SECURITIES AND EXCHANGE COMMISSION

                            Washington, D. C. 20549

                                   FORM 10-KSB

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

For fiscal year ended December 31, 1999 Commission file number: 0-16761

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

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

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

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

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

                                      None

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

                              Common Stock - $5 Par

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

    Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]

    Issuer's revenues for its most recent fiscal year:  $17,270,000

    State the aggregate market value of the voting stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days: As of February 25, 2000 - $26,127,717

    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, 2000 - 501,898

                      DOCUMENTS INCORPORATED BY REFERENCE:

    Proxy  Statement of Highlands  Bankshares,  Inc. filed via Form DEF 14A on
March 13, 2000.

                            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-KSB INDEX

                                                                       Page

Part I

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

Item  2.  Description of Property                                        4

Item  3.  Legal Proceedings                                              5

Item  4.  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")
and its life  insurance  subsidiary,  HBI Life  Insurance  Company  (hereinafter
referred to as "HBI Life").

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

    Services Offered by the Banks

    The banks offer all services  normally offered by a full service  commercial
bank,  including  commercial  and individual  demand and time deposit  accounts,
commercial and individual loans,  drive-in banking services and 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.

    Employees

    As of December 31, 1999,  The Grant County Bank had 54 full time  equivalent
employees and Capon Valley Bank had 36 full time equivalent employees. No person
is employed by Highlands or HBI Life on a full time basis.

    Competition

    The banks'  primary trade area is generally  defined as Grant County,  Hardy
County,  Mineral  County and the northern  part of Pendleton  County.  This area
includes  the  cities of  Petersburg,  Wardensville,  Moorefield  and Keyser and
several rural towns.  The banks compete with 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,  performing
certain data  processing  services,  and certain  leasing and  insurance  agency
activities.  HBI Life acts as  reinsurer of the credit life  insurance  coverage
sold by the Banks to bank  customers.  Approval of the Federal  Reserve Board is
necessary  to  engage  in any of these  activities  or to  acquire  corporations
engaging in these activities.

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

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

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

Item 2. Description of Properties

    The Grant County Bank's main office is located on Main Street in Petersburg,
West Virginia. In late 1999, the Bank opened a full service branch in Moorefield
to serve customers in this area. This facility is owned by the Bank and features
state-of-the-art  drive-up facilities and an automated teller machine.  The Bank
also has branch  facilities in Keyser and Riverton,  West Virginia which provide
banking services in 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 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, 1999.

Part II

Item 5. Market for Common Equity and Related Stockholder Matters

    The  Company had  approximately  828  stockholders  of record as of March 1,
2000.  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
           1999              Per Share          High            Low
           ----              ---------          ----            ---

        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

          1997

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


<PAGE> 6

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

Overview

    The Company's 1999 net income of $2,325,369  represents a 15.58% increase in
net income and earnings per share compared to 1998. This represented a return on
average equity of 9.94% for 1999 compared to 9.12% for 1998.  Returns on average
assets for 1999 and 1998 were 1.08% and 1.01%,  respectively.  The  increase  in
earnings  was due to an  increase  in the  volume of  earning  assets,  a stable
interest environment, and an unusual gain on an investment.

    The  tax  equivalent  interest  income  increased  by  $490,000  in  1999 to
$16,379,000 as compared to 1998. A 6.95% increase in the level of earning assets
offsets a decrease in the yield and  resulted in the earnings  improvement.  The
increase in earning assets is attributable to an 8.31% increase in average loans
outstanding  which were  primarily  real estate loans.  The funding of the asset
growth was from  deposits  of local  customers  (primarily  time  deposits)  and
declines in federal funds sold and securities available for sale.

    Noninterest  income  increased  39.70%  in 1999  compared  to 1998 due to an
increase in service charge income and an unusual gain from a demutualization  of
an insurance company which provides  insurance  coverage.  Noninterest  expenses
increased 9.96% in 1999 due mainly to the higher cost of data  processing,  year
2000 compliance expenses and the opening of a new branch in Moorefield.

Net Interest Margin

    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,  stable interest rates and expanded
banking  facilities.  The  overall  costs 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  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 and a decline in the level of
federal  funds sold and  investments.  The increase in the dollar  amount of tax
equivalent  net interest  margin for 1999 over the 1998 amounts is the result of
slight declines in the costs of funds and an annualized growth in earning assets
of 6.95%.  The Company  anticipates its net interest margin  remaining stable or
declining  slightly in view of future increases in interest rates by the Federal
Reserve  Bank.  Rates paid on deposits  are  expected to increase  over the next
twelve months as the result of recent and  anticipated  Federal  Reserve  Bank's
increases in rates.  Returns on most loans have repricing  opportunities  within
the next  twelve  months  and the  Company  should be able to  maintain  its net
interest margin.

    A summary of the net interest  margin  analysis is shown as Table II on page
20.


<PAGE> 7


Net Interest Margin (Continued)

    1998 Compared to 1997

    The Company's net interest  margin on a tax equivalent  basis was $8,144,000
for 1998 compared to $7,740,000 for 1997. The increase was due to an increase in
average earning assets (5.43%) and an increased  spread (the difference in rates
earned on assets and paid on  liabilities)  from 3.52% in 1997 to 3.60% in 1998.
Average loans outstanding grew by 9.44% from 1997 to 1998. This growth reflected
good  local  and  national  economic  conditions,  moderate  interest  rates and
expanded  banking  facilities.  The deposit increase  represented  growth in all
types of accounts  (particularly  time deposits) and was obtained primarily from
customers in the immediate service areas.

    Loans  outstanding  at December  31, 1998  increased  8.23% over  amounts at
December 31, 1997.  The loan increase 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 a slight decline in the level
of security investments.  The increase in the tax equivalent net interest margin
for 1998 over the 1997 amounts was the result of slight declines in the costs of
funds on all types of  deposit  accounts  and an  annualized  growth in  earning
assets of 5.43%.

