financial Statements                                          24

Item  8.  Changes in and Disagreement with Accountants on
          Accounting and Financial Disclosure                           47


Part III

Item  9.  Directors and Executive Officers                              47

Item 10.  Executive Compensation                                        47

Item 11.  Security Ownership of Certain Beneficial Owners
            and Management                                              47

Item 12.  Certain Relationships and Related Transactions                47


Part IV

Item 13.  Exhibits and Reports on Form 8-K                              47

Signatures                                                              49


<PAGE> 3

Part I

Item 1. Description of Business

    General

    Highlands Bankshares, Inc. (Highlands), incorporated under the laws of West
Virginia in 1985, is a multi-bank holding company subject to the provisions of
the Bank Holding Company Act of 1956, as amended, and owns 100% of the
outstanding stock of its subsidiary banks, The Grant County Bank and Capon
Valley Bank (hereinafter referred to as the "Banks") and its life insurance
subsidiary, HBI Life Insurance Company (HBI Life). Capon Valley Bank became a
member of Highlands effective July 1, 1987, in a combination accounted for as a
pooling of interests.

    The Grant County Bank was chartered on May 20, 1902, and Capon Valley Bank
was chartered on July 1, 1918. Both are state banks chartered under the laws of
the State of West Virginia. HBI Life was chartered in April 1988 under the laws
of the State of Arizona.

    Services Offered by the Banks

    The banks offer all services normally offered by a full service commercial
bank, including commercial and individual demand and time deposit accounts,
commercial and individual loans, drive-in banking services and automatic teller
machine banking. No material portion of the banks' deposits have been obtained
from a single or small group of customers and the loss of the deposits of any
one customer or of a small group of customers would not have a material adverse
effect on the business of the banks. Credit life accident and health insurance
are sold to customers of the subsidiary banks through HBI Life Insurance
Company.

    Employees

    As of December 31, 1998, The Grant County Bank had 44 full time equivalent
employees and Capon Valley Bank had 36 full time equivalent employees. No person
is employed by Highlands or HBI Life on a full time basis.

    Competition

    The banks' primary trade area is generally defined as Grant County, Hardy
County, Mineral County and the northern part of Pendleton County. This area
includes the cities of Petersburg, Wardensville, Moorefield and Keyser and
several rural towns. The banks compete with three state chartered banks and two
national banks. No financial institution has been chartered in the area within
the last five years although branches of state and nationally chartered banks
have located in this area within this time period. Competition for new loans and
deposits in the banks' service area is quite intense and all competition has
been forced to pay rates on deposits which exceed the national averages.

    The banks' secondary trade area includes portions of Hampshire County in
West Virginia and Frederick County in Virginia. In addition, the banks compete
with money market mutual funds and investment brokerage firms for deposits in
their service area.

    Regulation and Supervision

    Highlands is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934. These include, but are not limited to, the
filing of annual, quarterly and other current reports with the Securities and
Exchange Commission.


<PAGE> 4

    Regulation and Supervision (Continued)

    Highlands, as a bank holding company, is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Act"). It is registered as
such and is supervised by the Federal Reserve Board. The Act requires Highlands
to secure the prior approval of the Federal Reserve Board before Highlands
acquires ownership or control of more than five percent of the voting shares, or
substantially all of the assets of any institution, including another bank.

    As a bank holding company, Highlands is required to file with the Federal
Reserve Board an annual report and such additional information as it may require
pursuant to the Act. The Federal Reserve Board may also conduct examinations of
Highlands and any or all of its subsidiaries. Under Section 106 of the 1970
Amendments to the Act and the regulations of the Federal Reserve Board, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit, provision of
credit, sale, or lease of property or furnishing of services.

    Federal Reserve regulations permit bank holding companies to engage in
nonbanking activities closely related to banking or to managing or controlling
banks. These activities include the making or servicing of loans, performing
certain data processing services, and certain leasing and insurance agency
activities. HBI Life acts as reinsurer of the credit life insurance coverage
sold by the Banks to bank customers. Approval of the Federal Reserve Board is
necessary to engage in any of these activities or to acquire corporations
engaging in these activities.

    The operations of the Banks are subject to federal and state statutes which
apply to state chartered banks. Bank operations are also subject to the
regulations of the Federal Deposit Insurance Corporation (the "FDIC"), which
insures the banks' deposits. In addition, the Capon Valley Bank is a member of
the Federal Reserve Bank System and is subject to the regulations of the Federal
Reserve Bank Board.

    The supervisory authorities regularly examine such areas as reserves, loans,
investments, management practices, and other aspects of the banks' operations.
These examinations are designed primarily for the protection of depositors. In
addition to these regular examinations, the banks must furnish the various
regulatory authorities quarterly reports containing a full and accurate
statement of its affairs.

    The operations of the insurance subsidiary are subject to the oversight and
review of State of Arizona Department of Insurance.

Item 2. Description of Properties

    The Grant County Bank's main office is located on Main Street in Petersburg,
West Virginia. An automatic teller machine allows customers greater flexibility
in their banking transactions. In late 1996, the Bank opened a full service
branch in Mineral County to serve the Keyser area. This facility is owned by the
Bank and features state-of-the-art drive-up facilities and an automatic teller
machine. The Bank also has a branch in Riverton, West Virginia which provides
banking services in northwest Pendleton County. The Riverton branch building has
an annual lease while the main and Keyser office facilities are owned by the
Bank.

    Capon Valley Bank has its main office in Wardensville, West Virginia and
branch offices located in Moorefield and Baker, West Virginia. The Bank opened
its new Baker branch in April of 1997 to serve the customer base between
Moorefield and Wardensville. This facility includes state-of-the-art drive in
and automatic teller operations. All facilities are owned by the Bank and
considered adequate for current operations.


<PAGE> 5

Item 3. Legal Proceedings

    Management is not aware of any material pending or threatened litigation in
which Highlands or its subsidiaries may be involved as a defendant. In the
normal course of business, the banks periodically must initiate suits against
borrowers as a final course of action in collecting past due loans.


Item 4. Results of Votes of Security Holders

     Highlands has not submitted any matters to the vote of security holders for
the quarter ending December 31, 1998.


Part II

Item 5. Market for  Registrant's  Common  Equity  and  Related  Stockholder  
Matters

    The Company had approximately 826 stockholders of record as of March 1,
1999. The Company's stock is not traded on any national or regional stock
exchange although brokers in Cumberland, Maryland, Winchester and Harrisonburg,
Virginia may occasionally initiate or be a participant in a trade. Terms of an
exchange between individual parties may not be known to the Company. The
following outlines the dividends paid and market prices of the Company's stock
based on prices disclosed to management. Such prices may not include retail
mark-ups, mark-downs or commissions.

                             Dividends          Market Price Range
           1998              Per Share          High             Low


        First Quarter         $ .27           $ 63.00          $ 50.00
        Second Quarter          .27             62.75            58.25
        Third Quarter           .27             69.00            63.00
        Fourth Quarter          .27             63.25            62.25

          1997

        First Quarter         $ .25           $ 44.25          $ 41.00
        Second Quarter          .25             45.00            43.00
        Third Quarter           .25             46.86            44.00
        Fourth Quarter          .25             46.50            44.75

           1996

        First Quarter         $ .18           $ 39.88          $ 38.00
        Second Quarter          .18             40.50            38.00
        Third Quarter           .18             40.50            39.00
        Fourth Quarter          .40             42.00            40.50


<PAGE> 6

Item 6. Management's  Discussion  and  Analysis of Financial  Condition  and 
        Results of Operations

Overview

    The Company's 1998 net income of $2,011,882 represents a 7.01% increase in
net income and a 7.51% increase in income per share compared to 1997. This
represented a return of 9.12% on average equity for 1998 compared to 8.80% for
1997. Returns on average assets for 1998 and 1997 were 1.01% and 1.00%,
respectively. The increase in earnings was due to an increase in the volume of
earning assets in a stable interest environment.

    The tax equivalent interest income increased by $676,000 in 1998 to
$15,870,000 as compared to 1997. A 5.43% increase in the level of earning assets
offset a slight decrease in the yield and resulted in the earnings improvement.
The increase in earning assets is attributable to a 9.44% increase in average
loans outstanding and was primarily in real estate loans. The funding of the
asset growth was from deposits of local customers, primarily time deposits.

    Noninterest income increased 28.64% in 1998 compared to 1997 due to an
increase in service charge income and a decrease in losses on security
transactions. Noninterest expenses increased 5.11% in 1998 due mainly to the
higher cost of data processing and year 2000 compliance expenses.


Net Interest Margin

    1998 Compared to 1997

    The Company's net interest margin on a tax equivalent basis was $8,125,000
for 1998 compared to $7,721,000 for 1997. The increase was due to an increase in
average earning assets (5.43%) and an increased spread (the difference in rates
earned on assets and paid on liabilities) from 3.51% in 1997 to 3.59% in 1998.
Average loans outstanding grew by 9.44% from 1997 to 1998. This growth reflects
good local and national economic conditions, moderate interest rates and
expanded banking facilities. The overall costs of funds reflects the high level
of competition for deposits in the Company's service area which has
traditionally paid higher rates on deposits than larger statewide financial
institutions. The deposit increase represents growth in all types of accounts
(particularly time deposits) and has been obtained primarily from customers in
the immediate service areas.

    Loans outstanding at December 31, 1998 increased 8.23% over amounts at
December 31, 1997. The loan increase has been the result of opening branches in
new market areas and a continued effort to increase lending in existing markets.
Loan growth has been funded primarily by deposit growth with a slight decline in
the level of security investments since December 31, 1997. The increase in the
tax equivalent net interest margin for 1998 over the 1997 amounts is the result
of slight declines in the costs of funds on all types of deposit accounts and an
annualized growth in earning assets of 5.43%. Barring any future increases in
interest rates by the Federal Reserve Bank, the Company anticipates its net
interest margin remaining stable or increasing slightly. Rates paid on deposits
are expected to remain stable or decline slightly over the next twelve months
and returns on and the levels of earning assets are expected to remain at
current levels during this period.

    A summary of the net interest margin analysis is shown as Table II on page
21.

    1997 compared to 1996

    The Company's net interest income on a tax equivalent basis increased to
$7,721,000 for 1997 or 7.10% higher than the amount for 1996. Yields on loans
declined slightly (seventeen basis points) due to declines in mortgage rates.
The mortgage rate decline was the result of declines in the rate on long-term
government bonds and other market yields. Yields on investment securities
increased three basis points while yields on federal funds sold increased
eighteen basis points. The result of the above was a yield on earning assets of
8.55%, the same as the 1996 yield.


<PAGE> 7

Net Interest Margin (Continued)

    1997 compared to 1996 (Continued)

    The Company's overall cost of funds declined by eleven basis points in 1997
to 5.04%. The decline was primarily in the area of time deposits with a decline
of nineteen basis points. The decline was due to the maturity of higher costing
certificates that originated in 1995 and matured in the summer and fall of 1997.
Lesser reductions in the cost of demand and savings deposits were also
contributors to the decline in the cost of deposits.

    A summary of the net interest margin analysis is shown as Table II on Page
21.


