SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                                   FORM 10K/A

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

For fiscal year ended December 31, 2000        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-K/A or any amendment to this Form 10-K/A. [X]

    Issuer's revenues for its most recent fiscal year:  $19,470,393

    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 February 28, 2001 - $22,189,041

    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, 2001 - 501,898

                      DOCUMENTS INCORPORATED BY REFERENCE:

    Proxy  Statement of Highlands  Bankshares,  Inc. filed via Form DEF 14A on
March 20, 2001.

                            LOCATION OF EXHIBIT INDEX

    The index of exhibits is contained in Part IV herein on pages 49-50.

    TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT  YES         NO   X
                                                       -----      -----


<PAGE> 2

                                 FORM 10-K/A 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.  Submission of Matters to a Vote of Security Holders            5


Part II

Item  5.  Market for 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                                          26

Item  8.  Changes in and Disagreement with Accountants on
          Accounting and Financial Disclosure                           50


Part III

Item  9.  Directors, Executive Officers, Promoters and Control
          Persons; Compliance with Section 16(a) of the
          Exchange Act                                                  50

Item 10.  Executive Compensation                                        50

Item 11.  Security Ownership of Certain Beneficial Owners
          and Management                                                50

Item 12.  Certain Relationships and Related Transactions                50


Part IV

Item 13.  Exhibits and Reports on Form 8-K                              50

Signatures                                                              52




<PAGE> 3



Part I

Item 1. Description of Business

    General

    Highlands Bankshares, Inc. (hereinafter referred to as "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"), its life insurance subsidiary, HBI Life Insurance Company
(hereinafter referred to as "HBI Life") and its trust subsidiary, Highlands
Bankshares Trust Company (hereinafter referred to as "HBTC").

    The Grant County Bank was chartered on August 6, 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. HBTC was chartered in December 2000 under the laws of
the state of West Virginia.

    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
automated teller machines. 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. Trust
services are offered through HBTC.

    Employees

    As of December 31, 2000, The Grant County Bank had 55 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. HBTC uses employees
of the Banks and reimburses them for the cost of these services.

    Competition

    The banks' primary trade area is generally defined as Grant County, Hardy
County, Mineral County, Randolph 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 four state
chartered banks and six 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 banks have 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 Bank 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, trust
services, 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. HBTC provides trust
services to customers of the Banks. 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.

    The operations of the trust company are subject to the oversight and review
of the State of West Virginia and the Federal Reserve Bank.

Item 2. Description of Properties

    The Grant County Bank's main office is located on Main Street in Petersburg,
West Virginia. In July 2000, the Bank acquired a full service branch in Harman
through the purchase of the Stockmans' Bank of Harman. This location will
primarily serve Randolph County. The Bank also has branch facilities in
Moorefield, Keyser and Riverton, West Virginia which provide banking services in
Hardy County, Mineral County, and northwest Pendleton County, respectively. The
Riverton branch building is leased while all other locations 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
Wardensville location was substantially renovated and expanded in 2000 to
enhance customer service. Capon's offices serve mainly Hardy County and
Hampshire County, West Virginia. All facilities include state-of-the-art drive
in and automated 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. Submission of Matters to a Vote of Security Holders

     Highlands has not submitted any matters to the vote of security holders for
the quarter ending December 31, 2000.


Part II

Item 5. Market for Common Equity and Related Stockholder Matters

    The Company had approximately 850 stockholders of record as of March 1,
2001. The Company's stock is not traded on any national or regional stock
exchange although brokers in Cumberland, Maryland or 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
           2000              Per Share          High             Low
           ----              ---------          ----             ---

        First Quarter          $.31            $59.00         $57.00
        Second Quarter          .31             58.50          50.13
        Third Quarter           .31             55.00          51.00
        Fourth Quarter          .31             51.00          48.00


           1999

        First Quarter          $.29            $62.50         $62.50
        Second Quarter          .29             59.00          59.00
        Third Quarter           .29             60.00          57.00
        Fourth Quarter          .29             60.00          58.00


           1998

        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


<PAGE> 6


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

Overview

    The Company's 2000 net income of $2,380,911 represents a 2.39% increase in
net income and earnings per share compared to 1999. This represented a return on
average equity of 9.40% for 2000 compared to 9.94% for 1999. Returns on
average assets for 2000 and 1999 were 1.03% and 1.08%, respectively. The
increase in earnings was due to an increase in the volume of earning assets, a
stable net interest margin and increased service charges on deposit accounts.

    The tax equivalent interest income increased by $1,926,000 in 2000 to
$18,305,000 as compared to 1999. A 7.11% increase in the level of earning assets
and an increase in yields resulted in the earnings improvement. A 13.48%
increase in average loans outstanding was the result of a good local economy
that was spread across all types of loans. The increase was also partly
attributable to the acquisition of the branch at Harman. The funding of the
asset growth was from deposits of local customers (primarily time deposits) and
declines in securities available for sale. Also, contributing to the asset
funding was approximately $9.0 million in deposits acquired in the Harman
purchase.

    Noninterest income increased 23.03% in 2000 compared to 1999 due to
increases in service charge income and profits from the sale of bonds acquired
in the Harman acquisition. Noninterest expenses increased 12.15% in 2000 due
mainly to the higher personnel and equipment expenses.


Net Interest Margin

    2000 compared to 1999

    The Company's net interest margin on a tax equivalent basis was
$9,515,000 for 2000 compared to $8,716,000 for 1999. The increase was due to an
increase in average earning assets (7.11%) and a consistent spread (the
difference in rates earned on assets and paid on liabilities) of 3.69% in 2000
compared to 3.70% in 1999. Average loans outstanding grew by 13.48% from 1999 to
2000. This growth reflected good local and national economic conditions, stable
interest rates and additional banking facilities acquired by an acquisition. The
overall cost of funds reflected 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 was the result of growth in the area of time deposit accounts and were
obtained primarily from customers in the immediate service areas.

    Loans outstanding at December 31, 2000 increased 13.60% over amounts at
December 31, 1999. The loan increase was the result of acquiring a branch in a
new market area and continued efforts to increase lending in existing markets.
Loan growth was funded primarily by deposit growth and a decline in the level of
investments. The increase in the dollar amount of tax equivalent net interest
margin for 2000 over the 1999 amounts is the result of an annualized growth in
earning assets of 7.11%. The Company anticipates its net interest margin
remaining stable in view of recent declines in interest rates targeted by the
Federal Reserve Bank. Rates paid on deposits are expected to decline over the
next twelve months as the result of recent Federal Reserve Bank's rate cuts.
Returns on most loans have repricing opportunities within the next twelve months
and the Company should be able to maintain or slightly improve its net interest
margin in a declining rate environment.

    A summary of the net interest margin analysis is shown as Table II on page
22.


<PAGE> 7


Net Interest Margin (Continued)

    1999 Compared to 1998

    The Company's net interest margin on a tax equivalent basis was
$8,716,000 for 1999 compared to $8,144,000 for 1998. The increase was due to an
increase in average earning assets (6.95%) and an increased spread (the
difference in rates earned on assets and paid on liabilities) from 3.60% in 1998
to 3.70% in 1999. Average loans outstanding grew by 8.31% from 1998 to 1999.
This growth reflected good local and national economic conditions, slightly
increasing interest rates and expanded banking facilities. The deposit increase
represented growth in money market savings and time deposit accounts and was
obtained primarily from customers in the immediate service areas.

    Loans outstanding at December 31, 1999 increased 12.29% over amounts at
December 31, 1998. The loan increase was the result of opening branches in new
market areas and continued efforts to increase lending in existing markets. Loan
growth was funded primarily by deposit growth with declines in the level of
security investments. The net interest margin for 1999 and 1998 was 4.35% and
was the result of declines in the rates of all types of earning assets and all
types of deposit accounts.

    A summary of the net interest margin analysis is shown as Table II on Page
22.


Provision for Loan Losses

    The Company's provision for loan losses were $500,000 for 2000, $320,000 for
1999 and $355,000 for 1998. Net loan losses were $412,000 in 2000 compared to
$357,000 in 1999 and $369,000 in 1998. The Company's three year charge off rate
of .24% of average loans outstanding compares closely with its peer group. The
2000 charge off percentage of .23% of average loans was slightly above the peer
group average for the year and reflects some charged off loans acquired from
Harman. (See the following discussion relating to the allowance for loan
losses.)


Noninterest Income

    2000 Compared to 1999

    Overall noninterest income increased in 2000 by 23.03% when compared with
1999 operations. Increases in service charge income was the result of volume
increases and increased rates for not sufficient funds (NSF) checks. Other
operating income declined due to a $165,000 gain from the demutualization of an
insurance company in 1999 which was not repeated in 2000. The Company did
recognize greater income from investments in insurance contracts due to a
complete year of investing in these assets. Gains of $104,000 from the sale of
investments in 2000 compared to losses from the sale of investments in 1999 of
$65,000 added $169,000 to total noninterest income.

    1999 Compared to 1998

    Noninterest income for 1999 increased 39.70% from 1998. Increases in service
charge income of 20.56% and other operating income of 96.02% were the result of
an increase in volume of transactions and the gain from an insurance company
demutualization, respectively. The Company also recognized greater income from
investments in insurance contracts due to a larger volume of such investments.
Losses on security transactions increased from $2,000 in 1998 to $64,000 in 1999
as the Company sold investments in mutual funds that were not meeting
expectations.