    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 $320,000 for 1999, $355,000 for
1998 and $190,000 for 1997.  Net loan losses were  $357,000 in 1999  compared to
$370,000 in 1998 and $78,000 in 1997.  The Company's  three year charge off rate
of .19% of average loans  outstanding  compares closely with its peer group. The
1999 charge off  percentage of .23% of average loans is only slightly  above the
peer group average for the year. (See the following  discussion  relating to the
allowance for loan losses.)

Noninterest Income

    1999 Compared to 1998

    Overall  noninterest  income  increased in 1999 by 39.70% when compared with
1998  operations.  Increases in service  charge  income was the result of volume
increases and an increase in rates for not sufficient funds (NSF) checks.  Other
operating income increased due to a $165,000 gain from the demutualization of an
insurance company with which the Company has investments in insurance contracts.
The Company  also  recognized  greater  income  from  investments  in  insurance
contracts due to a larger volume of investment in these assets.  Losses from the
sale of mutual funds in 1999 of $65,000 tempered the overall gain in noninterest
income as no such losses were incurred in 1998.

    1998 Compared to 1997

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


<PAGE> 8

Noninterest Expenses

    1999 Compared to 1998

    Total noninterest  expenses  increased 9.96% in 1999 when compared with 1998
operations.  Salaries and benefits increased 10.76% due to the increase in staff
at the new  branch,  merit and  inflationary  raises and higher  benefit  costs.
Average full time equivalent  employees increased 7.75% in 1999 and staffing the
new branch was a major  reason for this  increase.  The costs of  occupancy  and
equipment increased 8.93% due to the branch openings and depreciation associated
with the new facility  and  equipment  upgrades to insure year 2000  compliance.
Data  processing  expenses  increased by 3.64% due to new  communication  lines,
general asset growth and expanded locations.  Other operating expenses increased
10.91% in 1999 for all of the  reasons  cited  above.  Noninterest  expense as a
percentage  of average  assets was 2.74% in 1999  compared  to 2.69% in 1998 and
2.73% in 1997. This ratio  continues to compare  favorably to the Company's peer
group. The overall increase in noninterest expenses is in line with the increase
in assets and is in line with management's expectations.

    1998 Compared to 1997

    Overall,  noninterest expense increased 5.11% in 1998 when compared to 1997.
Personnel  expenses  increased  3.80% as the  result of merit  and  inflationary
raises.  Occupancy and equipment expenses increased 2.35% as the result of asset
growth and inflation. Data processing expenses increased by 4.46% as a result of
increased  transaction  volume and rate increases.  Other  noninterest  expenses
increased by 9.94% 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  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 $18,230,000 or 12.29% in 1999. The bulk of this
increase was in real estate and consumer  loans.  The loan to deposit  ratio was
86.62% at December 31, 1999 compared to 80.39% at December 31, 1998.  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,
                                             1999        1998        1997
                                             ----        ----        ----
                                               (Dollars in Thousands)
     Real Estate:
       Mortgage                           $ 93,391    $ 83,446    $ 75,221
       Construction                          3,296       2,969       2,189
     Commercial                             31,567      30,718      30,716
     Installment                            39,994      33,464      31,492
                                           -------     -------     -------

                                           168,248     150,597     139,618
     Less unearned discount                 (1,634)     (2,213)     (2,513)
                                           -------     -------     -------

                                           166,614     148,384     137,105
     Allowance for loan losses              (1,318)     (1,355)     (1,369)
                                           -------     -------     -------

       Loans, net                         $165,296    $147,029    $135,736
                                           =======     =======     =======


     The following  table shows the maturity of loans  outstanding (in thousands
of dollars) as of December 31, 1999, 1998 and 1997.

    Maturity Range                          1999        1998        1997
    --------------                          ----        ----        ----

     Predetermined Rates:
       0 - 12 months                      $ 91,080    $ 73,878    $ 63,117
       13 - 60 months                       61,193      53,765      54,070
       More than 60 months                  14,147      20,702      19,918
     Nonaccrual Loans                          194          39
                                           -------     -------     -------

       Total Loans                        $166,614    $148,384    $137,105
                                           =======     =======     =======


     The following  table shows the Company's  loan  maturity  distribution  (in
thousands of dollars) as of December 31, 1999:

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

     Commercial and

       Agricultural Loans     $ 23,353    $  5,860    $  2,354    $ 31,567
     Real Estate-mortgage       55,924      27,500       9,967      93,391
     Real Estate-construction    3,296                               3,296
     Consumer - installment      8,542      27,891       1,927      38,360
                               -------     -------     -------     -------

       Total                  $ 91,115    $ 61,251    $ 14,248    $166,614
                               =======     =======     =======     =======


<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 $121,000 at December 31, 1999,
$95,000 at December 31, 1998 and $174,000 at December 31, 1997.  All  foreclosed
property  held at December 31, 1999 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 20.94% at December 31, 1999 compared to 1998.
Nonaccrual  loans,  which had been  minimal in 1997 and 1998,  increased  as the
result of a few workout  situations.  Loans 90 and more days past due  increased
11.30% compared to a 12.29% increase in total loans outstanding. The increase in
delinquent real estate loans includes a large loan that is primarily  guaranteed
by the State of West  Virginia.  Management  does not  anticipate  any  material
losses from the current level of nonperforming assets.