Provision for Loan Losses

    The Company's provision for loan losses were $355,000 for 1998, $190,000 for
1997 and $135,000 for 1996. The increases in the provision were necessary to
provide an adequate allowance for loan losses for a growing loan portfolio. Net
loan losses were $370,000 in 1998 compared to $77,000 in 1997 and $197,000 in
1996. The Company's three year average charge off rate of .16% compares
favorably with industry standards and its peer group. (See the following
discussion relating to the allowance for loan losses.)


Noninterest Income

    1998 Compared to 1997

    Noninterest income (before losses on securities) for 1998 increased 7.07%
from 1997. Increases in service charge income of 12.08% and other operating
income of 37.19% were the result of an increase in volume. Insurance income
decreased $67,000 due to significantly higher mortality rates. Losses on
security transactions declined from $117,000 in 1997 to $2,000 in 1998. 1997
included a loss of $123,000 on a mutual fund that was not repeated in 1998. The
Company expects future growth in noninterest income to coincide with asset and
deposit growth.

    1997 compared to 1996

    Overall noninterest income declined in 1997 by 3.48% when compared with 1996
operations. The Company experienced a loss on the redemption of a mutual fund
investment that was redeemed in 1997. The loss of $123,000 was recognized on the
redemption though the Company may recover a portion of this loss in the
resolution of pending legal actions. Exclusive of the above, noninterest income
before security losses increased 10.77% as the result of higher service charges
on deposit accounts and the institution of minimum balance requirements on some
deposit accounts. Other types of noninterest income increased slightly in line
with asset growth.


<PAGE> 8

Noninterest Expenses

    1998 Compared to 1997

    Overall, noninterest expense increased 5.11% in 1998 when compared to 1997.
Personnel expenses increased 3.80% as the result of merit and inflationary
raises. Occupancy and equipment expenses increased 2.35% as the result of asset
growth and inflation. Data processing expenses increased by 4.46% as a result of
increase transaction volume and rate increases. Other noninterest expenses
increased by 9.94% due to asset growth and costs in preparing for the upcoming
year 2000. The overall increase in noninterest expenses is in line with the
increase in assets and is in line with management's expectations. Noninterest
expense as a percentage of average assets was 2.69% in 1998 compared with 2.73%
in 1997 and 2.61% in 1996. This ratio continues to compare favorably to the
Company's peer group.

    1997 compared to 1996

    Total noninterest expenses increased 11.94% in 1997 when compared with 1996
operations. Salaries and benefits increased 13.41% due to the increase in staff
at the new branches and merit and inflationary raises. Average full time
equivalent employees increased 9.60% in 1997 and staffing the new branches was
the major reason for this increase. The costs of occupancy and equipment
increased 11.09% due to the branch openings and the equipment costs and
depreciation associated with this expansion. Data processing expenses increased
by 12.47% due to new communication lines, general asset growth and expanded
locations. Other noninterest expenses increased 8.92% in 1997 for all of the
reasons cited above.


Financial Condition

     Loan Portfolio

     The Company is an active residential mortgage and construction lender and
generally extends commercial loans to small and medium sized businesses within
its primary service area. The Company's commercial lending activity extends
across its primary service areas of Grant, Hardy, Hampshire, Mineral and
northern Pendleton counties. Consistent with its focus on providing
community-based financial services, the Company does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.

     The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels, consumer
confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based upon
the strength and activity of the local economies of the Company's market areas.
The risk associated with real estate construction loans varies based upon the
supply of and demand for the type of real estate under construction.

    Loans outstanding increased $11,279,000 or 8.23% in 1998. The bulk of this
increase was in real estate loans with smaller increases in other types of
loans. The loan to deposit ratio was 80.39% at December 31, 1998 compared to
81.64% at December 31, 1997. Management believes this level of lending activity
is satisfactory to generate adequate earnings without undue credit risk. Loan
demand is expected to remain satisfactory in the near future with any growth a
function of local and national economic conditions.


<PAGE> 9

Financial Condition (Continued)

     Loan Portfolio (Continued)

     The following table summarizes the Company's loan portfolio, net of
unearned income:

                                                  At December 31, 
                                            1998        1997        1996
                                               (Dollars in Thousands)
     Real Estate:
       Mortgage                           $ 83,446    $ 75,221    $ 70,829
       Construction                          2,969       2,189       2,158
     Commercial                             30,718      30,716      25,104
     Installment                            33,464      31,492      28,693

                                           150,597     139,618     126,784
     Less unearned discount                 (2,213)     (2,513)     (2,184)

                                           148,384     137,105     124,600
     Allowance for loan losses              (1,355)     (1,369)     (1,257)

       Loans, net                         $147,029    $135,736    $123,343


     The following table shows the maturity of loans outstanding (in thousands
of dollars) as of December 31, 1998, 1997 and 1996.

    Maturity Range                          1998        1997        1996

     Predetermined Rates:
       0 - 12 months                      $ 73,878    $ 63,117    $ 45,402
       13 - 60 months                       53,765      54,070      68,879
       More than 60 months                  20,702      19,918      10,319
     Nonaccrual Loans                           39                        

       Total Loans                        $148,384    $137,105    $124,600


     The following table shows the Company's loan maturity distribution (in
thousands of dollars) as of December 31, 1998:

                                               Maturity Range
                                Less Than      1-5        Over
       Loan Type                  1 Year      Years      5 Years      Total

     Commercial and
       Agricultural Loans       $ 23,526    $  5,223    $  1,969    $ 30,718
     Real Estate - mortgage       40,119      25,281      18,046      83,446
     Real Estate - construction    2,969                               2,969
     Consumer - installment        7,264      23,261         726      31,251

       Total                    $ 73,878    $ 53,765    $ 20,741    $148,384


<PAGE> 10

Financial Condition (Continued)

     Loan Portfolio (Continued)

     Nonperforming loans include nonaccrual loans, loans 90 days or more past
due and restructured loans. Nonaccrual loans are loans on which interest
accruals have been discontinued. Loans which reach nonaccrual status may not be
restored to accrual status until all delinquent principal and interest has been
paid or the loan becomes both well secured and in the process of collection.
Restructured loans are loans with respect to which a borrower has been granted a
concession on the interest rate or the original repayment terms because of
financial difficulties. Nonperforming loans do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources. Nonperforming
loans are listed in the table below.

     Real estate acquired through foreclosure was $95,000 at December 31, 1998,
$174,000 at December 31, 1997 and $160,000 at December 31, 1996. All foreclosed
property held at December 31, 1998 was in the Company's primary service area.
The Company's practice is to value real estate acquired through foreclosure at
the lower of (i) an independent current appraisal or market analysis less
anticipated costs of disposal, or (ii) the existing loan balance. The Company is
actively marketing all foreclosed real estate and does not anticipate material
write-downs in value before disposition.

     Management has continued its efforts to reduce delinquencies through
greater efforts in the early stages of the delinquency. The increase in
delinquent real estate loans in 1998 was due to one large loan which is 75%
guaranteed by a governmental agency. Management does not anticipate any material
losses from the current level of nonperforming assets.

     The following table summarizes the nonperforming loans:

                                                          At December 31,
                                                   1998      1997        1996
                                                      (Dollars in Thousands)

     Loans accounted for on a nonaccrual basis    $   39   $            $     

     Loans contractually past due 90 days or
       more as to interest or principal
       payments (not included in nonaccrual
       loans above)
         Commercial                                   41        17         63
         Real estate                               1,339       938        208
         Installments                                142       292        110

       Total Delinquent Loans                      1,522     1,247        381

       Total Nonperforming Loans                 $ 1,561    $1,247      $ 381


<PAGE> 11

Financial Condition (Continued)

     Loan Portfolio (Continued)

    An inherent risk in the lending of money is that the borrower will not be
able to repay the loan under the terms of the original agreement. The allowance
for loan losses (see subsequent section) provides for this risk and is reviewed
periodically for adequacy. This review also considers concentrations of loans in
terms of geography, business type or level of risk. While lending is
geographically diversified within the service area, the Company does have some
concentration of loans in the area of agriculture (primarily poultry farming),
timber and related industries. Management recognizes these concentrations and
considers them when structuring its loan portfolio. As of December 31, 1998,
management is not aware of any significant potential problem loans in which the
debtor is currently meeting their obligations as stated in the loan agreement
but which may change in future periods.

     As of December 31, 1998, the Company did not have any potential problem
loans as defined in Guide 3 that would require disclosure.


Allowance for Loan Losses

     Management has analyzed the potential risk of loss on the Company's loan
portfolio given the loan balances and the value of the underlying collateral and
has recognized losses where appropriate. Nonperforming loans are closely
monitored on an ongoing basis as part of the Company's loan review process.
Management reviews the loan loss allowance at the end of each quarter. Based
primarily on the Company's loan classification system, which classifies problem
credits as substandard, doubtful or loss, additional provisions for losses are
made monthly. The ratio of the allowance for loan losses to total loans
outstanding was .91% at December 31, 1998 compared to 1.00% at December 31, 1997
and 1.01% at December 31, 1996. At December 31, 1998, the ratio of the allowance
for loan losses to nonperforming loans was 86.83% compared to 109.78% at
December 31, 1997 and 329.92% at December 31, 1996.

     The unusually large amount of net charge offs in 1998 was the result of
several large bankruptcies. Some recoveries are expected from these actions but
it is too premature to estimate the amount at this time. Loan losses in 1997
were spread over all loan types with no individual loss constituting a
significant portion of the total.

     Management continues to monitor the economic health of the poultry
industry. The Company has direct loans to poultry growers and the industry is a
large employer in the Company's trade area. Operating results for the industry
were poor in 1997 due to over supply of products and high grain prices. The
situation has improved during 1998, however it may take some time for borrowers
to recover financially.


<PAGE> 12

Allowance for Loan Losses (Continued)

     The following table summarizes changes in the allowance for loan losses:

                                               Year Ending December 31,
                                              1998       1997       1996
                                               (In Thousands of Dollars)

     Balance at beginning of period          $1,370     $1,257    $1,319

     Loan Losses:
       Commercial and agricultural              135         34        92
       Real estate - mortgage                    53         20        59
       Installment loans to individuals         289        170       186

       Total loan losses                        477        224       337

     Recoveries:
       Commercial and agricultural                6          9         9
       Real estate - mortgage                     1         25        15
       Installment loans to individuals         100        113       116

       Total recoveries                         107        147       140

       Net loan losses                          370         77       197

     Additions charged to operations            355        190       135

     Balance at end of period                $1,355     $1,370    $1,257

     The Company has allocated the allowance for loan losses according to the
amounts deemed to be reasonably necessary to provide for the possibility of
losses incurred within each of the above categories of loans. The allocation of
the allowance as shown in the table below should not be interpreted as an
indication that loan losses in future years will occur in the same proportions
or that the allocation indicates future loan loss trends. Furthermore, the
portion allocated to each loan category is not the total amount available for
future losses that might occur within such categories since the total allowance
is a general allowance applicable to the entire portfolio.