<PAGE> 8


Noninterest Expenses

    2000 Compared to 1999

    Total noninterest expenses increased 12.15% in 2000 when compared with 1999
operations. Salaries and benefits increased 12.34% due to the increase in staff
at the new branch, merit and inflationary raises and higher benefit costs.
Average full time equivalent employees increased 6.67% in 2000 due mainly to
staffing the new branches in Moorefield and Harman. The costs of occupancy and
equipment increased 14.78% due to a full year of costs in the Moorefield branch
and depreciation associated with the new facility and equipment upgrades. Data
processing expenses increased by 3.45% due to general asset growth and expanded
locations. Other operating expenses increased 13.22% for all of the reasons
cited above. Noninterest expense as a percentage of average assets was 2.86% in
2000 compared to 2.74% in 1999 and 2.69% in 1998. These ratios compare favorably
to the Company's peer group. The overall increase in noninterest expenses is a
reflection of additional locations which generally take one to three years to
become profitable.

    1999 Compared to 1998

    Overall, noninterest expense increased 9.96% in 1999 when compared to 1998.
Personnel expenses increased 10.76% as the result of additional locations.
Occupancy and equipment expenses increased 8.93% as the result of asset growth
and inflation year 2000 preparedness. Data processing expenses increased by
3.65% as a result of volume growth. Other noninterest expenses increased by
10.91% due to asset growth and costs in preparing for the year 2000.


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, Randolph
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 $22,654,000 or 13.60% in 2000. All loan types
recognized significant growth. The loan to deposit ratio was 87.39% at December
31, 2000 compared to 86.62% at December 31, 1999. 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 presents the year-end balances of loans, classified by
type (in thousands):

                             2000      1999      1998       1997      1996
                             ----      ----      ----       ----      ----
     Real estate loans:
       Construction and
        land
        development       $  4,096   $ 3,296   $  2,969   $ 2,189   $  2,158
       Secured by
        farmland            10,059     9,219      9,586     9,436     10,642
       Secured by 1-4
        family residential
        properties          72,408    67,775     64,372    59,126     54,238
       Secured by multi-
        Family (5 or more)
        residential
        properties                                                     250
       Secured by nonfarm,
        non-residential
        properties          39,122    33,064     28,142    26,076     20,807

     Loans to farmers          567       391        449       541        593
     Commercial and
       Industrial loans      8,029     6,568      4,498     3,101      4,082
     Consumer loans         54,691    46,266     38,353    35,414     31,653
     Loans for nonrated
       industrial
       development
       obligations             275
     All other loans            21        35         15     1,222        178
                           -------    ------    -------    ------    -------

       Loans - net of
        Unearned income   $189,268  $166,614   $148,384  $137,105   $124,601
                           =======    =======   =======    =======   =======


     There were no foreign loans outstanding during any of the above periods.


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

                                                   At December 31,
                                       --------------------------------------
                                            2000        1999        1998
                                            ----        ----        ----
                                              (In Thousands of Dollars)
     Real Estate:
       Mortgage                           $101,890    $ 93,391    $ 83,446
       Construction                          4,061       3,296       2,969
     Commercial                             37,681      31,567      30,718
     Installment                            46,191      39,994      33,464
                                           -------     -------     -------

                                           189,823     168,248     150,597
     Less unearned discount                   (555)     (1,634)     (2,213)
                                           -------     -------     -------

                                           189,268     166,614     148,384
     Allowance for loan losses              (1,493)     (1,318)     (1,355)
                                           -------     -------     -------

       Loans, net                         $187,775    $165,296    $147,029
                                           =======     =======     =======


<PAGE> 10


Financial Condition (Continued)

     Loan Portfolio (Continued)

     The following table shows the maturity of loans outstanding (in
thousands of dollars) as of December 31, 2000, 1999 and 1998.

    Maturity Range                          2000        1999        1998
    --------------                          ----        ----        ----

     Predetermined Rates:
       0 - 12 months                      $105,054    $ 91,080    $ 73,878
       13 - 60 months                       75,918      61,193      53,765
       More than 60 months                   8,264      14,147      20,702
     Nonaccrual Loans                           32         194          39
                                           -------     -------     -------

       Total Loans                        $189,268    $166,614    $148,384
                                           =======     =======     =======

     The following table shows the Company's loan maturity distribution (in
thousands of dollars) as of December 31, 2000:

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

     Commercial and
       Agricultural Loans     $  29,333   $   5,039   $   3,309   $  37,681
     Real Estate - mortgage      63,383      34,895       3,612     101,890
     Real Estate -
       construction               4,061                               4,061
     Consumer - installment       8,277      36,016       1,343      45,636
                               --------    --------    --------    --------

       Total                  $ 105,054   $  75,950   $   8,264   $ 189,268
                               ========    ========    ========    ========

     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 are placed in nonaccrual status when
the collection of principal or interest is 120 days past due and collection is
uncertain based on the net realizable value of the collateral and/or the
financial strength of the borrower.  Also, the existence of any guaranties
by federal or state agencies is given consideration in this decision.  The
policy is the same for all types of loans. Restructured loans are loans
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 $111,000 at December 31, 2000,
$121,000 at December 31, 1999 and $95,000 at December 31, 1998. All foreclosed
property held at December 31, 2000 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.

     Nonperforming loans increased 25.69% at December 31, 2000 compared to 1999.
Nonaccrual loans declined as the result of a few workout situations. Loans 90
and more days past due increased 38.19% compared to a 13.60% increase in total
loans outstanding. The increase in delinquent loans includes a large amount of
loans acquired in the Harman acquisition that were nonperforming when acquired.
In addition, a substantial portion of the delinquent real estate loans have been
guaranteed by state or federal agencies.  Management does not anticipate any
significant losses from the current level of nonperforming assets.


<PAGE> 11


Financial Condition (Continued)

     Loan Portfolio (Continued)

     The following table summarizes the nonperforming loans:

                                                  At December 31,
                                          -------------------------------
                                           2000        1999        1998
                                           ----        ----        ----
                                               (Dollars in Thousands)

     Loans accounted for on a
       nonaccrual basis
       Real estate                       $    32      $  194      $    39
                                          ------       -----       ------

     Loans contractually past due 90 days
       or more as to interest or principal
       payments (not included in nonaccrual
       loans above)
         Commercial                           60          89           41
         Real estate                       1,984       1,465        1,339
         Installments                        297         140          142
                                          ------       -----       ------

       Total Delinquent Loans              2,341       1,694        1,522
                                          ------       -----       ------

       Total Nonperforming Loans         $ 2,373      $1,888      $ 1,561
                                          ======       =====       ======

    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, 2000,
management is not aware of any significant potential problem loans for 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, 2000, 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 .79% at December 31, 2000 and December 31, 1999 compared to .91%
at December 31, 1998. At December 31, 2000, the ratio of the allowance for loan
losses to nonperforming loans was 62.92% compared to 69.83% at December 31, 1999
and 86.83% at December 31, 1998.


<PAGE> 12


Allowance for Loan Losses (Continued)

     The computation of the allowance for loan losses is based on a formula
recommended by the FDIC in the early 1990's. Both banks classify loans into
categories and assign a loss rate as follows:

                 Loss                        100%
                 Doubtful                     50%
                 Substandard                  15%
                 Special mention               5%

     All loans 90 days or more past due and nonaccrual loans are included in one
of the four categories above. Generally, all loans in excess of $250,000 are
evaluated individually as well as any loan regardless of size that is classified
as loss, doubtful or special mention. All other loans are evaluated as a group.

     After reducing the loan portfolio by the above loans, remaining loans that
are 30-90 days past due are identified and grouped by loan type. Each category
is assigned a loss ratio as follows:

                 Consumer                      3%
                 Real estate                   1%
                 Commercial                    2%
                 Unused lines of credit        1%

     The balance of the loan portfolio is assigned a loss ratio which is
approximately twice the average annual charge-offs over the last three year
period. The allowance determined under this formula has been the largest
component of the total allowance over the last few years.

     The loss factors used on graded loans are those recommended by the FDIC and
have not been changed as the Company believes they are still a good tool for
establishing allowances. The Company's consumer and real estate loans are
usually secured by real or personal property and an estimate of loss can be made
based on collateral. While most commercial lending is secured, those that are
not secured are made to persons who are well known to the loan officers and have
been regular customers of the banks for many years.

     The allowance for loan losses is computed quarterly and adjusted prior to
the issuance of the quarterly financial statements. All loan losses charged to
the allowance are approved by the boards of directors at their regular meetings.
The allowance is reviewed for adequacy after considering historical loss rates,
current economic conditions (both locally and nationally) and any known
credit problems that have not been considered under the above formulae. There
have been no changes in the methodology or assumptions used in the last three
years.

     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
have improved due to moderating grain prices and better turkey pricing. However,
the industry has not fully recovered due to a decline in chicken prices and
profitability in this industry is still quite volatile. The area's large
employer in the poultry industry, WLR Foods, Inc., was recently sold to a Texas
poultry producer, Pilgrim's Pride, Inc. While some management jobs may be
eliminated, the overall effect on the poultry industry of this event should be
negligible.