     The following table summarizes the nonperforming loans:

                                                  At December 31,
                                           1999        1998        1997
                                           ----        ----        ----
                                               (Dollars in Thousands)

     Loans accounted for on a
       nonaccrual basis                  $  194       $   39     $

     Loans  contractually  past due
       90 days or more as to interest
       or  principal payments (not
       included in nonaccrual loans above)
         Commercial                           89          41           17
         Real estate                       1,465       1,339          938
         Installments                        140         142          292
                                          ------       -----       ------

       Total Delinquent Loans              1,694       1,522        1,247
                                          ------       -----       ------

       Total Nonperforming Loans         $ 1,888      $1,561      $ 1,247
                                          ======       =====       ======


<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, 1999,
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,  1999,  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, 1999 compared to .91% at December 31, 1998
and 1.00% at December 31, 1997. At December 31, 1999, the ratio of the allowance
for loan losses to nonperforming loans was 69.83% compared to 86.83% at December
31, 1998 and 109.78% at December 31, 1997.

     Charge offs for 1999 were .23% of average loans  outstanding  and about the
same as the Company's  peer group over the last three years.  Losses on mortgage
lending were higher in 1999  primarily  due to an individual  loss.  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  since 1997 due to a dramatic  decline in 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.


<PAGE> 12

Allowance for Loan Losses (Continued)

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

                                               Year Ending December 31,
                                              1999       1998       1997
                                              ----       ----       ----
                                               (In Thousands of Dollars)

     Balance at beginning of period          $1,355     $1,370    $1,257
                                              -----      -----     -----

     Loan Losses:
       Commercial and agricultural              107        135        34
       Real estate - mortgage                    87         53        20
       Installment loans to individuals         254        289       170
                                              -----      -----     -----

       Total loan losses                        448        477       224
                                              -----      -----     -----

     Recoveries:
       Commercial and agricultural               16          6         9
       Real estate - mortgage                     1          1        25
       Installment loans to individuals          74        100       113
                                              -----      -----     -----

       Total recoveries                          91        107       147
                                              -----      -----     -----

       Net loan losses                          357        370        77
                                              -----      -----     -----

     Additions charged to operations            320        355       190
                                              -----      -----     -----

     Balance at end of period                $1,318     $1,355    $1,370
                                              =====      =====     =====

     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,

                        1999               1998              1997

                           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    $  395   30%    19%   $  379  28%    23%   $  343    25%   22%

Real estate
  mortgage       211   16     58       434  32     56       548    40    56
Installment      580   44     23       406  30     21       343    25    22
Unallocated      132   10              136  10              136    10
              ------  ---   ----     ----- ---    ---     -----   ---   ---

              $1,318  100%   100%   $1,355 100%   100%   $1,370   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 $320,000 for 1999,
$355,000  for 1998 and  $190,000  for 1997.  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 1999, total  securities  decreased to $29.8
million or 13.52% of total assets at December 31, 1999.  Total  securities  were
$34.0 million or 16.11% of total assets at December 31, 1998.

     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, 1999, cost of the securities  available for sale exceeded their market value
by $580,000 ($366,000 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,
                                 1999    1998    1997    1999    1998    1997
                                 ----    ----    ----    ----    ----    ----
                                (Dollars in Thousands)  (Dollars in Thousands)

     U.S. treasuries, agencies
       and corporations         $       $       $  751 $21,160 $22,129 $20,349
     Obligations of states and
       political subdivisions    2,837   2,987   3,295     243     262     101

     Mortgage-backed securities    340     517     531   4,339   6,821  10,665
                                ------   -----   -----  ------  ------  ------

       Total Debt Securities     3,177   3,504   4,577  25,742  29,212  31,115

     Other securities                                      151     546     567
                                ------  ------   -----  ------  ------  ------

       Total                   $ 3,177 $ 3,504  $4,577 $25,893 $29,758 $31,682
                                ======  ======   =====  ======  ======  ======


     The  carrying  amount and  estimated  market value of debt  securities  (in
thousands  of dollars) at December  31, 1999 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                 $  1,030     $  1,047     10.31%
     Due after one year through five years        977          974      7.15%
     Due after five years through ten years     1,170        1,155      7.46%

       Total Held to Maturity                $  3,177     $  3,176      8.29%
                                             ========      =======     =====


     Securities Available for Sale           Amortized      Fair       Average
                                               Cost         Value       Yield

     Due in one year or less                 $  7,438     $  7,380      5.76%
     Due after one year through five years     17,370       17,064      5.90%

     Due after five years through ten years       482          483       5.89%
     Due after ten years                          255          244       7.34%
                                              -------     --------      -----

       Total Fixed Rate Securities             25,545       25,171       5.95%

     Variable Rate Securities                     572          571

     Equities                                     167          151       5.87%
                                             --------     --------      -----

       Total Available for Sale             $  26,284    $  25,893       5.95%
                                             ========     ========      =====


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

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


<PAGE> 15

Deposits

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

     The average balance of interest bearing deposits increased by 7.07% in 1999
over average levels in 1998. The average rate paid on deposits declined to 4.47%
in 1999 from  4.88% in 1998 and 5.04% in 1997.  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
1999 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                    1999        1998        1997
         --------------                    ----        ----        ----
                                            (In Thousands of Dollars)

     Three months or less               $  6,341    $  5,883    $   6,086
     Four to twelve months                12,342      11,391        8,497
     One year to five years                9,846       8,449        8,744
                                         -------     -------     --------

       Total                            $ 28,529    $ 25,723    $  23,327
                                         =======     =======     ========


Borrowed Money

     The Company will occasionally  borrow funds from the Federal Home Loan Bank
to reduce market rate risks.  Such borrowings have fixed repayment terms and are
amortized  over a ten to twenty  year  life.  Borrowings  from this  institution
allows the banks to offer  long-term,  fixed rate loans to their  customers  and
match the  interest  rate  exposure of the  receivable  and the  liability.  The
Company had additional  borrowings in 1999 of $395,000 and repayments within the
year of $147,000.