     The following table shows the balance and percentage of the Company's
allowance for loan losses allocated to each major category of loans:

                                          At December 31, 
                         1998                  1997             1996

                                Percent               Percent           Percent
                                  of                    of                of
                                 Loans                Loans              Loans
                       Percent    in        Percent    in       Percent   in
                         of    Category       of    Category      of   Category
                        Allow- to Total      Allow- to Total    Allow- to Total
                Amount  ance    Loans Amount ance   Loans Amount ance   Loans
                                      (Dollars in Thousands)

     Commercial $  379   28%    23%  $  343    25%    22%  $  314  25%   18%
     Real estate
       mortgage    434   32     56      548    40     56      440  35    59
     Installment   406   30     21      343    25     22      314  25    23
     Unallocated   136   10             136    10             189  15

                $1,355  100%   100%  $1,370  100%    100%  $1,257 100%  100%


<PAGE> 13

Allowance for Loan Losses (Continued)

     For each period presented, the provision for loan losses charged to
operations is based on management's judgment after taking into consideration all
factors connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include internally generated loan review reports, previous
loan loss experience with the borrower, the status of past due interest and
principal payments on the loan, the quality of financial information supplied by
the borrower and the general financial condition of the borrower.

     The provision for loan losses charged to operations was $355,000 for 1998,
$190,000 for 1997 and $135,000 for 1996. In the opinion of management, the
provision charged to operations over this three year period has been sufficient
to maintain an adequate allowance for loan losses.


Securities

     The Company's securities portfolio serves several purposes. Portions of the
portfolio are used to secure certain public and trust deposits. The remaining
portfolio is held as investments or used to assist the Company in liquidity and
asset liability management. During 1998, total securities decreased to $34.0
million or 16.11% of total assets at December 31, 1998. Total securities were
$37.0 million or 19.38% of total assets at December 31, 1997.

     The securities portfolio consists of three components: securities held to
maturity, securities available for sale and restricted securities. Securities
are classified as held to maturity when management has the intent and the
Company has the ability at the time of purchase to hold the securities to
maturity. Held to maturity securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Securities to be held for
indefinite periods of time are classified as available for sale and accounted
for at market value. Securities available for sale include securities that may
be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity needs
and other similar factors. Restricted securities are those investments purchased
as a requirement of membership in certain loan banks and cannot be transferred
without the Bank's permission. The Company's purchases of securities have
generally been limited to securities of high credit quality with short to medium
term maturities.

     The Company identifies at the time of acquisition those securities that are
available for sale. These securities are valued at their market value with any
difference in market value and amortized cost shown as an adjustment in
stockholders' equity. Changes within the year in market values are reflected as
changes in stockholders' equity, net of the deferred tax effect. As of December
31, 1998, the market value of the securities available for sale exceeded their
cost by $190,000 ($119,000 after the related tax effect).


<PAGE> 14

Securities (Continued)

     The following table summarizes the carrying value of the Company's
securities at the dates indicated:

                                  Held to Maturity         Available for Sale
                                   Carrying Value            Carrying Value
                                    December 31,              December 31,
                                1998    1997    1996      1998    1997    1996
                               (Dollars in Thousands)    (Dollars in Thousands)

     U.S. treasuries, agencies
       and corporations       $       $   751  $4,200   $22,129 $20,349 $18,304
     Obligations of states and
       political subdivisions  2,987    3,295   3,818       262     101
     Mortgage-backed securities  517      531     541     6,821  10,665  13,807

       Total Debt Securities   3,504    4,577   8,559     9,212  31,115  32,111

     Other securities                                       546     567     946

       Total                 $ 3,504  $ 4,577   $8,559  $29,758 $31,682 $33,057


     The carrying amount and estimated market value of debt securities (in
thousands of dollars) at December 31, 1998 by contractual maturity are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.

     Securities Held to Maturity         Carrying      Market       Average
                                          Amount        Value        Yield  

     Due in one year or less            $     155    $      156      7.77%
     Due after one year
       through five years                     934           949      7.25%
     Due after five years
       through ten years                    1,403         1,478      7.87%
     Due after ten years                    1,012         1,038      9.09%

       Total Held to Maturity           $   3,504    $    3,621      8.02%


     Securities Available for Sale       Amortized      Market       Average
                                           Cost          Value        Yield  

     Due in one year or less             $  10,885    $   10,945      6.00%
     Due after one year through
       five years                           13,556        13,736      6.19%
     Due after five years through
       ten years                             3,320         3,326      6.95%
     Due after ten years                     1,188         1,205      7.01%

       Total Fixed Rate Securities          28,949        29,212      6.24%
     Equities                                  619           546

       Total Available for Sale          $  29,568    $   29,758


     Yields on tax exempt securities are stated at tax equivalent yields.

     Management has generally kept the maturities of investments relatively
short providing for flexibility in investing. Such a philosophy allows the
Company to better match deposit maturities with investment maturities and thus
react more quickly to interest rate changes.


<PAGE> 15

Deposits

     The Company's predominant source of funds is local deposits. The Company's
deposit base is comprised of demand deposits, savings and money market accounts
and other time deposits. The Company's deposits are provided by individuals and
businesses located within the communities served.

     The average balance of interest bearing deposits increased by 7.32% in 1998
over average levels in 1997. The average rate paid on deposits declined to 4.91%
in 1998 from 5.03% in 1997 and 5.15% in 1996. The majority of the Company's
deposits are higher yielding time deposits as most of its customers are
individuals who seek higher yields than savings accounts or don't wish to accept
the risks of the stock market.

     The Company does not actively solicit large certificates of deposit (those
more than $100,000) due to the unstable nature of these deposits. Increases in
1998 are the result of overall deposit growth and higher than average rates
offered by the Company. A summary of the maturity of large deposits is as
follows:
                                                    December 31,
         Maturity Range                   1998        1997        1996
                                            (In Thousands of Dollars)

     Three months or less               $  5,883    $  6,086    $   4,832
     Four to twelve months                11,391       8,497       11,360
     One year to five years                8,449       8,744        4,667

       Total                            $ 25,723    $ 23,327    $  20,859


Borrowed Money

     The Company will occasionally borrow funds from the Federal Home Loan Bank
to reduce market rate risks. Such borrowings have fixed repayment terms and are
amortized over a ten to twenty year life. Borrowings from this institution
allows the banks to offer long-term, fixed rate loans to their customers and
match the interest rate exposure of the receivable and the liability.


Capital Resources

     The assessment of capital adequacy depends on a number of factors such as
asset quality, liquidity, earnings performance and changing competitive
conditions and economic forces. The Company seeks to maintain a strong capital
base to support its growth and expansion activities, to provide stability to
current operations and to promote public confidence.

     The Company's capital position continues to exceed regulatory minimums. The
primary indicators relied on by the Federal Reserve Board and other bank
regulators in measuring strength of capital position are the Tier 1 Capital,
Total Capital and Leverage ratios. Tier 1 Capital consists of common
stockholders' equity. Total Capital consists of Tier 1 Capital and a portion of
the allowance for loan losses. Risk-based capital ratios are calculated with
reference to risk-weighted assets which consist of both on and off-balance sheet
risks.

     The following table shows risk-based capital ratios and stockholders'
equity to total assets:

                                           Regulatory     December 31,
                                             Minimum    1998       1997

     Capital Ratios
       Risk-based capital to risk-weighted
        assets
         Tier 1                               4.00%     17.00%    17.35%
         Total                                8.00%     18.02%    18.47%
       Stockholders' equity to total assets   3.00%     10.83%    11.15%


<PAGE> 16

Capital Resources (Continued)

     The capital management function is an ongoing process. Central to this
process is internal equity generation accomplished by earnings retention. During
1998, 1997 and 1996, total stockholders' equity increased by $1,550,000,
$1,068,000 and $1,367,000, respectively, as a result of earnings retention and
changes in the unrealized gains (losses) on securities available for sale. The
return on average equity was 9.12% in 1998 compared to 8.80% for 1997 and 9.99%
for 1996. Total cash dividends declared represent 26.94% of net income for 1998
compared to 26.84% of net income for 1997 and 24.00% for 1996. Book value per
share was $45.52 at December 31, 1998 compared to $42.43 at December 31, 1997
and $39.35 at December 31, 1996.

     In April of 1997, the Company repurchased 12,168 shares of common stock for
$499,000. The repurchased stock is being held as treasury stock and may be used
in future periods for a variety of business purposes. The stock was repurchased
from the estate of William G. VanMeter for whom the Company's chairman, John
VanMeter, is the executor.

     The Company's principal source of cash income is dividend payments from the
Banks. Certain limitations exist under applicable law and regulation by
regulatory agencies regarding dividend payments to a parent by its subsidiaries.
As of January 1, 1999, the Banks had $2,365,000 of retained earnings available
for distribution to the Company as dividends without prior regulatory approval.


Liquidity and Interest Rate Sensitivity

     Liquidity. Liquidity is the ability to meet present and future financial
obligations through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. The Company's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of the Company's management of liquid assets and the
ability to generate liquidity through liability funding, management believes
that the Company maintains overall liquidity sufficient to satisfy its
depositors' requirements and meet its customers' credit needs.

     Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions, the Federal Reserve Bank of Richmond and
the Federal Home Loan Bank of Pittsburgh. In the past, growth in deposits and
proceeds from the maturity of investment securities have been sufficient to fund
the net increase in loans.

     The investing activity saw a net increase in loans of $11,279,000, an
increase in federal funds sold of $5,479,000, an increase in investment
securities of $2,982,000 and an increase in deposits in other banks of
$2,605,000. In addition, the Company invested $2,070,000 in single premium life
insurance policies used to fund deferred compensation. New equipment and
facility additions were $337,000 in 1998 compared with $607,000 in 1997. Funding
these investments was an increase in deposits of $16,652,000, additional
long-term debt of $2,146,000 and retained operating income of $1,470,000.

     In the year ending December 31, 1998, cash and due from banks increased
$1,866,000 as cash provided by operations and financing activities exceeded cash
used in investing activities. Cash provided by operations consists primarily of
earnings from operations and noncash expenses such as the provision for loan
losses, deferred income taxes and depreciation. The dividends paid of $542,000
in 1998 was an increase of 7.42 percent over 1997 amounts.


<PAGE> 17

Liquidity and Interest Rate Sensitivity (Continued)

     The Company is not aware of any trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations. The Company is not aware of any
proposals from any regulatory authority which, if implemented, would have such
an effect.


     Interest Rate Sensitivity. In conjunction with maintaining a satisfactory
level of liquidity, management must also control the degree of interest rate
risk assumed on the balance sheet. Managing this risk involves regular
monitoring of the interest sensitive assets relative to interest sensitive
liabilities over specific time intervals.

     At December 31, 1998, the Company had a negative gap position through the
third year. This liability sensitive position typically produces a favorable
contribution to earnings during periods of decreasing rates and an unfavorable
contribution to earnings during a period of increasing rates. Absent any major
changes in federal reserve policy, the Company expects a slight decline in the
overall cost of money in 1998 due to the maturity of these certificates and
stability in other deposit rates.

     With the largest amount of interest sensitive assets and liabilities
repricing within three years, the Company monitors these areas closely. Early
withdrawal of deposits, prepayments of loans and loan delinquencies are some of
the factors that could affect actual versus expected cash flows. In addition,
changes in rates on interest sensitive assets and liabilities may not be equal,
which could result in a change in net interest margin. While the Company does
not match each of its interest sensitive assets against specific interest
sensitive liabilities, it does periodically review its cumulative position of
interest sensitive assets and liabilities.