<PAGE> 13


Allowance for Loan Losses (Continued)

     An analysis of the loan loss allowance is set forth in the following table
(in thousands):

                             2000       1999     1998      1997       1996
                             ----       ----     ----      ----       ----

     Balance at beginning of
       period             $ 1,318   $  1,355   $ 1,370   $  1,257   $ 1,319

     Charge-offs:
       Commercial loans       172        107       135         34        92
       Real estate loans      128         87        53         20        59
       Consumer loans         215        254       289        170       186
                           ------    -------    ------    -------    ------

                              515        448       477        224       337
                           ------    -------    ------    -------    ------

     Recoveries:
       Commercial loans         2         16         6          9         9
       Real estate loans       30          1         1         25        15
       Consumer loans          71         74       100        113       116
                           ------    -------    ------    -------    ------

                              103         91       107        147       140
                           ------    -------    ------    -------    ------

     Net charge-offs          412        357       370         77       197
     Provision for loan
       losses                 500        320       355        190       135
     Other                     87
                           ------    -------    ------    -------    ------
     Balance at end of
       period             $ 1,493   $  1,318   $ 1,355   $  1,370   $ 1,257
                           ======    =======    ======    =======    ======

     Percent of net
       charge-offs to
       average net loans
       outstanding during
       the period             .23%       .23%      .26%       .06%      .17%
                         ========  =========  ========  =========  ========



<PAGE> 14
<TABLE>

<CAPTION>

Allowance for Loan Losses (Continued)

                                                                 At December 31,
                  -----------------------------------------------------------------------------------------------------------
                        2000                   1999                   1998                 1997                  1996
             -----------------------  --------------------  -------------------- -------------------- ----------------------
                            Percent                Percent                 Percent               Percent               Percent
                               of                     of                     of                    of                    of
                              Loans                 Loans                  Loans                 Loans                 Loans
                      Percent  in           Percent  in           Percent   in           Percent  in         Percent    in
                        of  Category          of  Category          of   Category          of   Category       of    Category
                      Allow- to Total       Allow- to Total        Allow- to Total       Allow- to Total      Allow- to Total
              Amount   ance  Loans  Amount  ance   Loans  Amount   ance    Loans Amount   ance  Loans  Amount ance    Loans
              -----   -----  -----  -----   -----  -----  ------  ------   ----- ------  ------ -----  ------ ------  -------
                                                           (Dollars in Thousands)
<S>           <C>       <C>   <C>   <C>      <C>   <C>    <C>       <C>   <C>   <C>      <C>    <C>   <C>      <C>    <C>

Commercial    $ 507      34%   20%  $ 395     30%   19%   $ 379      28%   23%  $ 343     25%    22%  $  314    25%    18%
Real estate
   mortgage     239      16    56     211     16    58      434      32    56     548     40     56      440    35     59
Installment     598      40    24     580     44    23      406      30    21     343     25     22      314    25     23
Unallocated     149      10           132     10            136      10           136     10             189    15
              -----     ---   ---   -----    ---   ---    -----     ---   ---   -----    ---    ---    -----   ---   ----

             $1,493     100%  100% $1,318    100%  100%  $1,355     100%  100% $1,370    100%   100%  $1,257   100%   100%
              =====     ===   ===   =====    ===   ===    =====     ===   ===   =====    ===    ===    =====   ===    ===
</TABLE>

<PAGE> 15

     Cumulative net loan losses, after recoveries, for the five year period
ending December 31, 2000 are as follows:

                  Commercial                   $   498         35%
                  Real estate                      275         20%
                  Consumer                         640         45%
                                                ------        ----

                    Total                      $ 1,413        100%
                                                ======        ===

     The above acts as the basis for allocating the overall allowances.
Additional changes have been made in the allocation of the allowance to address
unknowns, loan commitments, etc. The unallocated portion is not computed using a
specific formula and is management's best estimate of what should be allocated
for contingencies in the current portfolio. Without an unallocated reserve, the
allocation would have been made along the lines of the five year average losses
by loan type. In 2000, a greater portion was allocated to the commercial
allowance and a lesser amount to the consumer allowance as changes in the net
loan loss ratios occurred. A single loss involving the mental incapacity of a
guarantor on a commercial loan was responsible for about half of the gross
commercial charge-offs in 2000.

     Net charge-offs as a percentage of average loans outstanding for the years
ending December 31, 1996 to 2000 are as follows:

              2000                      0.23%
              1999                      0.23%
              1998                      0.26%
              1997                      0.06%
              1996                      0.17%

     While 2000 losses were slightly above peer group amounts, they are
considered reasonable in the eyes of management. The allowance as of December
31, 2000 was .79% of loans outstanding which is below peer group levels.
However, management believes the present allowance, which is 3.43 times the
average annual net charge-off rate over the last three years, is adequate based
on its knowledge of the loan portfolio and historical performance.


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 2000, total securities decreased to $25.8
million or 10.39% of total assets at December 31, 2000. Total securities were
$29.8 million or 13.52% of total assets at December 31, 1999.

     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 issuer's permission. The Company's purchases of securities have
generally been limited to securities of high credit quality with short to medium
term maturities.


<PAGE> 16


Securities (Continued)

     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, 2000, the fair value of the securities available for sale exceeded their
cost basis by $62,000 ($39,000 after the related tax effect).

     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,
                            2000      1999     1998     2000    1999     1998
                            ----      ----    ----      ----    ----    ----
                           (In Thousands of Dollars)  (In Thousands of Dollars)

     U.S. treasuries,
       agencies and
       corporations       $    88  $         $        $18,719  $21,160  $22,129
     Obligations of states
       and political
       subdivisions         2,131    2,837     2,987      789      243      262
     Mortgage-backed
       securities               9      340       517    3,275    4,339    6,821
                           ------   ------     -----    ------  ------   ------

       Total Debt
         Securities         2,228    3,177     3,504   22,783   25,742   29,212

     Other securities                                      52      151      546
                           ------   ------     -----  ------    ------   ------

       Total              $ 2,228  $ 3,177    $3,504  $22,835  $25,893  $29,758
                           ======   ======     =====   ======  ======   ======


     The carrying amount and estimated market value of debt securities (in
thousands of dollars) at December 31, 2000 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         Amortized       Fair        Average
                                           Cost          Value        Yield
                                       ------------   -----------   ---------

     Due in one year or less             $     531    $      532      6.18%
     Due after one year through
       five years                            1,108         1,104      7.01%
     Due after five years through
       ten years                               500           510      7.01%
     Due after ten years                        89            88      5.20%
                                          --------     ---------     -----

       Total Held to Maturity            $   2,228    $    2,234      6.74%
                                          ========     =========     =====


     Securities Available for Sale       Amortized       Fair        Average
                                           Cost          Value        Yield
                                       ------------   -----------   ---------

     Due in one year or less             $   7,855    $    7,838      5.47%
     Due after one year through
       five years                           10,874        10,929      6.31%
     Due after five years through
       ten years                             2,800         2,819      6.81%
     Due after ten years                     1,187         1,197      7.77%
                                          --------     ---------     -----

       Total Fixed Rate Securities          22,716        22,783      6.16%

     Equities                                   58            52      5.18%
                                          --------     ---------     -----

       Total Available for Sale          $  22,774    $   22,835      6.16%
                                          ========     =========     =====


     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> 17


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 5.32% in 2000
over average levels in 1999. The average rate paid on deposits increased to
4.82% in 2000 from 4.46% in 1999 and 4.88% in 1998. 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
2000 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                   2000        1999        1998
         --------------                   ----        ----        ----
                                            (In Thousands of Dollars)

     Three months or less               $  4,172    $  6,341    $   5,883
     Four to twelve months                14,336      12,342       11,391
     One year to five years               16,376       9,846        8,449
                                         -------     -------     --------

       Total                            $ 34,884    $ 28,529    $  25,723
                                         =======     =======     ========

     Certificates of Deposit

     3 months or less                               $  4,172
     Over 3 through 12 months                         14,336
     Over 12 through 36 months                        13,753
     Over 36 months                                    2,623
                                                     -------

                                                    $ 34,884
                                                     =======

Borrowed Money

     The Company occasionally borrows 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. The
Company had additional borrowings in 2000 of $1,732,000 and repayments within
the year of $290,000.


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.


<PAGE> 18


Capital Resources (Continued)

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

                                            Regulatory     December 31,
                                              Minimum    2000       1999
                                           -----------   ----       ----

     Capital Ratios
       Risk-based capital to risk-weighted assets
         Tier 1                               8.00%     15.17%    16.60%
         Total                                4.00%     16.03%    17.35%
       Stockholders' equity to total assets   5.00%     10.57%    10.99%

     The capital management function is an ongoing process. Central to this
process is internal equity generation accomplished by earnings retention. During
2000, 1999, and 1998, total stockholders' equity increased by $2,044,000,
$1,378,000 and $1,550,000, 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 9.40% in 2000 compared to 9.94% for 1999 and
9.12% for 1998. Total cash dividends declared represent 26.14% of net income for
2000 compared to 25.04% of net income for 1999 and 26.94% for 1998. Book value
per share was $52.34 at December 31, 2000 compared to $48.26 at December 31,
1999 and $45.52 at December 31, 1998.

     The Company's principal source of cash income is dividend payments from the
Banks and insurance subsidiary.  Certain limitations exist under
applicable law and regulation by regulatory agencies regarding dividend payments
to a parent by its subsidiaries. As of January 1, 2001, the Banks had $3,441,000
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 $17,279,000, an
increase in interest bearing deposits of $3,925,000 and an increase in fed funds
sold of $2,737,000.  New equipment and facility  additions were $1,288,000
in 2000 compared with $1,338,000 in 1999. The net cost of the branch acquisition
was $1,220,000 after reducing the purchase price by the cash owned by the
acquired institution. Funding these investments was an increase in deposits of
$15,418,000, a decline in investments of $6,662,000 and retained operating
income of $1,759,000.


<PAGE> 19


Liquidity and Interest Rate Sensitivity (Continued)

     In the year ending December 31, 2000, cash and due from banks decreased
$250,000 as cash provided by operations and financing activities was less than
cash used in investing activities. The Banks increased currency reserves at
all branches at the end of 1999 in anticipation of larger cash requirements
resulting from the year 2000 changeover. 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
$622,000 in 2000 was an increase of 6.90 percent over 1999 amounts.

