SECURITIES AND EXCHANGE COMMISSION

                            Washington, D. C. 20549

                                    FORM 10-K

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

For 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 or any amendment to this Form 10-K. [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 47-48.

    TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT  YES         NO   X


<PAGE> 2

                                 FORM 10-K 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                                          23

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


Part III

Item  9.  Directors, Executive Officers, Promoters and Control
          Persons; Compliance with Section 16(a) of the
          Exchange Act                                                  47

Item 10.  Executive Compensation                                        47

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

Item 12.  Certain Relationships and Related Transactions                47


Part IV

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

Signatures                                                              49



<PAGE> 3


Part I

Item 1. Description of Business

    General

    Highlands  Bankshares,   Inc.  (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
20.



<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
20.

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  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
                                           ========    ========    ========


     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
                               ========    ========    ========    ========



<PAGE> 10



Financial Condition (Continued)

     Loan Portfolio (Continued)

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

     Real estate acquired through foreclosure was $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.
Management  does not  anticipate  any material  losses from the current level of
nonperforming assets.

     The following table summarizes the nonperforming loans:

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

     Loans accounted for on a
       nonaccrual basis                  $    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
                                          ======       =====       ======



<PAGE> 11



Financial Condition (Continued)

     Loan Portfolio (Continued)

    An inherent  risk in the lending of money is that the  borrower  will not be
able to repay the loan under the terms of the original agreement.  The allowance
for loan losses (see subsequent  section) provides for this risk and is reviewed
periodically for adequacy. This review also considers concentrations of loans in
terms  of  geography,   business  type  or  level  of  risk.  While  lending  is
geographically  diversified  within the service area, the Company does have some
concentration of loans in the area of agriculture  (primarily  poultry farming),
timber and related industries.  Management  recognizes these  concentrations and
considers them when  structuring  its loan  portfolio.  As of December 31, 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.

     Charge offs for 2000 were .23% of average loans  outstanding  and about the
same as the Company's peer group over the last three years. Losses on commercial
lending were higher in 2000 due to an individual loss involving the inability of
a guarantor to pay the indebtedness. The Company anticipates some recoveries due
to pending legal  actions but reflects  these only when the recovery is actually
realized.

     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> 12



Allowance for Loan Losses (Continued)

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

                                               Year Ending December 31,
                                          -----------------------------
                                              2000       1999       1998
                                              ----       ----       ----
                                               (In Thousands of Dollars)

     Balance at beginning of period          $1,318     $1,355    $1,370
                                              -----      -----     -----

     Allowance relating to loans acquired
       in purchase                               87
                                              -----      -----     -----

     Loan Losses:
       Commercial and agricultural              172        107       135
       Real estate - mortgage                   128         87        53
       Installment loans to individuals         215        254       289
                                              -----      -----     -----

       Total loan losses                        515        448       477
                                              -----      -----     -----

     Recoveries:
       Commercial and agricultural                2         16         6
       Real estate - mortgage                    30          1         1
       Installment loans to individuals          71         74       100
                                              -----      -----     -----

       Total recoveries                         103         91       107
                                              -----      -----     -----

       Net loan losses                          412        357       370
                                              -----      -----     -----

     Additions charged to operations            500        320       355
                                              -----      -----     -----

     Balance at end of period                $1,493     $1,318    $1,355
                                              =====      =====     =====

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

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

                                           At December 31,
                              -------------------------------------
                          2000                 1999                  1998
                    ---------------       ----------------     ---------------

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

     Commercial $  507   34%   20%   $  395   30%   19%    $ 379   28%    23%
     Real
       estate
       mortgage    239   16    56       211   16    58       434   32     56
     Installment   598   40    24       580   44    23       406   30     21
     Unallocated   149   10             132   10             136   10
                   ----- ---- ----      ----- ---  ---     -----   ---    --

                $1,493  100%  100%   $1,318  100%  100%   $1,355  100%   100%
                 =====  ===   ===     =====  ===    ===    =====  ===    ===



<PAGE> 13



Allowance for Loan Losses (Continued)

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

     The provision for loan losses  charged to operations was $500,000 for 2000,
$320,000  for 1999 and  $355,000  for 1998.  In the opinion of  management,  the
provision  charged to operations over this three year period has been sufficient
to maintain an adequate allowance for loan losses.