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    1999       1998
                                                 -----------  ----       ----
     Capital Ratios

       Risk-based capital to risk-weighted assets
         Tier 1                                     8.00%     16.60%    17.00%
         Total                                      4.00%     17.35%    18.02%
       Stockholders' equity to total assets         5.00%     10.99%    10.83%


<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
1999,  1998 and  1997,  total  stockholders'  equity  increased  by  $1,378,000,
$1,550,000 and $1,068,000,  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 9.94% in 1999 compared to 9.12% for 1998 and 8.80%
for 1997. Total cash dividends  declared represent 25.04% of net income for 1999
compared  to 26.94% of net income  for 1998 and 26.84% for 1997.  Book value per
share was $48.26 at December  31, 1999  compared to $45.52 at December  31, 1998
and $42.43 at December 31, 1997.

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

     The Company's principal source of cash income is dividend payments from the
Banks.  Certain  limitations  exist  under  applicable  law  and  regulation  by
regulatory agencies regarding dividend payments to a parent by its subsidiaries.
As of January 1, 2000, the Banks had $3,362,000 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  $18,597,000  and an
investment of $2,400,000 in single premium life insurance  policies used to fund
deferred  compensation.  New equipment and facility additions were $1,338,000 in
1999 compared with $337,000 in 1998.  Funding these  investments was an increase
in deposits of $7,758,000, a decline in interest bearing deposits in other banks
of  $995,000,  a decline  in  federal  funds  sold of  $9,700,000,  a decline in
investments of $4,178,000 and retained operating income of $1,743,000.

     In the year ending  December  31, 1999,  cash and due from banks  increased
$2,200,000 as cash provided by operations and financing activities exceeded cash
used in  investing  activities.  The Banks  increased  currency  reserves at all
branches at year end 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 $582,000
in 1999 was an increase of 7.41 percent over 1998 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, 1999,  the Company had a negative gap position  through the
third year. This liability  sensitive  position  typically  produces a favorable
contribution to earnings  during periods of decreasing  rates and an unfavorable
contribution  to  earnings  during a period of  increasing  rates.  The  Company
expects an increase  in the overall  cost of money in 2000 due to the renewal of
certificates to be issued at higher rates and a slight increase in other deposit
rates.

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

     The  majority of the  Company's  commercial  and real estate loans are made
with repricing  frequencies of three months to three years. For this reason, 79%
of all loans will reprice  within three years of December 31, 1999.  Installment
loans  generally  have a fixed rate of interest  but have  limited  amortization
periods.  These  loans have an average  life to maturity of less than two years.
Management  believes that its  philosophy of generally  requiring loan repricing
within  a  three  to  five  year  period  to be the  most  prudent  approach  to
asset/liability management.

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

     Table IV (page 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 is that all aspects of the Bank's operations have performed without major
interruption  and entering  the new  millennium  has had a negligible  impact on
customer service, correspondent banking or 2000 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

                          (Dollar amounts in thousands)

                                          Years Ending December 31,
                                  (In  Thousands  Except for Share Amounts)

                                  1999     1998     1997     1996     1995

Total Interest Income           $16,243  $15,772  $15,084  $14,182  $12,758
Total Interest Expense           (7,663)  (7,745)  (7,474)  (7,103)  (6,219)
                                 ------   ------   ------   ------   ------

Net Interest Income               8,580    8,027    7,610    7,079    6,539
Provision for Loan Losses           320      355      190      135      120
                                 ------   ------   ------   ------   ------

Net Interest Income after

   Provision for Loan Losses      8,260    7,672    7,420    6,944    6,419
Other Income                      1,026      735      571      592      581
Other Expenses                    5,912    5,377    5,115    4,570    4,191
                                 ------   ------   ------   ------   ------

Income before Income Taxes        3,374    3,030    2,876    2,966    2,809
Income Tax Expense                1,049    1,018      996      953      956
                                 ------   ------   ------   ------   ------

   Net Income                   $ 2,325  $ 2,012  $ 1,880  $ 2,013  $ 1,853
                                 ======   ======   ======   ======   ======


Net Income Per Share            $  4.63  $  4.01  $  3.73  $  3.92  $  3.60
Dividends Per Share             $  1.16  $  1.08  $  1.00  $   .94  $   .83

Total Assets at Year End       $220,481 $210,981 $190,770 $178,847 $167,884
                                =======  =======  =======  =======  =======



Return on Average Assets          1.08%    1.01%    1.00%    1.15%    1.16%
Return on Average Equity          9.94%    9.12%    8.80%    9.99%   10.15%
Dividend Payout Ratio            25.04%   26.94%   26.80%   24.00%   23.03%
Year End Equity to Assets Ratio  10.99%   10.83%   11.16%   11.31%   11.24%


<PAGE> 20
TABLE II

<TABLE>

                                  NET INTEREST MARGIN AND AVERAGE BALANCE ANALYSIS

                                             (Dollar amounts in thousands)

<CAPTION>

                                       1999                          1998                          1997
                                ------------------           -------------------              ------------
                                      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                  $155,102  $ 13,699    8.81    $143,197  $ 13,163    9.18     $130,848   $ 12,249    9.36

Investment securities:
   Taxable 4                 29,235     1,755    6.00      31,402     1,952    6.22       37,032      2,315    6.25
   Nontaxable 1,4             3,192       271    8.49       3,316       270    8.14        3,568        298    8.35
                            -------   -------    ----     -------   -------    ----      -------    -------    ----

   Total Investment
     Securities              32,427     2,026    6.25      34,718     2,222    6.40       40,600      2,613    6.44

Interest bearing deposits
   in banks                   4,161       222    5.33       1,215        64    5.27         685          37    5.40

Federal funds sold            8,685       432    4.97       8,216       440    5.36       5,561         314    5.65
                            -------   -------    ----     -------   -------    ----     -------     -------    ----