     The majority of the Company's commercial and real estate loans are made
with repricing frequencies of three months to three years. For this reason, 78%
of all loans will reprice within three years of December 31, 1998. Installment
loans generally have a fixed rate of interest but have limited amortization
periods. These loans have an average life to maturity of less than two years.
Management believes that its philosophy of generally requiring loan repricing
within a three to five year period to be the most prudent approach to
asset/liability management.

     In the area of investments, the Company employs a management technique
known as "laddering" to minimize interest rate exposures and provide a constant
flow of maturities subject to repricing at current market rates. To assist in
the management of investments, the Company employs an independent investment
counsel that advises it in planning and risk diversification. The Company
utilizes many forms of investment with a significant use of mortgage-backed
securities issued by federally chartered institutions. The Company does not
employ the use of derivatives in its approach to controlling market risk.
Although the majority of its investments are classified as available for sale,
the Company rarely sells securities except in unusual circumstances.

     Table IV (page 23) shows the maturity of liabilities and assets in future
periods. Table III (page 22) shows the effects of rate and volume changes on the
net interest margin for the past three year period.


<PAGE> 18

Effects of Inflation

     Inflation significantly affects industries having high levels of property,
plant and equipment or inventories. Although the Company is not significantly
affected in these areas, inflation does have an impact on the growth of assets.
As assets grow rapidly, it becomes necessary to increase equity capital at
proportionate levels to maintain the appropriate equity to asset ratios.
Traditionally, the Company's earnings and high capital retention levels have
enabled the Company to meet these needs.

     The Company's reported earnings results have been affected by inflation,
but isolating the effect is difficult. The different types of income and expense
are affected in various ways. Interest rates are affected by inflation, but the
timing and magnitude of the changes may not coincide with changes in the
consumer price index. Management actively monitors interest rate sensitivity, as
illustrated by the Gap Analysis (Table IV, page 23) in order to minimize the
effects of inflationary trends on interest rates. Other areas of noninterest
expenses may be more directly affected by inflation.


Year 2000 Readiness Disclosure

     The following statements are being designated as Year 2000 Readiness
Disclosures under the Year 2000 Information and Readiness Disclosure Act,
enacted by the 105th Congress on October 19. 1998.

     Each of the subsidiary banks and the insurance company have appointed a
group of individuals from within the Organization to identify critical areas for
year 2000 compliance and to determine if that area will be year 2000 compliant.
Critical compliance areas include third party data processing, wire transfers,
internal computer readiness, transaction processing, security, liquidity
planning and correspondent banking. The Company has begun to ascertain its
compliance internally through the help of computer and information consultants
and the upgrade of computer and information processing hardware. Noncompliance
items and systems have been identified. Remediation and testing are progressing
according to plan and testing of substantially all systems is anticipated to be
complete by June 30, 1999. Continuing discussions with third party vendors who
perform data processing functions and with correspondent banking institutions do
not indicate any critical shortcomings in their compliance at this time.

     As of December 31, 1998, the Company has incurred $410,000 in services and
equipment costs in its efforts to become year 2000 compliant. Most of these
expenditures include amounts for normal and scheduled equipment upgrades. The
Company has budgeted $650,000 in total expenditures through December 31, 1999
for its compliance effort. Roughly 60 to 70% of this amount will be for
equipment replacements and upgrades. Some of the costs of the year 2000 project
include the cost of Company personnel who will spend significant time on the
project. The Company does not anticipate that these costs, when aggregated, will
have a materially negative impact on the Company operations in any one period.

     The impact of year 2000 issues on the Company will depend not only on
corrective actions that the Company takes, but also on the way in which year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Company, or whose financial condition or operational capability is important to
the Company. To reduce this exposure, the Company has an ongoing process of
identifying and contacting mission critical third party vendors and other
significant third parties to determine their year 2000 plans and target dates.
Notwithstanding the Company's efforts, there can be no assurance that mission
critical third party vendors or other significant third parties will adequately
address their year 2000 issues.


<PAGE> 19

Year 2000 Readiness Disclosure (Continued)


     The Company is developing contingency plans for implementation in the event
that mission critical third party vendors or other significant third parties
fail to adequately address year 2000 issues. Such plans principally involve
identifying alternate vendors or internal remediation. The Company is also
enhancing its existing business resumption plans to reflect year 2000 issues and
is developing plans designed to coordinate the efforts of its personnel and
resources in addressing any year 2000 problems that become evident after
December 31, 1999. The Company has identified mission critical areas and
anticipates its business resumption plan will be completed by June 30, 1999.
There can be no assurance that any such plans will fully mitigate any such
failure or problems. Furthermore, there may be certain mission critical third
parties, such as utilities or telecommunication companies, where alternative
arrangements or sources are limited or unavailable.

     The Company's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address year 2000 issues. As a result, there
may be increases in the Company's problem loans and credit losses in future
years. It is not, however, possible to quantify the potential impact of such
losses at this time.

     If year 2000 issues are not adequately addressed by the Company and third
parties, the Company's business, results of operations and financial position
could be materially adversely affected.

     The foregoing year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs, the dates by which
the Company expects to substantially complete programming changes, remediation
and testing of systems and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third party service
providers and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to identify and convert all relevant computer systems,
results of year 2000 testing, adequate resolution of year 2000 issues by
governmental agencies, businesses or other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
system costs, the need to replace hardware, the adequacy of and ability to
implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing year 2000 discussion speak only as of the date
on which such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.

Securities and Exchange Commission WEB Site

     The Securities and Exchange Commission maintains a WEB site that contains
reports, proxy and information statements and other information regarding
registrants (including the Company) that file electronically with the
Commission. That address is (http: //www.sec.gov)


<PAGE> 20
TABLE I


                             SUMMARY OF OPERATIONS
                         (Dollar amounts in thousands)



                                          Years Ending December 31,
                                   (In Thousands Except for Share Amounts)
                                  1998     1997     1996     1995     1994

Total Interest Income           $15,772  $15,084  $14,182  $12,758  $11,726
Total Interest Expense           (7,745)  (7,474)  (7,103)  (6,219)  (5,082)

Net Interest Income               8,027    7,610    7,079    6,539    6,644
Provision for Loan Losses           355      190      135      120      240

Net Interest Income after
   Provision for Loan Losses      7,672    7,420    6,944    6,419    6,404
Other Income                        735      571      592      581      467
Other Expenses                    5,377    5,115    4,570    4,191    4,052

Income before Income Taxes        3,030    2,876    2,966    2,809    2,819
Income Tax Expense                1,018      996      953      956      944

   Net Income                   $ 2,012  $ 1,880  $ 2,013  $ 1,853  $ 1,875


Net Income Per Share            $  4.01  $  3.73  $  3.92  $  3.60  $  3.65
Dividends Per Share             $  1.08  $  1.00  $   .94  $   .83  $   .72

Total Assets at Year End       $210,981 $190,770 $178,847 $167,884 $153,361



Return on Average Assets          1.01%    1.00%    1.15%    1.16%    1.22%
Return on Average Equity          9.12%    8.80%    9.99%   10.15%   11.05%
Dividend Payout Ratio            26.94%   26.80%   24.00%   23.03%   19.74%
Year End Equity to Assets Ratio  10.83%   11.16%   11.31%   11.24%   10.94%


<PAGE> 21
TABLE II

<TABLE>

                    NET INTEREST MARGIN AND AVERAGE BALANCE ANALYSIS
                              (Dollar amounts in thousands)

<CAPTION>

                                      1998                       1997                         1996
                                     Income/ Yield/             Income/   Yield/             Income/   Yield/
EARNING ASSETS            Average    Expense  Rate     Average  Expense    Rate     Average  Expense    Rate

<S>                      <C>        <C>        <C>    <C>        <C>       <C>     <C>       <C>        <C>

Loans 3                  $ 143,197  $ 13,144   9.18   $ 130,848  $ 12,230   9.35   $ 116,864 $ 11,135   9.52

Investment securities:
   Taxable 4                31,402     1,952   6.22      37,032     2,315   6.25      40,270    2,491   6.19
   Nontaxable 1,4            3,316       270   8.14       3,568       298   8.35       4,146      354   8.53

   Total Investment
     Securities             34,718     2,222   6.40      40,600     2,613   6.44      44,416    2,845   6.41

Interest bearing deposits
   in banks                  1,215        64   5.27         685        37   5.40         898       48   5.35

Federal funds sold           8,216       440   5.36       5,561       314   5.65       5,192      284   5.47

   Total Earning Assets    187,346    15,870   8.47     177,694    15,194   8.55     167,370   14,312   8.55

Allowance for loan losses   (1,319)                      (1,314)                      (1,288)
Nonearnings assets          13,636                       10,860                        9,280

   Total Assets          $ 199,663                    $ 187,240                    $ 175,362

INTEREST-BEARING LIABILITIES

Deposits:
   Demand                $  29,187    $  808   2.77   $  27,823    $  799   2.87   $  26,701  $   778   2.91
   Savings                  20,135       671   3.33      18,684       659   3.53      17,535      620   3.54
   Time deposits           108,382     6,213   5.73     100,444     5,930   5.90      93,482    5,695   6.09

   Total Deposits          157,704     7,692   4.88     146,951     7,388   5.03     137,718    7,093   5.15
Other borrowed money           974        53   5.44       1,443        85   5.89         148       10   6.75

   Total Interest Bearing
     Liabilities           158,678     7,745   4.88     148,394     7,473   5.04     137,866    7,103   5.15

Noninterest bearing
  deposits                  17,744                       16,100                       15,600
Other liabilities            1,186                        1,370                        1,751

   Total Liabilities       177,608                      165,864                      155,217

   Stockholders' Equity     22,055                       21,376                       20,145

   Total Liabilities
     and Equity          $ 199,663                    $ 187,240                    $ 175,362

   Net Interest Earnings            $  8,125                     $  7,721                     $ 7,209

   Net Yield on Interest
     Earning Assets                           4.34%                         4.35%                       4.32%

</TABLE>

1 Yields are computed on a taxable equivalent basis using a 37% income tax rate.
2 Average balances are based on daily balances. 3 Includes loans in nonaccrual
  status.
4 Average balances for securities available for sale are based on amortized
  carrying values and do not reflect changes in market values.


<PAGE> 22
TABLE III

<TABLE>

                      EFFECT  OF RATE-VOLUME CHANGES ON NET INTEREST INCOME (On a fully
                                     taxable equivalent basis)
                                     (In thousands of dollars)

<CAPTION>

                               1998 Compared to 1997        1997 Compared to 1996
                                 Increase (Decrease)         Increase (Decrease)

                               Due to Change in: Total     Due to Change in:  Total
                               Average  Average Increase    Average Average Increase
                                Volume    Rate (Decrease)    Volume Rate   (Decrease)

Interest Income:
   <S>                           <C>     <C>      <C>        <C>    <C>      <C>

   Loans 2                       $1,155  $(241)   $ 914      $1,331 $(236)   $1,095

   Investment Securities:
     Taxable                       (352)   (11)    (363)      (200)    24     (176)
     Nontaxable                     (21)    (7)     (28)       (49)    (7)     (56)

   Total Investment Securities     (373)   (18)    (391)      (249)    17     (232)

   Interest bearing deposits
     in banks                        29     (2)      27        (11)            (11)
   Federal funds sold               144    (18)     126         20     10       30

   Total Interest Income            955   (279)     676       1,091  (209)     882


Interest Expense:

   Deposits:
     Demand                          39    (30)       9         33    (12)      21
     Savings                         51    (39)      12         41     (2)      39
     All other time deposits        468   (185)     283        424   (189)     235
   Other borrowed money             (28)    (4)     (32)        87    (12)      75

   Total Interest Expense           530   (258)     272        585   (215)     370

   Net Interest Income           $  425  $ (21)   $ 404      $ 506  $   6    $ 512

</TABLE>


1  Changes in volume are calculated based on the difference in average balance
   multiplied by the prior year average rate. Rate change differences are the
   difference in the volume changes and the actual dollar amount of interest
   income or expense changes.