     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, 2000, the Company had a neutral gap position as of twelve
months into the future. This position allows the Company to react quickly to
rate changes by the Federal Reserve Bank. The Company expects a decrease in the
overall cost of money in 2000 due to the maturity of certificates issued at
higher rates and a slight decrease in other deposit rates.

     With the largest amount of interest sensitive assets and liabilities
repricing within one year, the Company monitors this position 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 the 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, 80%
of all loans will reprice within three years of December 31, 2000. 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 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 investments 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 24) shows the maturity of liabilities and assets in future
periods. Table III (page 23) shows the effects of rate and volume changes on the
net interest margin for the past three year period.


<PAGE> 20


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 24) 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 Discussion

     The Company and its subsidiary banks began preparing for the year 2000
changeover in 1997. Plans were developed to update equipment and software and
contingency plans were instituted to address problems that may have occurred due
to suppliers inability to perform as expected. Some of the equipment purchases
replaced outdated property and would have been made in the normal course of
business. All phases of the Company's major operations were addressed and the
plans were heavily reviewed by federal and state regulators. The result of
this effort was that all aspects of the Bank's operations performed without
major interruption in 2000 and entering the new millennium had a negligible
impact on customer service, correspondent banking or profitability.


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> 21
TABLE I

                                            SUMMARY OF OPERATIONS

                                - - - - - - Years Ending December 31, - - - -
                                   - (In Thousands Except for Share Amounts)
                                  2000     1999     1998     1997     1996

Total Interest Income          $ 18,207 $ 16,243  $ 15,772 $ 15,084 $ 14,182
Total Interest Expense           (8,790)  (7,663)   (7,745)  (7,474)  (7,103)
                                -------  -------   -------  -------  -------

Net Interest Income               9,417    8,580     8,027    7,610    7,079
Provision for Loan Losses           500      320       355      190      135
                                -------  -------   -------  -------  -------

Net Interest Income after
   Provision for Loan Losses      8,917    8,260     7,672    7,420    6,944
Other Income                      1,263    1,026       735      571      592
Other Expenses                    6,631    5,912     5,377    5,115    4,570
                                -------  -------   -------  -------  -------

Income before Income Taxes        3,549    3,374     3,030    2,876    2,966
Income Tax Expense                1,168    1,049     1,018      996      953
                                -------  -------   -------  -------  -------

   Net Income                  $  2,381 $  2,325  $  2,012 $  1,880 $  2,013
                                =======  =======   =======  =======  =======


Net Income Per Share           $   4.74 $   4.63  $   4.01 $   3.73 $   3.92
Dividends Per Share            $   1.24 $   1.16  $   1.08 $   1.00 $    .94

Total Assets at Year End       $248,600 $220,481  $210,981 $190,770 $178,847
                                =======  =======   =======  =======  =======



Return on Average Assets          1.03%    1.08%    1.01%    1.00%    1.15%
Return on Average Equity          9.40%    9.94%    9.12%    8.80%    9.99%
Dividend Payout Ratio            26.14%   25.04%   26.94%   26.80%   24.00%
Year End Equity to Assets Ratio  10.57%   10.99%   10.83%   11.16%   11.31%


<PAGE> 22
TABLE II

<TABLE>

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

<CAPTION>

                                              2000                            1999                             1998
                               ----------------------------     -----------------------------      --------------------------
                                          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 1,3                   $  176,010   $  15,893     9.03   $  155,102    $  13,699      8.81   $ 143,197  $ 13,163    9.18

Investment securities:
   Taxable 4                    26,583       1,641     6.17       29,235        1,755      6.00      31,402     1,952    6.22
   Nontaxable 1,4                3,285         262     7.98        3,192          271      8.49       3,316       270    8.14
                             ---------    --------    -----        -----       ------      ----     -------     -----    -----

   Total Investment
     Securities                 29,868       1,903     6.37       32,427        2,026      6.25      34,718     2,222    6.40

Interest bearing deposits
   in banks                      3,464         179     5.17        4,161          222      5.33       1,215        64    5.27

Federal funds sold               5,276         330     6.25        8,685          432      4.97       8,216       440    5.36
                                 -----       --------  ------       ----       ------     -----      ------     -----    -----

   Total Earning Assets        214,618      18,305     8.53      200,375       16,379      8.17     187,346    15,889    8.48
                                            ------    -----                   -------     -----                ------     ----

Allowance for loan losses       (1,474)                           (1,322)                            (1,319)
Nonearnings assets              18,608                            16,931                             13,636
                                 ------                           ------                             ------

   Total Assets               $231,752                          $215,984                           $199,663
                               =======                         =========                           =======

INTEREST-BEARING LIABILITIES

Deposits:
   Demand                     $ 30,015    $    867     2.89     $ 32,971     $    809      2.45    $ 29,187    $  808    2.77
   Savings                      21,784         650     2.98       21,250          583      2.74      20,135       671    3.33
   Time deposits               126,041       7,061     5.60      114,632        6,133      5.35     108,382     6,213    5.73
                                -----       ------   ------       ------      -------     -----      -----      ------  -----

   Total Deposits              177,840       8,578     4.82      168,853        7,525      4.46     157,704     7,692    4.88
Other borrowed money             3,762         212     5.64        2,560          138      5.39         974        53    5.44
                                ------     -------   ------      ------        ------     -----     -------     -----    ----

   Total Interest Bearing
     Liabilities               181,602       8,790     4.84      171,413        7,663      4.47     158,678     7,745    4.88
                                             -----    -----                     ----      -----                 -----   -----

Noninterest bearing deposits    23,035                            20,319                             17,744
Other liabilities                1,793                               856                              1,186
                                -----                              -----                             ------

   Total Liabilities           206,430                           192,588                            177,608

   Stockholders' Equity         25,322                            23,396                             22,055
                                ------                            ------                             ------

   Total Liabilities and
      Equity                  $231,752                        $  215,984                           $199,663
                              ========                         =========                             ======

   Net Interest Earnings                  $  9,515                           $  8,716                        $  8,144
                                            ======                             ======                         =======

   Net Yield on Interest
      Earning Assets                                   4.43%                               4.35%                         4.35%
                                                       ====                                ======                         ====
</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> 23
TABLE III


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



                            2000 Compared to 1999        1999 Compared to 1998
                           ----------------------      ------------------------
                             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:

   Loans 2               $1,841   $ 353    $2,194      $1,093   $(557)   $ 536

   Investment Securities:
     Taxable               (159)     45      (114)       (135)    (62)    (197)
     Nontaxable               8     (17)       (9)        (10)     11        1
                           -----   ----      ----        ----    ----     ----

   Total Investment
     Securities            (151)     28      (123)       (145)    (51)    (196)

   Interest bearing deposits
     in banks               (37)     (6)      (43)        155       3      158
   Federal funds sold      (169)     67      (102)         25     (33)      (8)
                           -----   ----      ----        ----    ----     ----

   Total Interest Income  1,484     442     1,926       1,128    (638)     490
                          -----    ----     -----       -----    ----     ----


Interest Expense:

   Deposits:
     Demand                 (72)    130        58         105    (104)       1
     Savings                 15      52        67          37    (125)     (88)
     All other time
       deposits             610     318       928         358    (438)     (80)
   Other borrowed money      65       9        74          86      (1)      85
                           -----   ----      ----        ----    ----     ----

   Total Interest Expense   618     509     1,127         586    (668)     (82)
                           -----   ----     -----        ----    ----     ----

   Net Interest Income   $  866   $ (67)    $ 799       $ 542   $  30    $ 572
                           =====   ====     ====         ====    ====     ====


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> 24
TABLE IV


                       INTEREST RATE SENSITIVITY ANALYSIS
                            (In thousands of dollars)
                                DECEMBER 31, 2000


                                                            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                $23,758  $81,296  $46,202  $29,748  $8,263   $189,267
   Fed funds sold         7,040                                         7,040
   Securities             2,717    9,299    7,647    2,703   3,461     25,827
   Interest bearing time
     deposits             4,853      200    1,308                       6,361
                         ------   ------   ------   ------   -----     ------

   Total                 38,368   90,795   55,157   32,451   11,724   228,495
                         ------   ------   ------   ------   ------   -------

INTEREST BEARING LIABILITIES

   Transaction accounts  17,679                                        17,679
   Money market accounts 12,281                                        12,281
   Savings accounts      23,334                                        23,334
   Time deposits more
     than $100,000        4,172   14,335   13,754    2,623             34,884
   Time deposits less
     Than $100,000       15,745   40,408   38,912    6,883      76    102,024
   Other borrowed money            1,172      462       66   2,309      4,009
                         ------   ------   ------   ------   -----    ------

   Total                 73,211   55,915   53,128    9,572   2,385    194,211
                         ------   ------   ------   ------   -----    -------


Discrete interest
   sensitivity GAP      (34,843)  34,880    2,029   22,879   9,339     34,284

Cumulative interest
   sensitivity GAP      (34,843)      37    2,066   24,945  34,284

Ratio of cumulative
   interest sensitive
   assets to cumulative
   interest sensitive
   liabilities            52.41%  100.03%  101.13%  113.00% 117.65%


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


<PAGE> 25
TABLE V


                           QUARTERLY FINANCIAL RESULTS
                   (In thousands, except per share amounts)


                                 Fourth       Third      Second      First
                                 Quarter     Quarter     Quarter    Quarter
2000