   Total Earning Assets     200,375    16,379    8.17     187,346    15,889    8.48     177,694      15,213    8.56
                                      -------    ----               -------    ----                 -------    ----

Allowance for loan
 losses                      (1,322)                       (1,319)                       (1,314)
Nonearnings assets           16,931                        13,636                        10,860
                            -------                       -------                      --------

   Total Assets            $215,984                      $199,663                      $187,240
                            =======                     =========                       =======

INTEREST-BEARING LIABILITIES

Deposits:
   Demand                  $ 32,971    $   809    2.45    $ 29,187  $   808     2.77   $ 27,823       $  799    2.87
   Savings                   21,250        583    2.74      20,135      671     3.33     18,684          659    3.53
   Time deposits            114,632      6,133    5.35     108,382    6,213     5.73    100,444        5,930    5.90
                            -------     ------    ----     -------   ------     ----    -------       ------    ----

   Total Deposits           168,853      7,525    4.46     157,704    7,692     4.88    146,951        7,388    5.03
Other borrowed money          2,560        138    5.39         974       53     5.44      1,443           85    5.89
                            -------     ------    ----     -------   ------     ----    -------       ------    ----

   Total Interest Bearing
     Liabilities            171,413      7,663    4.47     158,678    7,745     4.88    148,394        7,473    5.04
                                        ------    ----               ------     ----                  ------    ----

Noninterest bearing
  deposits                   20,319                         17,744                       16,100
Other liabilities               856                          1,186                        1,370
                              -----                          -----                       ------

   Total Liabilities        192,588                        177,608                      165,864

   Stockholders'
     Equity                  23,396                         22,055                       21,376
                             ------                         ------                       ------

   Total Liabilities
     and Equity            $215,984                       $199,663                     $187,240
                            =======                        =======                      =======

   Net Interest Earnings               $  8,716                     $8,144                          $  7,740
                                        =======                      =====                           =======

   Net Yield on Interest Earning Assets           4.35%                         4.35%                           4.36%
                                                  ====                          ====                             ====
</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)

                            1999 Compared to 1998        1998 Compared to 1997
                              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                $1,093    $(557)   $ 536      $1,155  $(241)   $ 914

   Investment Securities:
     Taxable                (135)    (62)     (197)       (352)   (11)    (363)
     Nontaxable              (10)     11         1         (21)    (7)     (28)
                           -----    ----      ----        ----   ----     ----

   Total Investment
     Securities             (145)    (51)     (196)       (373)   (18)    (391)

   Interest bearing deposits
     in banks                155       3       158          29     (2)      27
   Federal funds sold         25     (33)       (8)        144    (18)     126
                           -----    ----      ----        ----   ----     ----

   Total Interest Income   1,128    (638)      490         955   (279)     676
                           -----    ----      ----        ----   ----     ----

Interest Expense:

   Deposits:
     Demand                  105    (104)        1          39    (30)       9
     Savings                  37    (125)      (88)         51    (39)      12
     All other time deposits 358    (438)      (80)        468   (185)     283

   Other borrowed money       86      (1)       85        (28)     (4)     (32)
                           -----    ----      ----       ----    ----     ----

   Total Interest Expense    586    (668)      (82)       530    (258)     272
                           -----    ----      ----       ----    ----     ----

   Net Interest Income    $  542   $  30     $ 572      $ 425   $ (21)   $ 404
                           =====    ====      ====       ====    ====     ====


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, 1999

                                                          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                $24,041  $67,074  $39,741  $21,510  $14,248 $166,614
   Fed funds sold         2,703                                        2,703
   Securities             4,483    5,816   15,581    1,152    2,783   29,815
   Interest bearing time
     deposits               783      600    1,053                      2,436
                         ------   ------   ------   ------    -----   ------

   Total                 32,010   73,490   56,375   22,662   17,031  201,568
                       -------- -------- -------- --------  -------  -------


INTEREST BEARING LIABILITIES

   Transaction accounts  18,102                                       18,102
   Money market accounts 13,391                                       13,391
   Savings accounts      21,330                                       21,330
   Time deposits more than
     $100,000             6,341   12,342    7,218    2,628            28,529
   Time deposits less than
     $100,000            17,296   43,902   22,994    5,675       41   89,908
   Other borrowed money      88      136      392      407    1,545    2,568
                         ------   ------   ------   ------    -----   ------

   Total                 76,548   56,380   30,604    8,710    1,586  173,828
                         ------   ------   ------   ------    -----  -------

Discrete interest
   sensitivity GAP      (44,538)  17,110   25,771   13,952  15,445    27,740

Cumulative interest
   sensitivity GAP      (44,538) (27,428)  (1,657)  12,295  27,740

Ratio of cumulative
  interest sensitive
  assets to cumulative
  interest sensitive
  liabilities             41.82%   79.37%   98.99%  107.14% 115.96%



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, 1999 and 1998             24

Consolidated Statements of Income for the Years Ended December 31,
  1999, 1998 and 1997                                                    25

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 1999, 1998 and 1997                       26

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1999, 1998 and 1997                                       27

Notes to Consolidated Financial Statements                               28

Independent Auditors' Report                                             46


<PAGE> 24

CONSOLIDATED BALANCE SHEETS

HIGHLANDS BANKSHARES, INC.