2 Nonaccrual loans have been included in average asset balances.


<PAGE> 23
TABLE IV


                      INTEREST RATE SENSITIVITY ANALYSIS
                           (In thousands of dollars)
                               DECEMBER 31, 1998



                                                           More than
                                                            5 Years
                         1 - 90  91 - 365 1 to 3   3 to 5 or Without
                          Days     Days    Years    Years  Maturity   Total
EARNINGS ASSETS

   Loans                $17,328  $56,550  $41,540  $12,225  $20,741 $148,384
   Fed funds sold        12,374                                      12,374
   Securities             5,390    9,875   12,445    1,748   4,535   33,993
   Interest bearing time
     deposits             2,832      600                              3,432

   Total                 37,924   67,025   53,985   13,973  25,276  198,183

INTEREST BEARING LIABILITIES

   Transaction accounts  18,354                                      18,354
   Money market accounts 11,393                                      11,393
   Savings accounts      20,849                                      20,849
   Time deposits more
     than $100,000        5,883   11,391    6,896    1,553           25,723
   Time deposits less
     than $100,000       16,103   40,723   23,928    5,371     100   86,225
   Other borrowed money      39      121      348      384   1,428    2,320

   Total                 72,621   52,235   31,172    7,308   1,528  164,864


Discrete interest
   sensitivity GAP      (34,697)  14,790   22,813    6,665  23,748   33,319

Cumulative interest
   sensitivity GAP      (34,697) (19,907)   2,906    9,571  33,319

Ratio of cumulative
   interest sensitive
   assets to cumulative
   interest sensitive
   liabilities            52.22%   84.06%  101.86%  105.86% 120.21%



Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.


<PAGE> 24

Item 7. Financial Statements


                         Index to Financial Statements



                                                                       Page

Consolidated Balance Sheets as of December 31, 1998 and 1997             25

Consolidated Statements of Income for the Years Ended December 31,
  1998, 1997 and 1996                                                    26

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 1998, 1997 and 1996                       27

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1998, 1997 and 1996                                       28

Notes to Consolidated Financial Statements                               29

Independent Auditors' Report                                             46


<PAGE> 25

CONSOLIDATED BALANCE SHEETS

HIGHLANDS BANKSHARES, INC.
                                                           December 31,
ASSETS                                               1998           1997

Cash and due from banks (notes 2, 3 and 15)      $ 5,111,863    $ 3,246,056
Interest bearing deposits in banks                 3,431,523        826,636
Federal funds sold                                12,374,283      6,895,115
Investments:
  Securities held to maturity (note 4)             3,503,965      4,576,963
  Securities available for sale (note 4)          29,757,841     31,682,358
  Other investments                                  730,950        715,250

Loans (notes 5, 13, 14 and 15)                   148,383,904    137,105,218
  Less allowance for loan losses (note 6)         (1,355,377)    (1,369,566)

  Net Loans                                      147,028,527    135,735,652

Bank premises and equipment (note 7)               4,759,710      4,772,798
Interest receivable                                1,556,347      1,547,604
Deferred income tax benefits (note 10)               124,612        164,988
Investment in insurance contracts                  2,122,432
Other assets                                         478,889        606,442

  Total Assets                                  $210,980,942   $190,769,862

LIABILITIES

Deposits:
  Noninterest bearing
    Demand deposits                              $22,043,509    $15,952,124
  Interest bearing
    Money market and interest checking            18,353,696     15,773,770
    Money market savings                          11,393,244     12,179,095
    Savings accounts                              20,849,433     19,389,384
    Certificates of deposit over $100,000
      (note 8)                                    25,722,913     23,327,442
    All other time deposits (note 8)              86,224,570     81,313,896

  Total Deposits                                 184,587,365    167,935,711

Accrued expenses and other liabilities             1,227,486      1,310,998
Long-term debt (note 9)                            2,319,544        226,152

  Total Liabilities                              188,134,395    169,472,861

STOCKHOLDERS' EQUITY

Common stock, $5 par value, 1,000,000 shares
  authorized, 546,764 shares issued                2,733,820      2,733,820
Surplus                                            1,661,987      1,661,987
Retained earnings (note 12)                       19,324,019     17,854,185
Other accumulated comprehensive income               119,422         39,710

                                                  23,839,248     22,289,702
Treasury stock (at cost, 44,866 shares
  in 1998 and 1997)                                 (992,701)      (992,701)

  Total Stockholders' Equity                      22,846,547     21,297,001

  Total Liabilities and Stockholders' Equity    $210,980,942   $190,769,862



        The accompanying notes are an integral part of this statement.


<PAGE> 26

CONSOLIDATED STATEMENTS OF INCOME

HIGHLANDS BANKSHARES, INC.

                                               Years  Ended  December 31,
                                             1998         1997        1996
INTEREST INCOME:
  Loans, including fees                 $13,144,542 $12,229,824 $11,134,887
  Federal funds sold                        440,293     314,382     284,286
  Interest bearing deposits                  64,230      36,915      48,357
  Investment securities - taxable         1,952,454   2,314,849   2,491,490
  Investment securities - nontaxable        170,115     187,667     223,795

  Total Interest Income                  15,771,634  15,083,637  14,182,815

INTEREST EXPENSE:
  Time deposits over $100,000             1,428,100   1,374,899   1,246,000
  Other deposits                          6,263,489   6,013,147   5,847,251

  Total Interest on Deposits              7,691,589   7,388,046   7,093,251

  Borrowed money                             52,937      85,224       9,921

  Total Interest Expense                  7,744,526   7,473,270   7,103,172

NET INTEREST INCOME                       8,027,108   7,610,367   7,079,643

PROVISION FOR LOAN LOSSES (note 6)          355,000     190,000     135,000

Net Interest Income after Provision
  for Loan Losses                         7,672,108   7,420,367   6,944,643

NONINTEREST INCOME:
  Service charges                           339,289     302,726     252,689
  Insurance commissions and income          107,482     174,061     162,306
  Other operating income                    290,221     211,546     206,398
  Loss on security transactions (note 4)     (2,071)   (117,036)    (29,503)

  Total Noninterest Income                  734,921     571,297     591,890

NONINTEREST EXPENSES:
  Salaries and benefits (note 11)         2,916,970   2,810,116   2,477,928
  Occupancy expense                         269,469     241,478     270,678
  Equipment expense                         411,660     424,032     328,372
  Data processing expense                   456,740     437,232     388,753
  Other operating expenses                1,321,750   1,202,271   1,103,804

  Total Noninterest Expenses              5,376,589   5,115,129   4,569,535

  Income before Income Tax Expense        3,030,440   2,876,535   2,966,998

INCOME TAX EXPENSE (note 10)              1,018,558     996,390     953,874

NET INCOME                               $2,011,882  $1,880,145  $2,013,124

Net Income Per Share                     $     4.01  $     3.73  $     3.92

Cash Dividends Paid Per Share            $     1.08  $     1.00  $      .94

Weighted Average Shares Outstanding         501,898     504,330     514,066



        The accompanying notes are an integral part of this statement.


<PAGE> 27
<TABLE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

HIGHLANDS BANKSHARES, INC.
<CAPTION>


                                                                     Accumulated
                                                                         Other
                                   Capital                  Retained Comprehensive Treasury
                                    Stock    Surplus        Earnings  Income (Loss)  Stock     Total
<S>                               <C>          <C>         <C>           <C>     <C>       <C>

BALANCE
   DECEMBER 31, 1995              2,733,820    1,661,987   14,948,757    11,280  (493,813) 18,862,031

   Comprehensive Income
     Net income                                             2,013,124                       2,013,124
     Change in unrealized loss
       on securities available
       for sale, net of tax
       effect of $95,420                                               (162,472)             (162,472)

Total Comprehensive
     Income                                                                                 1,850,062

   Cash dividends                                           (483,226)                        (483,226)

BALANCE
   DECEMBER 31, 1996              2,733,820    1,661,987   16,478,655  (151,192) (493,813) 20,229,457

   Comprehensive Income
     Net income                                             1,880,145                        1,880,145
     Change in unrealized loss
       on securities available
       for sale, net of tax
       effect of $112,119                                               190,902                190,902

   Total Comprehensive
     Income                                                                                  2,071,047

   Cash dividends                                            (504,615)                        (504,615)
   Purchase of treasury stock
     (12,168 shares)                                                             (498,888)    (498,888)

BALANCE
   DECEMBER 31, 1997              $2,733,820   1,661,987   17,854,185    39,710  (992,701)  21,297,001

   Comprehensive Income
     Net income                                             2,011,882                        2,011,882
     Change in unrealized loss
       on securities available
       for sale, net of tax
       effect of $46,814                                                 79,712                 79,712

   Total Comprehensive
     Income                                                                                  2,091,594

   Cash dividends                                            (542,048)                        (542,048)

BALANCE
   DECEMBER 31, 1998              $2,733,820  $1,661,987  $19,324,019 $ 119,422 $(992,701) $22,846,547
</TABLE>

             The accompanying notes are an integral part of this statement.


<PAGE> 28
<TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

HIGHLANDS BANKSHARES, INC.
<CAPTION>


                                                      Years Ended December 31,
                                                  1998         1997         1996
<S>                                            <C>          <C>           <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                  $2,011,882   $1,880,145    $2,013,124
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Loss on equipment                                                      26,339
       Loss on sale of securities                   2,071      117,036        29,503
       Depreciation                               350,429      359,740       262,757
       Net amortization of security premiums       15,062       25,000        66,023
       Provision for loan losses                  355,000      190,000       135,000
       Deferred income taxes                       (6,441)      (1,768)       62,065
       Change in other assets and liabilities:
         Interest receivable                       (8,743)    (186,171)      (58,820)
         Other assets                              75,118      (42,801)      (49,593)
         Accrued expenses                         (83,512)     (56,201)      239,230

   Net Cash Provided by Operating Activities    2,710,866    2,284,980     2,725,628

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from maturity of securities
     held to maturity                           1,068,833    3,354,000     3,736,267
   Purchases of securities held to maturity                                 (620,600)
   Proceeds from maturities of securities
     available for sale                        12,719,231    9,291,964    12,028,403
   Proceeds from sales of securities available
     for sale                                                  501,000     1,511,173
   Purchases of securities available for sale (10,681,150)  (7,630,000)  (19,863,779)
   Net change in other investments                (15,700)     (76,065) 
   Net change in deposits in other banks       (2,604,887)       6,990
160,957
   Net increase in loans                      (11,647,875)
(12,582,234)                                  (10,712,064)
   Change in federal funds sold                (5,479,168)
(4,401,038)                                     3,522,275
   Purchase of property and equipment            (337,341)    (607,000)   (1,476,627)
   Investment in insurance contracts           (2,070,000)                       

   Net Cash Used in Investing Activities      (19,048,057) (12,142,383)  (11,713,995)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net change in time deposits                  7,306,146    8,048,939     9,398,863
   Net change in other deposit accounts         9,345,508    2,777,665        (2,468)
   Additional long-term debt                    2,145,532    2,603,924       160,000
   Repayment of long-term debt                    (52,140)  (2,519,388)     (175,844)
   Dividends paid in cash                        (542,048)    (504,615)     (483,226)
   Purchase of treasury stock                                 (498,888)          

   Net Cash Provided by Financing Activities   18,202,998    9,907,637     8,897,325

CASH AND CASH EQUIVALENTS:
   Net increase (decrease) in cash and
     due from banks                             1,865,807       50,234       (91,042)
   Cash and due from banks, beginning of year   3,246,056    3,195,822     3,286,864

   Cash and Due from Banks, End of Year        $5,111,863   $3,246,056    $3,195,822

Supplemental Disclosures:
   Cash paid for:
     Interest expense                          $7,798,847   $7,525,000    $6,993,122
     Income taxes                               1,013,250      939,000       940,000
</TABLE>

       The accompanying notes are an integral part of this statement.