Interest income               $   4,922   $   4,737   $   4,368   $   4,180
Interest expense                  2,441       2,306       2,083       1,960
                               --------    --------    --------    --------

   Net interest income            2,481       2,431       2,285       2,220
Provision for loan losses           190          90         100         120
                               --------    --------    --------    --------
   Net interest income after
     provision                    2,291       2,341       2,185       2,100

Non-interest income                 432         284         268         279
Non-interest expense              1,767       1,654       1,639       1,571
                               --------    --------    --------    --------

   Income before income tax
     provision                      956         971         814         808
Income tax provision                229         356         313         270
                               --------    --------    --------    --------

   Net Income                 $     727   $     615   $     501   $     538
                               ========    ========    ========    ========

Per common share:
   Net income (basic)         $    1.45  $     1.23  $     1.00  $     1.07
   Net income (diluted)            1.45        1.23        1.00        1.07
   Cash dividends                   .31         .31         .31         .31

1999

Interest income               $   4,159   $   4,090   $   4,046   $   3,948
Interest expense                  1,921       1,908       1,928       1,906
                               --------    --------    --------    --------

   Net interest income            2,238       2,182       2,118       2,042
Provision for loan losses           100          85          75          60
                               --------    --------    --------    --------
   Net interest income after
     provision                    2,138       2,097       2,043       1,982

Non-interest income                 426         225         213         162
Non-interest expense              1,652       1,457       1,425       1,378
                               --------    --------    --------    --------

   Income before income tax
     provision                      912         865         831         766
Income tax provision                208         285         295         261
                               --------    --------    --------    --------

   Net Income                   $   704     $   580     $   536    $    505
                                =======     =======      ======    =========
Per common share:
   Net income (basic)         $    1.40  $     1.16  $     1.07  $     1.01
   Net income (diluted)            1.40        1.16        1.02        1.01
   Cash dividends                   .29         .29         .29         .29


<PAGE> 26


Item 7. Financial Statements


                          Index to Financial Statements


                                                                        Page

Consolidated Balance Sheets as of December 31, 2000 and 1999             27

Consolidated Statements of Income for the Years Ended December 31,
  2000, 1999 and 1998                                                    28

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 2000, 1999 and 1998                       29

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2000, 1999 and 1998                                       30

Notes to Consolidated Financial Statements                               31

Independent Auditors' Report                                             49


<PAGE> 27


CONSOLIDATED BALANCE SHEETS

HIGHLANDS BANKSHARES, INC.
                                                           December 31,
ASSETS                                               2000            1999
                                                --------------  -------------

Cash and due from banks (notes 2, 3 and 16)     $   7,061,961  $  7,312,241
Interest bearing deposits in banks                  6,360,931     2,436,271
Federal funds sold                                  7,039,508     2,702,633
Investments:
  Securities held to maturity (note 4)              2,228,390     3,176,547
    (fair value of $2,233,856 and $3,175,918
     at December 31, 2000 and 1999, respectively)
  Securities available for sale (note 4)           22,835,324    25,892,783
  Other investments                                   763,050       745,550

Loans (notes 5, 14, 15 and 16)                    189,267,688   166,614,055
  Less allowance for loan losses (note 6)          (1,492,936)   (1,318,332)
                                                 ------------   -----------

  Net Loans                                       187,774,752   165,295,723

Bank premises and equipment (note 7)                6,809,453     5,690,860
Interest receivable                                 1,901,296     1,627,874
Investment in insurance contracts                   4,854,304     4,661,662
Other assets                                          971,124       938,901
                                                 ------------   -----------

  Total Assets                                  $ 248,600,093  $220,481,045
                                                 ============   ===========

LIABILITIES

Deposits:
  Noninterest bearing                           $  26,369,759  $ 21,085,145
  Interest bearing
    Money market and interest checking             17,678,521    18,101,823
    Money market savings                           12,281,053    13,391,006
    Savings accounts                               23,333,958    21,330,208
    Certificates of deposit over $100,000
       (note 8)                                    34,884,029    28,528,959
    All other time deposits (note 8)              102,023,919    89,907,847
                                                 ------------   -----------

  Total Deposits                                  216,571,239   192,344,988

Accrued expenses and other liabilities              1,751,921     1,344,052
Long-term debt (note 9)                             4,009,319     2,567,958
                                                 ------------   -----------

  Total Liabilities                               222,332,479   196,256,998
                                                 ------------   -----------

STOCKHOLDERS' EQUITY

Common stock, $5 par value, 3,000,000 and
  1,000,000 shares authorized at December 31,
  2000 and 1999, respectively, 546,764
  shares issued                                     2,733,820     2,733,820
Surplus                                             1,661,987     1,661,987
Retained earnings (note 12)                        22,825,747    21,067,191
Other accumulated comprehensive income (loss)          38,761      (246,250)
                                                 ------------   -----------

                                                   27,260,315    25,216,748
Treasury stock (at cost, 44,866 shares in
  2000 and 1999)                                     (992,701)     (992,701)
                                                 ------------   -----------

  Total Stockholders' Equity                       26,267,614    24,224,047
                                                 ------------   -----------

  Total Liabilities and Stockholders' Equity    $ 248,600,093  $220,481,045
                                                 ============   ===========

        The accompanying notes are an integral part of this statement.


<PAGE> 28


CONSOLIDATED STATEMENTS OF INCOME

HIGHLANDS BANKSHARES, INC.

                                               Years Ended December 31,
                                          ---------------------------------
                                             2000        1999         1998
INTEREST INCOME:
  Loans, including fees                $ 15,891,868  $13,663,857  $13,144,542
  Federal funds sold                        330,761      431,670      440,293
  Interest bearing deposits                 179,100      221,724       64,230
  Investment securities - taxable         1,641,057    1,754,509    1,952,454
  Investment securities - nontaxable        164,486      171,192      170,115
                                         ----------   ----------    ---------

  Total Interest Income                  18,207,272   16,242,952   15,771,634
                                         ----------   ----------   ----------

INTEREST EXPENSE:
  Time deposits over $100,000             1,865,498    1,524,334    1,428,100
  Other deposits                          6,712,478    6,000,044    6,263,489
                                         ----------   ----------    ---------

  Total Interest on Deposits              8,577,976    7,524,378    7,691,589

  Borrowed money                            212,054      138,313       52,937
                                         ----------    ---------    ---------

  Total Interest Expense                  8,790,030    7,662,691    7,744,526
                                         ----------   ----------    ---------

NET INTEREST INCOME                       9,417,242    8,580,261    8,027,108

PROVISION FOR LOAN LOSSES (note 6)          500,000      320,000      355,000
                                         ----------   ----------    ---------

Net Interest Income after Provision
  for Loan Losses                         8,917,242    8,260,261    7,672,108
                                         ----------   ----------    ---------

NONINTEREST INCOME:
  Service charges                           591,614      409,052      339,289
  Insurance commissions and income          132,105      112,339      107,482
  Other operating income                    435,534      568,903      290,221
  Gain (loss) on security transactions
    (note 4)                                103,870      (63,590)      (2,071)
                                         ----------    ---------    ---------

  Total Noninterest Income                1,263,123    1,026,704      734,921
                                         ----------    ---------    ---------

NONINTEREST EXPENSES:
  Salaries and benefits (note 11)         3,629,664    3,230,973    2,916,970
  Occupancy expense                         302,738      269,483      269,469
  Equipment expense                         548,850      472,441      411,660
  Data processing expense                   489,744      473,392      456,740
  Other operating expenses                1,659,834    1,466,016    1,321,750
                                         ----------    ---------    ---------

  Total Noninterest Expenses              6,630,830    5,912,305    5,376,589
                                         ----------    ---------    ---------

  Income before Income Tax Expense        3,549,535    3,374,660    3,030,440

INCOME TAX EXPENSE (note 10)              1,168,624    1,049,291    1,018,558
                                         ----------    ---------    ---------

NET INCOME                              $ 2,380,911   $2,325,369  $ 2,011,882
                                         ==========    =========   ==========

Earnings Per Share                      $      4.74   $     4.63  $      4.01
                                         ==========    =========   ==========

Cash Dividends Paid Per Share           $      1.24   $     1.16  $      1.08
                                         ==========    =========   ==========

Weighted Average Shares Outstanding         501,898      501,898      501,898
                                         ==========    =========    =========


        The accompanying notes are an integral part of this statement.


<PAGE> 29
<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, 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 gain
       (loss) on securities
       available for sale, net
       of tax effect of $46,814
       (see note 2(l))                                                             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

   Comprehensive Income
     Net income                                                   2,325,369                                   2,325,369
     Change in unrealized gain
       (loss) on securities
       available for sale, net
       of tax effect of $214,757
       (see note 2(l))                                                           (365,672)                     (365,672)
                                                                                                                --------

   Total Comprehensive
     Income                                                                                                   1,959,697

   Cash dividends                                                  (582,197)                                   (582,197)
                                    --------    --------           --------      --------      --------        --------

BALANCE
   DECEMBER 31, 1999               2,733,820     1,661,987       21,067,191      (246,250)    (992,701)      24,224,047

   Comprehensive Income
     Net income                                                   2,380,911                                   2,380,911
     Change in unrealized gain
       (loss) on securities
       available for sale, net
       of tax effect of $167,386
       (see note 2(l))                                                            285,011                       285,011
                                                                                                                --------

   Total Comprehensive
     Income                                                                                                   2,665,922

   Cash dividends                                                  (622,355)                                   (622,355)
                                   --------      --------           --------      --------     --------        --------

BALANCE
   DECEMBER 31, 2000            $2,733,820     $ 1,661,987     $ 22,825,747     $  38,761   $ (992,701)    $ 26,267,614
                                 =========       =========        =========      ========     ========        =========
</TABLE>

             The accompanying notes are an integral part of this statement.