                                                           December 31,
ASSETS                                               1999           1998

Cash and due from banks (notes 2, 3 and 15)      $ 7,312,241    $ 5,111,863
Interest bearing deposits in banks                 2,436,271      3,431,523
Federal funds sold                                 2,702,633     12,374,283
Investments:
  Securities held to maturity (note 4)             3,176,547      3,503,965
    (fair value of $3,175,918 and $3,621,218
     at December 31, 1999 and 1998, respectively)
  Securities available for sale (note 4)          25,892,783     29,757,841
  Other investments                                  745,550        730,950

Loans (notes 5, 13, 14 and 15)                   166,614,055    148,383,904
  Less allowance for loan losses (note 6)         (1,318,332)    (1,355,377)
                                                  ----------     ----------

  Net Loans                                      165,295,723    147,028,527

Bank premises and equipment (note 7)               5,690,860      4,759,710
Interest receivable                                1,627,874      1,556,347
Investment in insurance contracts                  4,661,662      2,122,432
Other assets                                         938,901        603,501
                                                  ----------     ----------

  Total Assets                                  $220,481,045   $210,980,942
                                                 ===========    ===========

LIABILITIES

Deposits:
  Noninterest bearing                            $21,085,145    $22,043,509
  Interest bearing
    Money market and interest checking            18,101,823     18,353,696
    Money market savings                          13,391,006     11,393,244
    Savings accounts                              21,330,208     20,849,433
    Certificates of deposit over $100,000 (note 8)              28,528,959
25,722,913

    All other time deposits (note 8)              89,907,847     86,224,570
                                                  ----------     ----------

  Total Deposits                                 192,344,988    184,587,365

Accrued expenses and other liabilities             1,344,052      1,227,486
Long-term debt (note 9)                            2,567,958      2,319,544
                                                  ----------     ----------

  Total Liabilities                              196,256,998    188,134,395
                                                 -----------    -----------

STOCKHOLDERS' EQUITY

Common stock, $5 par value, 1,000,000 shares
  authorized, 546,764 shares issued                2,733,820      2,733,820
Surplus                                            1,661,987      1,661,987

Retained earnings (note 12)                       21,067,191     19,324,019
Other accumulated comprehensive income (loss)       (246,250)       119,422
                                                  ----------     ----------

                                                  25,216,748     23,839,248
Treasury stock (at cost, 44,866 shares in 1999
  and 1998)                                         (992,701)      (992,701)

  Total Stockholders' Equity                      24,224,047     22,846,547
                                                  ----------     ----------

  Total Liabilities and Stockholders' Equity    $220,481,045   $210,980,942
                                                 ===========    ===========

        The accompanying notes are an integral part of this statement.


<PAGE> 25

CONSOLIDATED STATEMENTS OF INCOME

HIGHLANDS BANKSHARES, INC.

                                             Years      Ended     December 31,
                                             1999        1998          1997
INTEREST INCOME:

  Loans, including fees                  $13,663,857  $13,144,542 $12,229,824
  Federal funds sold                         431,670      440,293     314,382
  Interest bearing deposits                  221,724       64,230      36,915
  Investment securities - taxable          1,754,509    1,952,454   2,314,849
  Investment securities - nontaxable         171,192      170,115     187,667
                                           ---------     --------    --------

  Total Interest Income                   16,242,952   15,771,634  15,083,637
                                          ----------   ----------  ----------

INTEREST EXPENSE:

  Time deposits over $100,000              1,524,334    1,428,100   1,374,899
  Other deposits                           6,000,044    6,263,489   6,013,147
                                           ---------    ---------   ---------

  Total Interest on Deposits               7,524,378    7,691,589   7,388,046

  Borrowed money                             138,313       52,937      85,224
                                           ---------     --------    --------

  Total Interest Expense                   7,662,691    7,744,526   7,473,270
                                          ---------     ---------   ---------

NET INTEREST INCOME                        8,580,261    8,027,108   7,610,367

PROVISION FOR LOAN LOSSES (note 6)           320,000      355,000     190,000
                                           ---------     --------    --------

Net Interest Income after Provision

  for Loan Losses                          8,260,261    7,672,108   7,420,367
                                           ---------    ---------   ---------

NONINTEREST INCOME:

  Service charges                            409,052      339,289     302,726
  Insurance commissions and income           112,339      107,482     174,061
  Other operating income                     568,903      290,221     211,546
  Loss on security transactions (note 4)     (63,590)      (2,071)   (117,036)
                                           ---------     --------    --------

  Total Noninterest Income                 1,026,704      734,921     571,297
                                           ---------     --------    --------

NONINTEREST EXPENSES:

  Salaries and benefits (note 11)          3,230,973    2,916,970   2,810,116
  Occupancy expense                          269,483      269,469     241,478
  Equipment expense                          472,441      411,660     424,032
  Data processing expense                    473,392      456,740     437,232
  Other operating expenses                 1,466,016    1,321,750   1,202,271
                                           ---------    ---------   ---------

  Total Noninterest Expenses               5,912,305    5,376,589   5,115,129
                                           ---------    ---------   ---------

  Income before Income Tax Expense         3,374,660    3,030,440   2,876,535

INCOME TAX EXPENSE (note 10)               1,049,291    1,018,558     996,390
                                           ---------    ---------    --------

NET INCOME                                $2,325,369   $2,011,882  $1,880,145
                                           =========    =========   =========

Net Income Per Share                      $     4.63   $     4.01  $     3.73
                                          ==========    =========   =========

Cash Dividends Paid Per Share             $     1.16   $     1.08  $     1.00
                                          ==========    =========   =========

Weighted Average Shares Outstanding          501,898      501,898     504,330
                                           =========     ========    ========

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

   Comprehensive Income
     Net income                                                    1,880,145                                    1,880,145
     Change in unrealized loss
       on securities available
       for sale, net of tax
       effect of $112,119 (see note 2(l))                                         190,902                         190,902
                                                                                                                ---------

   Total Comprehensive
     Income                                                                                                     2,071,047

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

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

   Comprehensive Income
     Net income                                                   2,011,882                                     2,011,882
     Change in unrealized gain
       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
       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
                                  =========      =========     ==========      =========          ========     ==========
</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,
                                               1999       1998        1997