<PAGE> 29

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     HIGHLANDS BANKSHARES, INC.


     NOTE 1   NATURE OF OPERATIONS:

              Highlands Bankshares, Inc. (the "Company") is a bank holding
              company and operates under a charter issued by the state of West
              Virginia. The Company owns all of the outstanding stock of The
              Grant County Bank, the Capon Valley Bank and HBI Life Insurance
              Company, Inc. which operate under charters issued in West Virginia
              and Arizona. State chartered banks are subject to regulation by
              the West Virginia Division of Banking, Federal Reserve Bank and
              the Federal Deposit Insurance Corporation while the insurance
              company is regulated by the Arizona Department of Insurance. The
              Banks provide services to customers located mainly in Grant,
              Hardy, Hampshire, Mineral and Pendleton counties of West Virginia,
              including the towns of Petersburg, Keyser, Moorefield and
              Wardensville through six branch offices. The insurance company
              sells life and accident coverage exclusively through the Company's
              subsidiary banks.


     NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

              The accounting and reporting policies of Highlands Bankshares,
              Inc. ("Company") and its subsidiaries conform to generally
              accepted accounting principles and to accepted practice within the
              banking industry.

              (a) Principles of Consolidation

                  The consolidated financial statements include the accounts of
                  The Grant County Bank, the Capon Valley Bank and HBI Life
                  Insurance Company. All significant intercompany accounts and
                  transactions have been
                  eliminated.

              (b) Use  of   Estimates   in  the   Preparation   of  Financial
              Statements

                  In preparing the financial statements, management is required
                  to make estimates and assumptions that affect the reported
                  amounts in those statements; actual results could differ
                  significantly from those estimates. A material estimate that
                  is particularly susceptible to significant changes is the
                  determination of the allowance for loan losses, which is
                  sensitive to changes in local economic conditions.

              (c) Cash and Cash Equivalents

                  Cash and cash equivalents include cash on hand and noninterest
                  bearing funds at correspondent institutions.


<PAGE> 30

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     HIGHLANDS BANKSHARES, INC.


     NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

              (d) Securities

                  Securities that the Company has both the positive intent and
                  ability to hold to maturity (at time of purchase) are
                  classified as held to maturity securities. All other
                  securities are classified as available for sale. Securities
                  held to maturity are carried at historical cost and adjusted
                  for amortization of premiums and accretion of discounts, using
                  the effective interest method. Securities available for sale
                  are carried at fair value with any valuation adjustments
                  reported, net of deferred taxes, as a separate component of
                  stockholders' equity. Also included in securities available
                  for sale are marketable equity securities.

                  Other investments consist of investments in the Federal Home
                  Loan Bank of Pittsburgh and the Federal Reserve Bank of
                  Richmond. Such investments are required as members of these
                  institutions and these investments cannot be sold without a
                  change in the members' borrowing or service
                  levels.

                  Interest and dividends on securities and amortization of
                  premiums and discounts on securities are reported as interest
                  income using the effective interest method. Gains (losses)
                  realized on sales and calls of securities are determined using
                  the specific identification method.

              (e) Loans

                  Loans are carried on the balance sheet net of any unearned
                  interest and the allowance for loan losses. Interest income on
                  loans is determined using the effective interest method on the
                  daily amount of principal outstanding except where serious
                  doubt exists as to collectibility of the loan, in which case
                  the accrual of income is discontinued.

              (f) Allowance For Loan Losses

                  The allowance for loan losses is based upon management's
                  knowledge and review of the loan portfolio. Estimation of an
                  adequate allowance for loan losses involves the exercise of
                  judgement, the use of assumptions with respect to present
                  economic conditions and knowledge of the environment in which
                  the Banks operate. Among the factors considered in determining
                  the level of the allowance are the changes in composition of
                  the loan portfolio, the amount of delinquent and nonaccrual
                  loans, past loan loss experience and the value of collateral
                  securing the loans.


<PAGE> 31

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     HIGHLANDS BANKSHARES, INC.


     NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

              (g) Impaired Loans

                  Accounting standards require that impaired loans be presented
                  in the financial statements at the present value of expected
                  future cash flows or at the fair value of the loan's
                  collateral. A valuation allowance is required to the extent
                  that such measurement is less than the recorded investment.
                  Under this standard a loan is considered impaired based on
                  current information and events, if it is probable that the
                  Company will be unable to collect the scheduled payments of
                  principal and interest when due under the contractual terms of
                  the loan agreement. Charge-offs for impaired loans occur when
                  the loan, or portion of the loan is determined to be
                  uncollectible, as is the case for all loans.

              (h) Bank Premises and Equipment

                  Bank premises and equipment are stated at cost less
                  accumulated depreciation. Depreciation is charged to income
                  over the estimated useful lives of the assets using a
                  combination of the straight-line and accelerated methods. The
                  ranges of the useful lives of bank premises and equipment are
                  as follows:

                        Buildings and Improvements    15 - 40 years
                        Furniture and fixtures         6 - 15 years

                  Maintenance, repairs, renewals, and minor improvements are
                  charged to operations as incurred. Gains and losses on routine
                  dispositions are reflected in other income or expense.

              (i) Income Taxes

                  Amounts provided for income tax expense are based on income
                  reported for financial statement purposes rather than amounts
                  currently payable under federal and state tax laws. Deferred
                  taxes, which arise principally from differences between the
                  period in which certain income and expenses are recognized for
                  financial accounting purposes and the period in which they
                  affect taxable income, are included in the amounts provided
                  for income taxes.

              (j) Earnings Per Share

                  Earnings per share are based on the weighted average number of
                  shares outstanding.

              (k) Foreclosed Real Estate

                  The components of foreclosed real estate are adjusted to the
                  lower of cost or fair value less estimated costs of disposal.
                  The current year provision for a valuation allowance has been
                  recorded as an expense to current operations.


     NOTE 3   CASH AND DUE FROM BANKS:

              The Banks are required to maintain average reserve balances based
              on a percentage of deposits. The Banks have generally met this
              requirement through average cash on hand and balances with their
              correspondent institutions.


<PAGE> 32

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     HIGHLANDS BANKSHARES, INC.


NOTE 4    SECURITIES:

          The carrying amount and estimated fair value of securities are as
          follows:

                               Carrying   Unrealized Unrealized     Fair
                                 Amount       Gains        Losses        Value

          Held to Maturity

          December 31, 1998

          Mortgage-backed       $  516,905  $   5,870   $          $  522,775
          State and municipals   2,987,060    111,383               3,098,443

          Total Securities
            Held to Maturity    $3,503,965  $ 117,253   $          $3,621,218

          December 31, 1997

          U. S. Treasuries
            and Agencies        $  750,921  $   1,480   $     447  $  751,954
          Mortgage-backed          530,738      4,807                 535,545
          State and municipals   3,295,304     97,662       2,801   3,390,165

          Total Securities
            Held to Maturity    $4,576,963  $ 103,949   $   3,248  $4,677,664

          Available for Sale


          December 31, 1998

          U. S. Treasuries
            and Agencies       $21,428,019  $ 189,692   $     578  $21,617,133
          Mortgage-backed        6,751,620     69,812                6,821,432
          State and municipals     255,000      7,319                  262,319
          Marketable equities      618,708                 72,951      545,757
          Corporate obligations    514,934                  3,734      511,200

          Total Securities
            Available for Sale $29,568,281  $ 266,823   $  77,263   $29,757,841

          December 31, 1997

          U. S. Treasuries
            and Agencies       $20,229,821  $ 131,837   $  13,347   $20,348,311
          Mortgage-backed       10,659,595     57,894      51,676    10,665,813
          State and municipals     100,000      1,467                   101,467
          Marketable equities      629,908                 63,141       566,767

          Total Securities
            Available for Sale $31,619,324  $ 191,198   $ 128,164   $31,682,358


<PAGE> 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 4    SECURITIES (CONTINUED):

          The carrying amount and fair value of debt securities at December 31,
          1998, by contractual maturity, are shown below. Expected maturities
          will differ from contractual maturities because borrowers may have the
          right to call or prepay obligations with or without call or prepayment
          penalties.

          Securities Held to Maturity                Carrying        Fair
                                                      Amount         Value     

          Due in one year or less                  $  155,039    $  156,437
          Due after one year through five years       934,095       948,614
          Due after five years through ten years    1,402,662     1,460,547
          Due after ten years                         495,264       532,845
          Mortgage-backed securities                  516,905       522,775

            Total Held to Maturity                 $3,503,965    $3,621,218


          Securities Available for Sale              Carrying        Fair
                                                      Amount         Value     

          Due in one year or less                  $9,980,590    $10,033,236
          Due after one year through five years     9,057,195      9,189,671
          Due after five years through ten years    2,905,168      2,905,426
          Due after ten years                         255,000        262,319
          Mortgage-backed securities                6,751,620      6,821,432

          Total Fixed Rate Securities              28,949,573     29,212,084
          Equities                                    618,708        545,757

            Total Available for Sale               $29,568,281   $29,757,841

          The carrying amount (which approximates market value) of securities
          pledged by the banks to primarily secure deposits amounted to
          $8,036,529 at December 31, 1998 and $8,116,050 at December 31, 1997.

          There were no holdings totaling more than 10% of stockholders' equity
          with any issuer as of December 31, 1998 and 1997.