<PAGE> 30


CONSOLIDATED STATEMENTS OF CASH FLOWS

HIGHLANDS BANKSHARES, INC.


                                                Years Ended December 31,
                                               2000       1999       1998
                                         -------------------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                             $ 2,380,911  $ 2,325,369 $ 2,011,882
   Adjustments to reconcile net income to
     net cash provided by operating
     activities:
       (Gain) loss on sale of securities     (103,870)      63,590       2,071
       Gain on sale of property and
         equipment                               (237)
       Depreciation                           447,697      407,147     350,429
       Increase in insurance contracts       (192,642)    (139,230)    (52,432)
       Net amortization of security premiums    2,171      151,150      15,062
       Provision for loan losses              500,000      320,000     355,000
       Deferred income tax expense             18,010      (15,192)     (6,441)
       Change in other assets and liabilities:
         Interest receivable                 (158,422)     (71,527)     (8,743)
         Other assets                          86,378     (105,451)    127,550
         Accrued expenses                     315,869      116,566     (83,512)
                                           ----------   ----------   ---------

   Net Cash Provided by Operating
     Activities                             3,295,865    3,052,422   2,710,866
                                           ----------   ----------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of branch, net of cash
     acquired                              (1,220,000)
   Proceeds from maturity of securities
     held to maturity                         952,376      332,027   1,068,833
   Proceeds from maturities of securities
     available for sale                     7,590,970   15,000,285  12,719,231
   Proceeds from sales of securities
     available for sale                     2,115,255      377,499
   Purchases of securities available
     for sale                              (3,978,886) (12,312,504)(10,681,150)
   Net change in other investments            (17,500)     (14,600)    (15,700)
   Net change in deposits in other banks   (3,924,660)     995,252  (2,604,887)
   Net increase in loans                  (17,279,029) (18,587,196)(11,647,875)
   Change in federal funds sold            (2,736,875)   9,671,650  (5,479,168)
   Purchase of property and equipment      (1,287,893)  (1,338,297)   (337,341)
   Proceeds from sale of property and
     equipment                                  2,840
   Investment in insurance contracts                    (2,400,000) (2,070,000)
                                           ----------   ----------  ----------

   Net Cash Used in Investing Activities  (19,783,402)  (8,275,884)(19,048,057)
                                           ----------    ---------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net change in time deposits             14,050,142    6,489,323   7,306,146
   Net change in other deposit accounts     1,368,109    1,268,300   9,345,508
   Additional long-term debt                1,731,532      394,922   2,145,532
   Repayment of long-term debt               (290,171)    (146,508)    (52,140)
   Dividends paid in cash                    (622,355)    (582,197)   (542,048)
                                           ----------    ---------    --------

   Net Cash Provided by Financing
     Activities                            16,237,257    7,423,840  18,202,998
                                           ----------  ----------   ----------

CASH AND CASH EQUIVALENTS:
   Net (decrease) increase in cash and
     due from banks                          (250,280)   2,200,378   1,865,807
   Cash and due from banks, beginning
     of year                                7,312,241    5,111,863   3,246,056
                                           ----------   ----------   ---------

   Cash and Due from Banks, End of Year   $ 7,061,961  $ 7,312,241  $5,111,863
                                           ==========  ==========    =========

Supplemental Disclosures:
   Cash paid for:
     Interest expense                     $ 8,610,571  $ 7,688,056  $7,798,847
     Income taxes                           1,203,000    1,152,533   1,013,250

        The accompanying notes are an integral part of this statement.


<PAGE> 31


     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, Pendleton and Randolph counties
              of West Virginia, including the towns of Petersburg, Keyser,
              Moorefield and Wardensville through seven 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> 32


     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
                  other accumulated comprehensive income. 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> 33


     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.

              (h) Bank Premises and Equipment

                  Ban 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         5 - 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.


<PAGE> 34


     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     HIGHLANDS BANKSHARES, INC.


     NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

(l)   Comprehensive Income

                  The Corporation adopted SFAS 130, Reporting Comprehensive
                  Income, as of January 1, 1998. Accounting principles
                  generally require that recognized revenue, expenses, gains and
                  losses be included in net income. Certain changes in assets
                  and liabilities, such as unrealized gains and losses on
                  available-for-sale securities, are reported as a
                  separate component of the equity section of the balance sheet.
                  Such items, along with net income, are components of
                  comprehensive income. The adoption of SFAS 130 had no effect
                  on the Corporation's net income or shareholders' equity.

                  The components of other comprehensive income and related tax
                  effects are as follows:

                                                    Years Ended December 31,
                                                    ------------------------
                                                  2000        1999        1998
                                                  ----        ----        ----
                                                         (In thousands)

                   Unrealized holding gains
                      (losses) on available-
                      for-sale securities      $ 556,267   $(644,019)  $124,455
                   Reclassification adjustment
                      for (gains) losses
                      realized in income        (103,870)     63,590      2,071
                                                --------    --------    -------

                   Net Unrealized Gains
                      (Losses)                   452,397    (580,429)   126,526
                   Tax effect                   (167,386)    214,757    (46,814)
                                                --------    --------    -------

                   Net Change                  $ 285,011   $(365,672)  $ 79,712
                                                ========    ========    =======


     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> 35


     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, 2000

          U.S. Agencies       $    88,609 $           $      319 $    88,290
          Mortgage-backed           8,893        298                   9,191
          State and municipals  2,130,888     13,042       7,555   2,136,375
                               ----------  ---------   ---------   ---------

          Total Securities
            Held to Maturity  $ 2,228,390 $   13,340  $    7,874 $ 2,233,856
                               ==========  =========   =========   =========

          December 31, 1999

          Mortgage-backed     $   339,877 $      406  $      590 $   339,693
          State and municipals  2,836,670     21,575      22,020   2,836,225
                               ----------  ---------   ---------   ---------

          Total Securities
            Held to Maturity  $ 3,176,547 $   21,981  $   22,610 $ 3,175,918
                               ==========  =========   =========   =========


          Available for Sale

          December 31, 2000

          U. S. Treasuries
            and Agencies      $18,178,632 $   79,250  $   38,211 $18,219,671
          Mortgage-backed       3,257,381     24,107       6,402   3,275,086
          State and municipals    771,710     19,146       1,539     789,317
          Marketable equities      58,274                  6,574      51,700
          Corporate
            obligations           507,796                  8,246     499,550
                               ----------  ---------   ---------   ---------

          Total Securities
            Available for
            Sale$              22,773,793 $  122,503  $   60,972 $22,835,324
                               ==========  =========   =========  ==========

          December 31, 1999

          U. S. Treasuries
            and Agencies      $20,923,302 $    6,971  $  260,709 $20,669,564
          Mortgage-backed       4,426,672      5,988      93,779   4,338,881
          State and municipals    255,000                 12,112     242,888
          Marketable equities     167,211                 15,711     151,500
          Corporate
            obligations           511,466                 21,516     489,950
                               ----------  ---------   ---------   ---------

          Total Securities
            Available for Sale$26,283,651 $   12,959  $  403,827 $25,892,783
                               ==========  =========   =========  ==========


<PAGE> 36


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.




NOTE 4    SECURITIES (CONTINUED):

          The carrying amount and fair value of debt securities at December 31,
          2000, 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                                Fair
          ---------------------------                  Cost          Value
                                                  --------------  -----------

          Due in one year or less                  $   531,435   $  531,986
          Due after one year through five years      1,108,326    1,104,174
          Due after five years through ten years       491,127      500,215
          Due after ten years                           88,609       88,290
          Mortgage-backed securities                     8,893        9,191
                                                    ----------    ---------

            Total Held to Maturity                 $ 2,228,390   $2,233,856
                                                    ==========    =========


          Securities Available for Sale                              Fair
          -----------------------------                Cost          Value
                                                  --------------  -----------

          Due in one year or less                  $ 7,034,645   $ 7,018,526
          Due after one year through five years     10,745,968    10,801,394
          Due after five years through ten years     1,355,000     1,357,305
          Due after ten years                          322,525       331,313
          Mortgage-backed securities                 3,257,381     3,275,086
                                                    ----------     ---------

          Total Fixed Rate Securities               22,715,519    22,783,624
          Equities                                      58,274        51,700
                                                    ----------     ---------

            Total Available for Sale               $22,773,793   $22,835,324
                                                    ==========    ==========

          The carrying amount (which approximates market value) of securities
          pledged by the banks to primarily secure deposits amounted to
          $10,786,000 at December 31, 2000 and $10,326,000 at December 31, 1999.

          There were no holdings totaling more than 10% of stockholders' equity
          with any issuer as of December 31, 2000 and 1999.