CASH FLOWS FROM OPERATING ACTIVITIES:

   Net income                              $2,325,369  $2,011,882   $1,880,145
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Loss on sale of securities              63,590       2,071      117,036
       Depreciation                           407,147     350,429      359,740
       Increase in insurance contracts       (139,230)    (52,432)
       Net amortization of security premiums  151,150      15,062       25,000
       Provision for loan losses              320,000     355,000      190,000
       Deferred income tax expense            (15,192)     (6,441)      (1,768)
       Change in other assets and liabilities:
         Interest receivable                  (71,527)     (8,743)    (186,171)
         Other assets                        (105,451)     127,550     (42,801)
         Accrued expenses                     116,566      (83,512)    (56,201)
                                            ---------    ---------    --------

   Net Cash Provided by Operating
     Activities                             3,052,422    2,710,866   2,284,980
                                            ---------    ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from maturity of securities
     held to maturity                        332,027     1,068,833   3,354,000
   Proceeds from maturities of
     securities available for sale        15,000,285    12,719,231   9,291,964
   Proceeds from sales of securities
     available for sale                      377,499                   501,000
   Purchases of securities available
     for sale                            (12,312,504)  (10,681,150) (7,630,000)
   Net change in other investments           (14,600)      (15,700)    (76,065)
   Net change in deposits in other banks     995,252    (2,604,887)      6,990
   Net increase in loans                 (18,587,196)  (11,647,875)(12,582,234)
   Change in federal funds sold            9,671,650    (5,479,168) (4,401,038)
   Purchase of property and equipment     (1,338,297)     (337,341)   (607,000)
   Investment in insurance contracts      (2,400,000)   (2,070,000)
                                          ----------    ----------  ----------

   Net Cash Used in Investing Activities  (8,275,884)  (19,048,057)(12,142,383)
                                         -----------    ----------  ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net change in time deposits             6,489,323     7,306,146   8,048,939
   Net change in other deposit accounts    1,268,300     9,345,508   2,777,665
   Additional long-term debt                 394,922     2,145,532   2,603,924
   Repayment of long-term debt              (146,508)      (52,140) (2,519,388)
   Dividends paid in cash                   (582,197)     (542,048)   (504,615)
   Purchase of treasury stock                                         (498,888)
                                           ---------     ---------    --------

   Net Cash Provided by Financing
     Activities                            7,423,840    18,202,998   9,907,637
                                          ----------    ----------   ---------

CASH AND CASH EQUIVALENTS:
   Net increase in cash and
     due from banks                        2,200,378     1,865,807      50,234
   Cash and due from banks,
     beginning of year                     5,111,863     3,246,056   3,195,822
                                           ---------     ---------   ---------

   Cash and Due from Banks, End of Year   $7,312,241    $5,111,863  $3,246,056
                                           =========     =========   =========

Supplemental Disclosures:
   Cash paid for:
     Interest expense                     $7,688,056    $7,798,847  $7,525,000
     Income taxes                          1,152,533     1,013,250     939,000

        The accompanying notes are an integral part of this statement.


<PAGE> 28

CONSOLIDATED STATEMENTS OF CASH FLOWS

HIGHLANDS BANKSHARES, INC.

NOTE 1    NATURE OF OPERATIONS:

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

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


CONSOLIDATED STATEMENTS OF CASH FLOWS

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.  Although  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,
                                                    ------------------------
                                                  1999        1998        1997
                                                  ----        ----        ----
                                                         (In thousands)

              Unrealized holding gains (losses)
                 on available-for-sale
                 securities                      $(644,019)  $124,455  $185,985

              Reclassification adjustment for
                 losses realized in income          63,590      2,071   117,036
                                                  --------   --------  --------

              Net Unrealized Gains (Losses)       (580,429)   126,526   303,021
              Tax effect                           214,757    (46,814) (112,119)

              Net Change                         $(365,672)  $ 79,712  $190,902
                                                  ========    =======   =======


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, 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
                               =========   ========    ========   =========

          December 31, 1998

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

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

          Available for Sale

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

          December 31, 1998

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

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


<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,
          1999, 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                  $1,030,007    $1,047,066
          Due after one year through five years       964,503       961,609
          Due after five years through ten years    1,170,057     1,154,857
          Mortgage-backed securities                   11,980        12,386
                                                    ---------     ---------

            Total Held to Maturity                 $3,176,547    $3,175,918
                                                    =========     =========


          Securities Available for Sale                              Fair
                                                       Cost          Value

          Due in one year or less                  $6,428,680    $6,387,222
          Due after one year through five years    15,058,464    14,824,870
          Due after ten years                         255,000       242,888
          Mortgage-backed securities                4,374,296     4,286,303
                                                    ---------     ---------

          Total Fixed Rate Securities              26,116,440    25,741,283
          Equities                                    167,211       151,500
                                                    ---------     ---------

            Total Available for Sale               $26,283,651   $25,892,783
                                                    ==========    ==========

          The carrying  amount (which  approximates  market value) of securities
          pledged  by  the  banks  to  primarily  secure  deposits  amounted  to
          $10,326,168 at December 31, 1999 and $8,036,529 at December 31, 1998.

          There were no holdings totaling more than 10% of stockholders'  equity
          with any issuer as of December 31, 1999 and 1998.