Securities

     The Company's securities portfolio serves several purposes. Portions of the
portfolio are used to secure  certain public and trust  deposits.  The remaining
portfolio is held as  investments or used to assist the Company in liquidity and
asset liability  management.  During 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.

     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).



<PAGE> 14



Securities (Continued)

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

                              Held to Maturity         Available for Sale
                               Carrying Value           Carrying Value
                          -------------------------   ----------------
                                December 31,              December 31,
                            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> 15



Deposits

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

     The average balance of interest bearing deposits increased by 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
                                         =======     =======     ========


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.

     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%



<PAGE> 16



Capital Resources (Continued)

     The  capital  management  function is an ongoing  process.  Central to this
process is internal equity generation accomplished by earnings retention. During
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.

     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.



<PAGE> 17



Liquidity and Interest Rate Sensitivity (Continued)

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

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

     At December 31,  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 22) shows the maturity of  liabilities  and assets in future
periods. Table III (page 21) shows the effects of rate and volume changes on the
net interest margin for the past three year period.


<PAGE> 18



Effects of Inflation

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

     The Company's  reported  earnings  results have been affected by inflation,
but isolating the effect is difficult. The different types of income and expense
are affected in various ways. Interest rates are affected by inflation,  but the
timing  and  magnitude  of the  changes  may not  coincide  with  changes in the
consumer price index. Management actively monitors interest rate sensitivity, as
illustrated  by the Gap  Analysis  (Table IV, page 22) 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> 19
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> 20
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> 21
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> 22


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> 23



Item 7. Financial Statements

                          Index to Financial Statements

                                                                        Page

Consolidated Balance Sheets as of December 31, 2000 and 1999             24

Consolidated Statements of Income for the Years Ended December 31,
  2000, 1999 and 1998                                                    25

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 2000, 1999 and 1998                       26

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2000, 1999 and 1998                                       27

Notes to Consolidated Financial Statements                               28

Independent Auditors' Report                                             46







<PAGE> 24


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> 25


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> 26

<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> 27


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> 28


     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> 29


     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> 30


     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

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

                        Buildings and Improvements    15 - 40 years
                        Furniture and fixtures         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> 31


     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> 32


     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     HIGHLANDS BANKSHARES, INC.


NOTE 4    SECURITIES:

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

                               Carrying   Unrealized Unrealized     Fair
                                 Amount     Gains      Losses       Value

          Held to Maturity

          December 31, 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> 33


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 4    SECURITIES (CONTINUED):

          The carrying  amount and fair value of debt securities at December 31,
          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> 34


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> 35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.

NOTE 7    BANK PREMISES AND EQUIPMENT:

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

                                                         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> 36


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 10   INCOME TAX EXPENSE:

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

                                              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> 37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.

NOTE 10   INCOME TAX EXPENSE (CONTINUED):

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

                                                         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> 38


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.

NOTE 11   EMPLOYEE BENEFITS:

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

          The  Grant  County  Bank is a  member  of the West  Virginia  Bankers'
          Association  Retirement  Plan.  Benefits  under  the plan are based on
          compensation  and years of service with 100% vesting after seven years
          of service.  The Plan's assets are in excess of the projected  benefit
          obligations  and thus the Bank was not 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> 39


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> 40


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> 41


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> 42


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> 43


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> 44


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> 45


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> 46


                          INDEPENDENT AUDITORS' REPORT

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

We have  audited  the  accompanying  consolidated  balance  sheets of  Highlands
Bankshares,  Inc. and  subsidiaries  as of December  31, 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> 47


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> 48



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

     a)  Exhibits (Continued)
         --------------------

         Exhibit No.                        Description

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

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

             4              Not applicable

             9              Not applicable

            10              Not applicable

            11              Not applicable

            12              Not applicable

            16              Not applicable

            18              Not applicable

            21              Subsidiary  listing of the  Registrant is attached
                            on Page 50

            22              Not applicable

            23              Consent of Certified  Public  Accountant  attached
                            on Page 51

            24              Not applicable

            27              Financial Data Schedule attached

            28              Not applicable

     b)  Reports on Form 8-K

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


<PAGE> 49


                                   SIGNATURES

   Pursuant  to the  requirements  of  Section  13 or  15(d)  of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        HIGHLANDS BANKSHARES, INC.


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

                                        Date March 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