          All gains or losses in 1998 are from calls or early payoffs of
          securities designated as held to maturity. Losses in 1999 and gains in
          2000 arose from the sale of securities available for sale. Realized
          gains or losses for the years ending December 31 are as follows:

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

          Gains                       $ 103,870    $    4,259    $    9,438
          Losses                                      (67,849)      (11,509)
                                       --------     ---------     ---------

            Total                     $ 103,870    $  (63,590)   $   (2,071)
                                       ========     =========     =========


<PAGE> 37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 5    LOANS:

          Loans outstanding as of December 31 are summarized as follows:

                                                      2000          1999
                                                   ------------   -----------

          Commercial                              $ 37,681,492  $ 31,566,793
          Real estate construction                   4,061,000     3,296,000
          Real estate mortgages                    101,889,826    93,391,419
          Consumer installment                      46,191,314    39,993,963
                                                   -----------   -----------

            Subtotal                               189,823,632   168,248,175
            Unearned interest                         (555,944)   (1,634,120)
                                                   -----------   -----------

            Total Loans                           $189,267,688  $166,614,055
                                                   ===========   ===========


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:

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

          Balance at beginning
            of year                 $1,318,332    $1,355,377    $ 1,369,566
          Allowance relating to loans
            acquired in purchase        86,873
          Provision charged to
            operating expenses         500,000       320,000        355,000
          Loan recoveries              102,873        90,544        107,051
          Loans charged off           (515,142)     (447,589)      (476,240)
                                     ---------     ---------     ----------

            Balance at end of year  $1,492,936    $1,318,332    $ 1,355,377
                                     =========     =========     ==========

            Percentage of outstanding
              loans                       .79%          .79%           .91%


<PAGE> 38


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:

                                                         2000       1999
                                                     ----------- ----------

          Land                                      $1,017,103   $  917,139
          Buildings and improvements                 6,087,509    5,019,994
          Furniture and equipment                    3,322,481    2,925,284
                                                     ---------    ---------

          Total cost                                10,427,093    8,862,417
            Less - accumulated depreciation         (3,617,640)  (3,171,557)
                                                    ----------   ----------

            Net Book Value                          $6,809,453   $5,690,860
                                                     =========    =========

          Provisions for depreciation of $447,697 in 2000, $407,147 in 1999 and
          $350,429 in 1998 were charged to operations.


NOTE 8    DEPOSITS:

          At December 31, 2000, the scheduled maturities of certificates of
          deposit are as follows:

                      2001                         $75,987,325
                      2002                          43,890,585
                      2003                           7,448,992
                      2004                           3,238,955
                      2005                           6,342,091
                                                    ----------

                      Total                       $136,907,948
                                                   ===========


NOTE 9    LONG-TERM DEBT:

          The Company has borrowed money from the Federal Home Loan Bank of
          Pittsburgh (FHLB). The interest rates on most of the notes payable
          were fixed at the time of the advance and range from 2.50% to 6.85%;
          the weighted average interest rate is 5.78% at December 31, 2000. The
          debt is secured by the assets of the Banks.

          Repayments of long-term debt are due either monthly or quarterly.
          Interest expense of $212,054, $138,313, and $52,937 was incurred on
          these debts in 2000, 1999, and 1998, respectively. The maturities of
          long-term debt as of December 31, 2000 are as follows:

                      2001                         $  1,363,977
                      2002                              202,845
                      2003                              672,157
                      2004                              199,555
                      2005                              210,578
                      Thereafter                      1,360,207
                                                    -----------

                      Total                        $  4,009,319
                                                    ===========


<PAGE> 39


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:

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

          Current Expense
            Federal                       $   953,961 $  930,223  $ 899,787
            State                             196,653    134,260    125,212
                                           ----------  ---------   --------

            Total Current Expense           1,150,614  1,064,483  1,024,999
                                           ----------  ---------  ---------

          Deferred Expense
            Federal                            16,431    (13,961)    (5,919)
            State                               1,579     (1,231)      (522)
                                           ----------  ---------   --------

            Total Deferred Expense             18,010    (15,192)    (6,441)
                                           ----------  ---------   --------

            Income Tax Expense            $ 1,168,624 $1,049,291 $1,018,558
                                           ==========  =========  =========

          Income expense (benefits)
            relating to security
            transactions are as
            follows:                      $    38,432 $  (23,528) $    (766)


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

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

          Tax effect of temporary differences:
            Provision for loan losses       $ (12,874) $(10,937)  $(24,887)
            Sale of loans                       3,693     7,192     32,612
            Pension expense                   (24,694)  (26,626)   (18,030)
            Depreciation                       52,928    23,945     30,497
            Deferred compensation             (38,471)  (24,797)
            Basis of securities sold           75,369
            Miscellaneous                     (37,941)   16,031    (26,633)
                                              -------   -------    -------

            Net (increase) decrease in
              deferred income tax benefit   $  18,010  $(15,192)  $ (6,441)
                                             ========   =======    =======


<PAGE> 40


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:

                                                         2000       1999
                                                      ----------------------

          Deferred Tax Assets:
            Provision for loan losses                $ 382,072   $ 316,232
            Insurance commissions                       32,181      30,663
            Unrealized loss on securities available
              for sale                                             144,618
            Deferred compensation                       89,319      50,860
            Accrued pension expense                     23,965
            Other                                       25,310      10,796
                                                      --------    --------

            Total Assets                               552,847     553,169
                                                      --------    --------

          Deferred Tax Liabilities:
          -------------------------
            Unrealized gain on securities
              available for sale                        22,769
            Accretion income                            22,914      41,840
            Property basis differences                 299,745     156,768
                                                      --------    --------

            Total Liabilities                          345,428     198,608
                                                      --------    --------

            Net Tax Asset                            $ 207,419   $ 354,561
                                                      ========    ========


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

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

          Amounts at federal statutory
            rates                        $1,206,848  $1,147,384  $1,030,351
          Additions (reductions)
            resulting from:
              Tax-exempt income             (82,259)    (71,484)    (61,331)
              Partially exempt income       (36,606)    (30,125)    (27,497)
              State income taxes, net       115,964     100,227      90,004
              Income from life insurance
                contracts                   (71,798)    (51,515)    (15,096)
              Capital losses incurred
                (utilized)                              (53,346)
              State income tax adjustment    30,000
              Other                           6,475       8,150       2,127
                                          ---------   ---------   ---------

              Income tax expense         $1,168,624  $1,049,291  $1,018,558
                                          =========   =========   =========


<PAGE> 41


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 required to make contributions
          to the Plan in 2000, 1999 or 1998. The amounts of the accrued
          liability 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.

          Expenses related to the above benefit plans charged to operations
          totaled $266,601 in 2000, $266,704 in 1999 and $197,386 in 1998.


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, 2001, the banks could pay dividends to the Company of
          approximately $3,441,000 without permission of the regulatory
          authorities.


NOTE 13   ACQUISITION OF THE STOCKMANS BANK OF HARMAN

          On July 27, 2000, The Grant County Bank acquired the remaining stock
          not already owned by Highlands Bankshares from the
          stockholders of the Stockmans Bank of Harman (hereinafter referred to
          as "Harman"). Stockmans was a single branch bank serving Randolph
          County in West Virginia. The acquisition has been accounted for as
          purchase under generally accepted accounting principles and operations
          subsequent to July 26, 2000 have been included as part of the
          operations of the Company for the year 2000. Grant  purchased the
          229 shares not already owned by Highlands from unrelated shareholders
          and Highlands contributed the 21 shares it owned to Grant as a capital
          contribution. Unrelated shareholders were paid $7,850 per share in
          cash for their shares at closing. The total acquisition cost,
          including shares acquired in previous years, was $1,878,000 plus
          expenses. The total purchase price was allocated as follows:

              Cash and Due From Banks               $  .7 million
              Loans Receivable                        5.7 million
              Securities                              2.2 million
              Fed Funds Sold                          1.6 million
              Other Assets                             .7 million
              Deposits Assumed                       (8.7) million
              Other Liabilities                       (.3) million
              Cash Paid and Expenses of Purchase     (1.9) million


<PAGE> 42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 13   ACQUISITION OF THE STOCKMANS BANK OF HARMAN (CONTINUED)

          As part of the accounting for this transaction, the Company acquired
          goodwill totaling $219,000 which is being amortized on a straight line
          basis over a period of ten years.

          Proforma operations for 2000 and 1999, as if the companies had been
          combined from the beginning of each year, are shown below (in
          thousands of dollars):

                                                        2000        1999

          Interest Income                           $   18,596   $   16,952
          Interest Expense                              (8,951)      (7,960)
                                                     ---------    ---------
            Net Interest Income                          9,645        8,992
          Provision for Loan Losses                       (500)        (347)
                                                     ---------    ---------
            Net                                          9,145        8,645
          Noninterest Income                             1,275        1,055
          Noninterest Expense                           (6,899)      (6,364)
                                                     ---------    ---------
            Income before Income Taxes                   3,521        3,336
          Provision for Income Taxes                    (1,152)      (1,026)
                                                     ---------    ---------

          Net Income                                $    2,369   $    2,310
                                                     =========    =========


NOTE 14   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 $2,443,788 at December 31, 1999 was increased
          $859,495 by new loans and reduced $882,922 by payments resulting in an
          ending balance of $2,420,361 at December 31, 2000.


NOTE 15   COMMITMENTS AND GUARANTEES:

          The Banks make commitments to extend credit in the normal
          course of business and issued standby letters of credit to meet the
          financing needs of their 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:
                                                        2000        1999

          Commitments to extend credit             $11,517,000  $ 6,212,000
          Standby letters of credit                    438,000      215,000

          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.


<PAGE> 43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 16   CONCENTRATIONS:

          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 the 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 56%
          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 $6,809,453 and $6,669,749 at December 31,
          2000 and 1999, respectively.


NOTE 17   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.

          Long Term Debt

          The fair value of fixed rate loans is estimated using the rates
          currently offered by the Federal Intermediate Credit Bank for
          indebtedness with similar maturities.

          Interest Payable and Receivable

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


<PAGE> 44


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 17   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, 2000.