          All gains or losses in 1998 and 1996 are from calls or early payoffs
          of securities designated as held to maturity. Losses in 1997 include a
          loss on a mutual fund investment as well as gains/losses on calls and
          redemptions. Realized gains or losses for the years ending December 31
          are as follows:

                                         1998          1997          1996    

          Gains                       $   9,438    $    6,982    $    2,386
          Losses                         11,509      (124,018)      (31,889)

            Total                     $  (2,071)   $ (117,036)   $  (29,503)


<PAGE> 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 5    LOANS:

          Loans outstanding as of December 31 are summarized as follows:

                                                      1998          1997

          Commercial                              $30,717,977   $30,716,769
          Real estate construction                  2,969,000     2,189,000
          Real estate mortgages                    83,446,041    75,221,128
          Consumer installment                     33,463,853    31,491,717

            Subtotal                              150,596,871   139,618,614
            Unearned interest                      (2,212,967)   (2,513,396)

            Total Loans                           $148,383,904  $137,105,218


NOTE 6    ALLOWANCE FOR LOAN LOSSES:

          A summary of changes in the allowance for loan losses for the years
          ended December 31 is shown in the following schedule:

                                           1998         1997         1996

          Balance at beginning of year  $1,369,566   $1,257,454   $1,319,099
          Provision charged to
            operating expenses             355,000      190,000      135,000
          Loan recoveries                  107,051      146,855      140,289
          Loans charged off               (476,240)    (224,743)    (336,934)

            Balance at end of year      $1,355,377   $1,369,566   $1,257,454

            Percentage of outstanding
              loans                            .91%        1.00%        1.01%


<PAGE> 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 7    BANK PREMISES AND EQUIPMENT:

          Bank premises and equipment as of December 31 are summarized as
follows:

                                                       1998         1997

          Land                                      $  553,652   $  553,652
          Buildings and improvements                 5,176,923    4,597,205
          Furniture and equipment                    2,375,983    2,680,767

          Total cost                                 8,106,558    7,831,624
            Less - accumulated depreciation         (3,346,848)  (3,058,826)

            Net Book Value                          $4,759,710   $4,772,798

          Provisions for depreciation of $350,429 in 1998, $359,740 in 1997 and
          $262,757 in 1996, were charged to operations.


NOTE 8    DEPOSITS:

          At December 31, 1998, the scheduled maturities of certificates of
          deposit are as follows:

                      1999                        $ 75,304,436
                      2000                          24,481,013
                      2001                           5,222,373
                      2002                           3,043,815
                      2003                           3,895,846

                      Total                       $111,947,483


NOTE 9 LONG-TERM DEBT:

          The Company has borrowed money from the Federal Home Loan Bank of
          Pittsburgh (FHLB). The interest rates on the notes payable are fixed
          at the time of the advance and range from 2.50% to 6.60%; the weighted
          average interest rate is 5.37% at December 31, 1998. The long-term
          debt is secured by the assets of The Grant County Bank.

          Repayments of long-term debt are due either monthly or quarterly.
          Interest expense of $52,937, $53,181, and $9,921 was incurred on these
          debts in 1998, 1997, and 1996, respectively. The maturities of
          long-term debt as of December 31, 1998 are as follows:

                      1999                         $    159,923
                      2000                              169,042
                      2001                              178,691
                      2002                              188,902
                      2003                              195,387
                      Thereafter                      1,427,599

                      Total                        $  2,319,544


<PAGE> 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 10   INCOME TAX EXPENSE:

          The components of income tax expense for the years ended December 31,
          are summarized as follows:

                                              1998        1997        1996

          Current expense
            Federal                         $ 899,787   $883,728  $829,724
            State                             125,212    114,430    62,085

            Total current expense           1,024,999    998,158   891,809

          Deferred expense
            Federal                            (5,919)    (1,625)   56,940
            State                                (522)      (143)    5,125

            Total deferred expense             (6,441)    (1,768)   62,065

            Income tax expense             $1,018,558   $996,390  $953,874

          Income expense (benefits) relating
            to losses on security transactions
            are as follows:                 $    (766)   $ 2,040  $(10,916)


          The deferred tax effects of temporary differences for the years ended
          December 31 are as follows:

                                               1998       1997       1996

          Tax effect of temporary differences:
            Provision for loan losses       $ (24,887)  $(42,793) $  2,492
            Sale of loans                      32,612     (7,744)   11,105
            Pension expense                   (18,030)   (10,404)  (13,587)
            Depreciation                       30,497     51,675    41,825
            Miscellaneous                     (26,633)     7,498    20,230

            Net (increase) decrease in
              deferred income tax benefit   $  (6,441)  $(1,768)  $ 62,065


<PAGE> 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 10   INCOME TAX EXPENSE (CONTINUED):

          The net deferred tax assets arising from temporary differences as of
          December 31 are summarized as follows:

                                                         1998        1997    

          Deferred Tax Assets:
            Provision for loan losses                $ 305,295   $ 282,258
            Insurance commissions                       29,908      32,199
            Sale of loans                               13,773      46,385
            Capital loss carryforward                   45,343      45,343
            Other                                       29,153      26,819
              Less valuation allowance                 (45,343)    (45,343)

            Total Assets                               378,129     387,661

          Deferred Tax Liabilities:
            Pension prepaids                            25,039      43,070
            Unrealized gain on securities
              available for sale                        70,138      23,322
            Accretion income                            23,173      47,828
            Accelerated depreciation                   135,167     108,453

            Total Liabilities                          253,517     222,673

            Net Tax Asset                            $ 124,612   $ 164,988


          The following table summarizes the difference between income tax
          expense and the amount computed by applying the federal statutory
          income tax rate of 34 percent for the years ended December 31:

                                                1998         1997      1996

          Amounts at federal statutory rates  $1,030,351  $ 978,023  $1,008,779
          Additions (reductions) resulting
            from:
              Tax-exempt income                  (76,427)   (69,759)    (77,900)
              Partially exempt income            (27,497)   (39,429)    (39,771)
              State income taxes, net             90,004     80,113      69,538
              Nondeductible capital losses                   45,343
              Other                                2,127      2,099      (6,772)

              Income tax expense              $1,018,558  $ 996,390   $ 953,874


<PAGE> 38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 11   EMPLOYEE BENEFITS:

          The Company's two subsidiary banks each have separate retirement and
          profit sharing plans which cover substantially all full time employees
          at each bank. The Capon Valley Bank has a defined contribution pension
          plan with 401(k) features that is funded with discretionary
          contributions by the Company. The Company matches on a limited basis
          the contributions of the employees. Investment of employee balances is
          done through the direction of each employee.

          The Grant County Bank is a member of the West Virginia Bankers'
          Association Retirement Plan. Benefits under the plan are based on
          compensation and years of service with 100% vesting after seven years
          of service. The Plan's assets are in excess of the projected benefit
          obligations and thus the Bank was not able to make contributions to
          the Plan in 1998, 1997 or 1996. The amounts of the prepaid expense and
          the net pension expense reflected in operations are insignificant. In
          addition, The Grant County Bank also maintains a profit sharing plan
          covering substantially all employees to which contributions are made
          at the discretion of the Board of Directors.

          The Company has established an employee stock ownership plan which
          will provide stock ownership to all employees of the Company. The Plan
          provides total vesting upon the attainment of seven years of service.
          Contributions to the plan are made at the discretion of the Board of
          Directors and are allocated based on the compensation of each employee
          relative to total compensation paid by the Company. All shares held by
          the Plan will be considered outstanding in the computation of earnings
          per share. Shares of Company stock when distributed will have
          restrictions on transferability.

          Deferred compensation expenses for the above benefits charged to
          operations totaled $196,172 in 1998, $189,595 in 1997 and $206,893 in
          1996.


NOTE 12   RESTRICTIONS ON DIVIDENDS OF SUBSIDIARY BANKS:

          The principal source of funds of Highlands Bankshares, Inc. is
          dividends paid by subsidiary banks. The various regulatory authorities
          impose restrictions on dividends paid by a state bank. A state bank
          cannot pay dividends (without the consent of state banking
          authorities) in excess of the total net profits of the current year
          and the combined retained profits of the previous two years. As of
          January 1, 1999, the banks could pay dividends to the Company of
          approximately $2,364,584 without permission of the regulatory
          authorities.


NOTE 13   TRANSACTIONS WITH RELATED PARTIES:

          During the year, officers and directors (and companies controlled by
          them) were customers of and had transactions with the subsidiary Banks
          in the normal course of business. These transactions were made on
          substantially the same terms as those prevailing for other customers
          and did not involve any abnormal risk. The aggregate amount of loans
          to related parties of $3,248,639 at December 31, 1997, was increased
          $1,717,409 by new loans and reduced $3,590,854 by payments, resulting
          in an ending balance of $1,375,194 at December 31, 1998.


<PAGE> 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 14   COMMITMENTS AND GUARANTEES:

                  The Banks make commitments to extend credit in the normal
          course of business and issues standby letters of credit to meet the
          financing needs of its customers. The amount of the commitments
          represents the Banks' exposure to credit loss that is not included in
          the balance sheet. As of the balance sheet dates, the Banks had
          outstanding the following commitments:
                                                        1998        1997

          Commitments to extend credit              $6,516,000  $8,414,000
          Standby letters of credit                    541,000     645,000

          The Banks use the same credit policies in making commitments and
          issuing letters of credit as it does for the loans reflected in the
          balance sheet.

          Commitments to extend credit are agreements to lend to a customer as
          long as there is no violation of any condition established in the
          contract. Commitments generally have fixed expiration dates or other
          termination clauses and may require payment of a fee. Since many of
          the commitments are expected to expire without being drawn upon, the
          total commitment amounts do not necessarily represent future cash
          requirements. The Banks evaluate each customer's creditworthiness on a
          case-by-case basis. The amount of collateral obtained, if deemed
          necessary by the Banks upon extension of credit, is based on
          management's credit evaluation of the borrower. Collateral held varies
          but may include accounts receivable, inventory, property, plant and
          equipment.


NOTE 15   CONCENTRATIONS OF CREDIT:

          The Banks grant commercial, residential real estate and consumer loans
          to customers located primarily in the eastern portion of the State of
          West Virginia. Although the Banks have a diversified loan portfolio, a
          substantial portion of its debtors' ability to honor their contracts
          is dependent upon the agribusiness economic sector. Collateral
          required by the Banks is determined on an individual basis depending
          on the purpose of the loan and the financial condition of the
          borrower. The ultimate collectibility of the loan portfolios is
          susceptible to changes in local economic conditions. Approximately 59%
          of the loan portfolio is secured by real estate. See note 5 for a
          complete breakdown of loans by type.

          The Bank has cash deposited in and federal funds sold to other
          commercial banks totaling $15,178,758 and $7,661,626 at December 31,
          1998 and 1997, respectively.


<PAGE> 40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 16   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

          The fair value of the Company's assets and liabilities is influenced
          heavily by market conditions. Fair value applies to both assets and
          liabilities, either on or off the balance sheet. Fair value is defined
          as the amount at which a financial instrument could be exchanged in a
          current transaction between willing parties, other than in a forced or
          liquidation sale.

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

          Cash, Due from Banks and Money Market Investments

          The carrying amount of cash, due from bank balances, interest bearing
          deposits and federal funds sold is a reasonable estimate of fair
          value.

          Securities

          Fair values of securities are based on quoted market prices or dealer
          quotes. If a quoted market price is not available, fair value is
          estimated using quoted market prices for similar securities.

          Loans

          The fair value of loans is estimated by discounting the future cash
          flows using the current rates at which similar loans would be made to
          borrowers with similar credit ratings and for the same remaining
          maturities, taking into consideration the credit risk in various loan
          categories.

          Deposits

          The fair value of demand, interest checking, regular savings and money
          market deposits is the amount payable on demand at the reporting date.
          The fair value of fixed maturity certificates of deposit is estimated
          using the rates currently offered for deposits of similar remaining
          maturities.

          Interest Payable and Receivable

          The carrying value of amounts of interest receivable and payable is a
          reasonable estimate of fair value.


<PAGE> 41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 16   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):

          Off-Balance-Sheet Items

          The carrying amount and estimated fair value of off-balance-sheet
          items were not material at December 31, 1997.

          The carrying amount and estimated fair values of financial instruments
          as of December 31 are as follows:
<TABLE>
<CAPTION>

                                                   1998                        1997
                                                        Estimated                   Estimated
                                           Carrying        Fair       Carrying         Fair
                                            Amount         Value        Amount         Value
          <S>                            <C>           <C>           <C>           <C>

          Financial Assets:
            Cash and due from banks      $  5,111,863  $  5,111,863  $  3,246,056  $  3,246,056
            Interest bearing deposits       3,431,523     3,431,523       826,636       826,636
            Federal funds sold             12,374,283    12,374,283     6,895,115     6,895,115
            Securities held to maturity     3,503,965     3,621,218     4,576,963     4,677,664
            Securities available for sale  29,757,841    29,757,841    31,682,358    31,682,358
            Other investments                 730,950       730,950       715,250       715,250
            Loans, net                    147,028,527   150,145,023   135,735,652   136,215,953
            Interest receivable             1,556,347     1,556,347     1,547,604     1,547,604

          Financial Liabilities:
            Demand and savings
              deposits                     72,639,882    72,639,882    63,294,373    63,294,373
            Term deposits                 111,947,483   112,041,093   104,641,338   104,624,538
            Borrowed money                  2,319,544     2,287,194       226,152       226,152
            Interest payable                  688,888       688,888       743,000       743,000
</TABLE>


NOTE 17   REGULATORY MATTERS:

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

          Quantitative measures established by regulation to ensure capital
          adequacy require the Company to maintain minimum amounts and ratios
          (set forth in the table below) of total and Tier I capital (as defined
          in the regulations) to risk-weighted assets (as defined), and of Tier
          I capital (as defined) to average assets (as defined). Management
          believes, as of December 31, 1998, that the Company meets all capital
          adequacy requirements to which it is subject.


<PAGE> 42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 17   REGULATORY MATTERS (CONTINUED):

          To be categorized as well capitalized the Company must maintain
          minimum total risk-based, Tier I risk-based, and Tier I leverage
          ratios as set forth in the table. There are no conditions or events
          that management believes have changed the Company's category from a
          well capitalized status.

          The Company's actual capital ratios are presented in the following
          table:

                                         Actual        Regulatory  Requirements
                                        December        Adequately     Well
                                      1998     1997     Capitalized Capitalized

          Total risk-based ratio      18.02%   18.47%      8.00%       10.00%
          Tier 1 risk-based ratio     17.00%   17.35%      4.00%        6.00%
          Total assets leverage ratio 10.83%   11.15%      3.00%        5.00%

          Capital ratios and amounts are applicable both at the individual bank
          level and on a consolidated basis. At December 31, 1998, both
          subsidiary banks had capital levels far in excess of minimum
          requirements. As such, both banks qualified as "well capitalized
          banks" for FDIC insurance purposes and thus were charged the minimum
          rate for insurance coverage.


<PAGE> 43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 18   PARENT CORPORATION ONLY FINANCIAL STATEMENTS:


                                BALANCE SHEETS

          Assets                                           December 31,
                                                        1998         1997

            Cash                                   $    15,754  $    18,695
            Investment in subsidiaries              22,681,509   21,155,702
            Other investments                          100,000      100,000
            Other assets                                 1,740
            Income taxes receivable                                   5,436
            Due from subsidiaries                       48,017       17,168

            Total Assets                          $ 22,847,020  $ 21,297,001


          Liabilities

            Income taxes payable                   $       473  $         

            Total Liabilities                              473             

          Stockholders' Equity

            Common stock, par value $5 per share
              authorized 1,000,000 shares; 546,764
              shares issued                        $  2,733,820  $ 2,733,820
            Surplus                                   1,661,987    1,661,987
            Retained earnings                        19,324,019   17,854,185
            Other accumulated comprehensive income      119,422       39,710

                                                     23,839,248   22,289,702
            Less treasury stock (at cost,
              44,866 shares in 1998 and 1997)          (992,701)    (992,701)

            Total Stockholders' Equity               22,846,547   21,297,001

            Total Liabilities and Stockholders'
              Equity                               $ 22,847,020 $ 21,297,001


<PAGE> 44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 18   PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):


                  STATEMENTS OF INCOME AND RETAINED EARNINGS

                                               Years  Ended  December 31,
                                             1998        1997         1996

          Income

            Dividends from subsidiaries  $  623,525   $ 1,055,054  $  483,226
            Other dividends                     735           630         630

            Total                           624,260     1,055,684     483,856

          Expenses

            Professional fees                27,032        37,980      34,478
            Advertising                       6,807         6,094       3,320
            Other expenses                   53,992        39,054      18,754

            Total                            87,831        83,128      56,552

          Net income before income tax benefit
            and undistributed income of
            subsidiaries                    536,429       972,556     427,304

          Income tax benefit                (29,360)      (30,211)    (18,815)

          Income before undistributed income
            of subsidiaries                 565,789     1,002,767     446,119

          Undistributed income of
            subsidiaries                  1,446,093       877,378   1,567,005

            Net Income                    2,011,882     1,880,145   2,013,124

          Retained earnings,
            Beginning of period          17,854,185    16,478,655  14,948,757
            Dividends paid                 (542,048)     (504,615)   (483,226)

          Retained Earnings,
            End of Period               $19,324,019   $17,854,185 $16,478,655


<PAGE> 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 18   PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):


                           STATEMENTS OF CASH FLOWS


                                                  Years Ended ecember 31,
                                                1998        1997       1996


          Cash Flows from Operating Activities:
            Net income                         $2,011,882 $1,880,145 $2,013,124
            Adjustments
              Undistributed subsidiary income  (1,446,093)  (877,378)(1,567,005)
              Depreciation                            583        181        408
              Increase (decrease) in payables         473               (41,738)
              (Increase) decrease in receivables  (25,413)   (10,569)    19,139
              (Increase) decrease in other assets  (2,325)

            Net Cash Provided by Operating
              Activities                          539,107    992,379    423,928


          Cash Flows from Financing Activities:
            Dividends paid                       (542,048)  (504,615)  (483,226)
            Purchase of treasury stock                      (498,888)

            Net Cash Used in Financing
              Activities                         (542,048)(1,003,503)  (483,226)

          Net Decrease in Cash                     (2,941)   (11,124)   (59,298)

          Cash, Beginning of Year                  18,695     29,819     89,117

          Cash, End of Year                     $  15,754  $  18,695  $  29,819


<PAGE> 46

                         INDEPENDENT AUDITORS' REPORT




The Stockholders and Board of Directors
Highlands Bankshares, Inc.
Petersburg, West Virginia


We have audited the accompanying consolidated balance sheets of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1998. These financial statements are the responsibility of the Company'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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1998, in conformity with
generally accepted accounting principles.

                              S. B. Hoover & Company, L.L.P.



January 25, 1999
Harrisonburg, Virginia


<PAGE> 47

Item  8. Changes in and  Disagreements  with  Accountants  on Accounting and 
         Financial Disclosure

     None

Part III

Item  9. Directors and Executive Officers

     We are incorporating the Proxy Statement of Highlands  Bankshares,  Inc.
via Form DEF 14A filed March 19, 1999
 .
Item 10. Executive Compensation

     We are incorporating the Proxy Statement of Highlands  Bankshares,  Inc.
via Form DEF 14A filed March 19, 1999.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     We are incorporating the Proxy Statement of Highlands  Bankshares,  Inc.
via Form DEF 14A filed March 19, 1999.

Item 12. Certain Relationships and Related Transactions

     We are incorporating the Proxy Statement of Highlands  Bankshares,  Inc.
via Form DEF 14A filed March 19, 1999.

     Most of the directors, partnerships of which they may be general partners
and corporations of which they are officers or directors, maintain normal
banking relationships with the Bank. Loans made by the Bank to such persons or
other entities were made only in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than normal risk of collectibility or present other unfavorable
features. See Note 13 of the consolidated financial statements.

     John VanMeter is a partner with the law firm of VanMeter and VanMeter,
which has been retained by the Company as legal counsel and it is anticipated
that the relationship will continue. Jack H. Walters is a partner with the law
firm of Walters, Krauskopf & Roth, which provides legal counsel to the Company
and it is anticipated that the relationship will continue.

Part IV

Item 13. Exhibits and Reports on Form 8-K

     a)  Exhibits

         Exhibit No.                        Description

             2              Not applicable

             3 (i)          Articles   of    Incorporation    of    Highlands
                            Bankshares,  Inc. are  incorporated  by reference
                            to  Appendix C to  Highlands  Bankshares,  Inc.'s
                            Form S-4 filed October 20, 1986.

                            Amendments to the original Articles of Incorporation
                            are incorporated by reference; filed as Exhibit 3(i)
                            with 1997 10KSB.


<PAGE> 48

Item 13. Exhibits and Reports on Form 8-K (Continued)

     a)  Exhibits (Continued)

         Exhibit No.                        Description


             3 (ii)         Bylaws  of   Highlands   Bankshares,   Inc.   are
                            incorporated   by  reference  to  Appendix  D  to
                            Highland   Bankshares,   Inc.'s  Form  S-4  filed
                            October 20, 1986.

                            Amendments    to   the   original    Bylaws   are
                            incorporated  by  reference;   filed  as  Exhibit
                            3(ii) with 1997 10KSB

             4              Not applicable

             9              Not applicable

            10              Not applicable

            11              Not applicable

            12              Not applicable

            16              Not applicable

            18              Not applicable

            21              Subsidiaries  of the  Small  Business  Issuer  is
                            attached on Page 50

            22              Not applicable

            23              Consent of Certified Public  Accountant  attached
                            on Page 51

            24              Not applicable

            27              Financial Data Schedule attached

            28              Not applicable


     b)  Reports on Form 8-K

         No reports on Form 8-K were filed in the fourth quarter of 1998.


<PAGE> 49

                                  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.


                           By   LESLIE A. BARR
                                Leslie A. Barr
                                President Chief Executive Officer


                           Date  March 30, 1999



                            By   CLARENCE E. PORTER
                                 Clarence E. Porter
                                 Secretary/Treasurer,
                                 Chief Financial Officer
                                 and Chief Accounting Officer


                            Date  March 30, 1999

   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 and as of the date indicated.

        Signature                         Title                  Date

LESLIE A. BARR                                                March 30, 1999
Leslie A. Barr                          President
                                & Chief Executive Officer
                                        Director
THOMAS B. MCNEIL, SR.                                         March 30, 1999
Thomas B. McNeil, Sr.                   Director


                                                           
George B. Moomau                        Director


CLARENCE E. PORTER                                            March 30, 1999
Clarence E. Porter                 Secretary/Treasurer
                                     Chief Financial
                                 and Accounting Officer
                                        Director

                                                         
Courtney R. Tusing                      Director



JOHN G. VANMETER                                              March 30, 1999
John G. VanMeter                  Chairman of the Board
                                        Director



Jack H. Walters                         Director



L. KEITH WOLFE                                                March 30, 1999
L. Keith Wolfe                          Director