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

                                         2000                  1999
                                             Estimated             Estimated
                                 Carrying      Fair     Carrying     Fair
                                  Amount       Value     Amount      Value
                               ------------ ---------------------- ---------

          Financial Assets:
            Cash and due from
              banks            $ 7,061,961  $ 7,061,961 $ 7,312,241 $  7,312,241
            Interest bearing
              deposits           6,360,931    6,360,931   2,436,271    2,436,271
            Federal funds sold   7,039,508    7,039,508   2,702,633    2,702,633
            Securities held to
              maturity           2,228,390    2,233,856   3,176,547    3,175,918
            Securities available
              for sale          22,835,324   22,835,324  25,892,783   25,892,783
            Other investments      763,050      763,050     745,550      745,550
            Loans, net         187,774,752  187,498,412 165,295,723  164,368,631
            Interest receivable  1,901,296    1,901,296   1,627,874    1,627,874

          Financial Liabilities:
            Demand and savings
              deposits          79,663,291   79,663,291  73,908,182   73,908,182
            Term deposits      136,907,948  137,101,109 118,436,806  117,846,983
            Borrowed money       4,009,319    3,964,810   2,567,958    2,346,150
            Interest payable       842,979      842,979     663,522      663,522


NOTE 18   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, 2000, that the Company meets all capital
          adequacy requirements to which it is subject.


<PAGE> 45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 18   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
                                     2000     1999     Capitalized  Capitalized

          Total risk-based ratio    16.03%   17.35%       8.00%      10.00%
          Tier 1 risk-based ratio   15.17%   16.60%       4.00%       6.00%
          Total assets leverage
            ratio                   10.57%   10.99%       4.00%       5.00%

          Capital ratios and amounts are applicable both at the individual bank
          level and on a consolidated basis. At December 31, 2000, both
          subsidiary banks had capital levels 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> 46


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 19   PARENT CORPORATION ONLY FINANCIAL STATEMENTS:


                                 BALANCE SHEETS

          Assets                                           December 31,
                                                       ---------------------
                                                        2000        1999
                                                    ------------- ----------

            Cash                                    $    81,062  $    34,476
            Investment in subsidiaries               26,121,840   24,028,470
            Other investments                            32,584      100,000
            Other assets                                    671        1,115
            Income taxes receivable                     237,959      113,268
                                                     ----------   ----------

            Total Assets                            $26,474,116  $24,277,329
                                                     ==========   ==========

          Liabilities

            Due to subsidiaries                     $   206,502  $    53,282
                                                     ----------   ----------

            Total Liabilities                           206,502       53,282
                                                     ----------   ----------

          Stockholders' Equity

            Common stock, par value $5 per share
              3,000,000 and 1,000,000 shares
              authorized at December 31, 2000
              and 1999, respectively; 546,764
              shares issued                         $ 2,733,820  $ 2,733,820
            Surplus                                   1,661,987    1,661,987
            Retained earnings                        22,825,747   21,067,191
            Other accumulated comprehensive income       38,761     (246,250)
                                                     ----------   ----------

                                                     27,260,315   25,216,748
            Less treasury stock (at cost, 44,866
              shares in 2000 and 1999)                 (992,701)    (992,701)
                                                     ----------   ----------

            Total Stockholders' Equity               26,267,614   24,224,047
                                                     ----------   ----------

            Total Liabilities and Stockholders'
              Equity                                $26,474,116  $24,277,329
                                                     ==========   ==========


<PAGE> 47


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 19   PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):


                  STATEMENTS OF INCOME AND RETAINED EARNINGS

                                                Years Ended December 31,
                                           ---------------------------------
                                             2000       1999         1998
                                         ------------------------ -----------

          Income

            Dividends from subsidiaries   $  722,354  $  666,652  $  623,525
            Other dividends                                1,680         735
                                           ---------   ---------   ---------

            Total                            722,354     668,332     624,260
                                           ---------   ---------   ---------

          Expenses

            Professional fees                 48,988      34,056      27,032
            Directors' fees                   32,650      25,500      24,050
            Other expenses                    31,172      33,905      36,749
                                           ---------   ---------   ---------

            Total                            112,810      93,461      87,831
                                           ---------   ---------   ---------

          Net income before income tax
            benefit and undistributed
            income of subsidiaries           609,544     574,871     536,429

          Income tax benefit                  43,006      37,866      29,360
                                           ---------   ---------   ---------

          Income before undistributed income
            of subsidiaries                  652,550     612,737     565,789

          Undistributed income of
            subsidiaries                   1,728,361   1,712,632   1,446,093
                                           ---------   ---------   ---------

            Net Income                     2,380,911   2,325,369   2,011,882

          Retained earnings,
            Beginning of period           21,067,191  19,324,019  17,854,185
            Dividends paid                  (622,355)   (582,197)   (542,048)
                                           ---------   ---------   ---------

          Retained Earnings,
            End of Period                $22,825,747 $21,067,191 $19,324,019
                                          ==========  ==========  ==========



<PAGE> 48


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 19   PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):


                            STATEMENTS OF CASH FLOWS

                                                 Years Ended December 31,
                                              ------------------------------
                                                2000       1999      1998
                                             ---------- ---------  ---------


          Cash Flows from Operating Activities:
            Net income                    $2,380,911  $2,325,369  $2,011,882
            Adjustments
              Undistributed subsidiary
              income                      (1,728,361) (1,712,632) (1,446,093)
              Depreciation                       446         624         583
              Increase in other
                investments                  (12,584)
              Increase in payables           153,220      52,809         473
              Increase in receivables       (124,691)    (65,251)    (25,413)
              Increase in other assets                                (2,325)
                                           ---------   ---------    --------

            Net Cash Provided by Operating
              Activities                     668,941     600,919     539,107
                                           ---------   ---------    --------


          Cash Flows from Financing Activities:
            Dividends paid                  (622,355)   (582,197)   (542,048)
                                           ---------   ---------    --------

            Net Cash Used in Financing
              Activities                    (622,355)   (582,197)   (542,048)
                                           ---------   ---------    --------

          Net Increase (Decrease) in Cash     46,586      18,722      (2,941)

          Cash, Beginning of Year             34,476      15,754      18,695
                                           ---------   ---------    --------

          Cash, End of Year               $   81,062  $   34,476  $   15,754
                                           =========   =========    ========


<PAGE> 49


                          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, 2000 and 1999, 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,
2000. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2000, in conformity with
generally accepted accounting principles.


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


January 19, 2001
Harrisonburg, Virginia


<PAGE> 50


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

     None

Part III

Item  9. Directors,  Executive  Officers,  Promoters  and  Control  Persons;
         Compliance with Section 16(a) of the Exchange Act

     We are  incorporating the Proxy Statement of Highlands  Bankshares,  Inc.
via Form DEF 14A filed March 20, 2001.

Item 10. Executive Compensation

     We are  incorporating the Proxy Statement of Highlands  Bankshares,  Inc.
via Form DEF 14A filed March 20, 2001.

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 20, 2001.

Item 12. Certain Relationships and Related Transactions

     We are  incorporating the Proxy Statement of Highlands  Bankshares,  Inc.
via Form DEF 14A filed March 20, 2001.

     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 14 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> 51


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              Subsidiary  listing of the  Registrant is attached
                            on Page 53

            22              Not applicable

            23              Consent of Certified  Public  Accountant  attached
                            on Page 54

            24              Not applicable

            28              Not applicable


     b)  Reports on Form 8-K

         No reports on Form 8-K were filed in the fourth quarter of 2000.


<PAGE> 52


                                   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 27, 2001
                                             -------------------------



                                        By   CLARENCE E. PORTER
                                             ------------------------------
                                             Clarence E. Porter
                                             Secretary/Treasurer


                                        Date March 27, 2001
                                             -------------------------

   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 27, 2001
---------------------------                                  --------------
Leslie A. Barr                          President
                                & Chief Executive Officer
                                        Director
THOMAS B. MCNEIL, SR.                                        March 27, 2001
---------------------------                                  --------------
Thomas B. McNeil, Sr.                   Director


George B. Moomau                        Director


CLARENCE E. PORTER                                           March 27, 2001
---------------------------                                  --------------
Clarence E. Porter                 Secretary/Treasurer


Courtney R. Tusing                      Director


JOHN G. VANMETER                                             March 27, 2001
---------------------------                                  --------------
John G. VanMeter                  Chairman of the Board
                                        Director


Jack H. Walters                         Director


L. KEITH WOLFE                                               March 27, 2001
---------------------------                                  --------------
L. Keith Wolfe                          Director


<PAGE> 53


Exhibit 21 - List of Subsidiaries of the Registrant


   The following is a list of subsidiaries meeting the requirements of Exhibit
21.

   a)  The Grant County Bank  (incorporated in West Virginia),  doing business
       as The Grant County Bank.

   b)  Capon Valley Bank  (incorporated  in West Virginia),  doing business as
       the Capon Valley Bank.

   c)  HBI  Life  Insurance  Company,  Inc.  (incorporated  in  the  state  of
       Arizona), doing business as HBI Life.

   d)  Highlands  Bankshares Trust Company  (incorporated in the state of West
       Virginia), doing business as Highlands Bankshares Trust Company

                                                                   Exhibit 21


<PAGE> 54


Exhibit 23 - Consent of Certified Public Accountant



Board of Directors
Highlands Bankshares, Inc.


   We consent to the use of our report, dated January 19, 2001, relating to the
consolidated balance sheets of Highlands Bankshares, Inc. as of December 31,
2000 and 1999, and the related statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 2000, which report appears on page 24 in the December 31, 2000
Annual Report to Shareholders of Highlands Bankshares, Inc. and page 48 of this
10K/A.


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




Harrisonburg, VA
March 22, 2001