          All  gains  or  losses  in 1998 are from  calls  or early  payoffs  of
          securities  designated  as held to  maturity.  Losses in 1999 and 1997
          include losses on mutual fund  investments as well as  gains/losses on
          calls and  redemptions.  Realized gains or losses for the years ending
          December 31 are as follows:

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

          Gains                       $   4,259    $    9,438    $    6,982
          Losses                        (67,849)      (11,509)     (124,018)
                                       --------     ---------     ---------

            Total                     $ (63,590)   $   (2,071)   $ (117,036)
                                       ========     =========-    =========


<PAGE> 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 5    LOANS:

          Loans outstanding as of December 31 are summarized as follows:

                                                     1999          1998
                                                  ------------------------

          Commercial                              $31,566,793   $30,717,977
          Real estate construction                  3,296,000     2,969,000
          Real estate mortgages                    93,391,419    83,446,041
          Consumer installment                     39,993,963    33,463,853
                                                   ----------    ----------

            Subtotal                              168,248,175   150,596,871
            Unearned interest                      (1,634,120)   (2,212,967)
                                                   ----------    ----------

            Total Loans                          $166,614,055  $148,383,904
                                                  ===========   ===========


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:

                                          1999          1998         1997

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

          Provision charged to
            operating expenses            320,000       355,000      190,000
          Loan recoveries                  90,544       107,051      146,855
          Loans charged off              (447,589)     (476,240)    (224,743)
                                        ---------     ---------   ----------

            Balance at end of year     $1,318,332    $1,355,377   $1,369,566
                                        =========     =========   ==========

            Percentage of outstanding

              loans                          .79%          .91%        1.00%


<PAGE> 35

CONSOLIDATED STATEMENTS OF CASH FLOWS

HIGHLANDS BANKSHARES, INC.


NOTE 7    BANK PREMISES AND EQUIPMENT:

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

                                                        1999         1998
                                                    ----------------------

          Land                                       $ 917,139   $  553,652
          Buildings and improvements                 5,019,994    5,176,923
          Furniture and equipment                    2,925,284    2,375,983
                                                     ---------    ---------

          Total cost                                 8,862,417    8,106,558
            Less - accumulated depreciation         (3,171,557)  (3,346,848)
                                                    ----------   ----------

            Net Book Value                          $5,690,860   $4,759,710
                                                     =========    =========

          Provisions for depreciation of $407,147 in 1999,  $350,429 in 1998 and
          $359,740 in 1997 were charged to operations.

NOTE 8    DEPOSITS:

          At December 31, 1999,  the  scheduled  maturities of  certificates  of
          deposit are as follows:

                      2000                         $79,984,589
                      2001                          20,648,211
                      2002                           9,359,494
                      2003                           3,925,004
                      2004                           4,519,508
                                                    ----------

                      Total                       $118,436,806
                                                   ===========


NOTE 9    LONG-TERM DEBT:

          The Company  has  borrowed  money from the  Federal  Home Loan Bank of
          Pittsburgh  (FHLB).  The interest rates on the notes payable are fixed
          at the time of the advance and range from 2.50% to 6.60%; the weighted
          average  interest  rate is 5.37% at December 31, 1999.  The  long-term
          debt is secured by the assets of The Grant County Bank.

          Repayments  of  long-term  debt are due either  monthly or  quarterly.
          Interest  expense of  $138,313,  $52,937,  and $53,181 was incurred on
          these debts in 1999, 1998, and 1997,  respectively.  The maturities of
          long-term debt as of December 31, 1999 are as follows:

                      2000                         $    224,204
                      2001                              190,744
                      2002                              201,580
                      2003                              208,726
                      2004                              198,226
                      Thereafter                      1,544,478
                                                    -----------

                      Total                        $  2,567,958
                                                    ===========


<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:

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

          Current Expense

            Federal                         $ 930,223  $  899,787   $883,728
            State                             134,260     125,212    114,430
                                             --------     -------    -------

            Total Current Expense           1,064,483   1,024,999   $998,158
                                            ---------   ---------    -------

          Deferred Expense

            Federal                           (13,961)    (5,919)     (1,625)
            State                              (1,231)      (522)       (143)
                                             --------    -------     -------

            Total Deferred Expense            (15,192)    (6,441)     (1,768)
                                             --------    -------     -------

            Income Tax Expense             $1,049,291 $1,018,558    $996,390
                                            =========  =========     =======

          Income expense (benefits) relating
            to losses on security transactions
            are as follows:                 $ (23,528) $    (766)   $  2,040


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

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

          Tax effect of temporary differences:

            Provision for loan losses       $ (10,937) $(24,887)  $(42,793)
            Sale of loans                       7,192    32,612     (7,744)
            Pension expense                   (26,626)  (18,030)   (10,404)
            Depreciation                       23,945    30,497     51,675
            Deferred compensation             (24,797)
            Miscellaneous                      16,031   (26,633)     7,498
                                              -------   -------    -------

            Net increase in deferred
              income tax benefit            $ (15,192) $ (6,441)  $ (1,768)
                                             ========   =======    =======


<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:

                                                        1999        1998
                                                     --------------------

          Deferred Tax Assets:

            Provision for loan losses                $ 316,232   $ 305,295
            Insurance commissions                       30,663      29,908
            Sale of loans                                6,581      13,773
            Unrealized loss on securities available
              for sale                                 144,618
            Deferred compensation                       50,860      26,063
            Capital loss carryforward                               45,343
            Other                                        4,215       3,090
                                                      --------    --------

            Subtotal                                   553,169     423,472
            Less valuation allowance                               (45,343)
                                                      --------    --------

            Total Assets                               553,169     378,129
                                                      --------    --------

          Deferred Tax Liabilities:

            Pension prepaids                                        25,039
            Unrealized gain on securities
              available for sale                                    70,138
            Accretion income                            41,840      23,173
            Accelerated depreciation                   156,768     135,167
                                                      --------    --------

            Total Liabilities                          198,608     253,517
                                                      --------    --------

            Net Tax Asset                            $ 354,561   $ 124,612
                                                      ========    ========


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

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

          Amounts at federal statutory rates  $1,147,384  $1,030,351 $ 978,023
          Additions (reductions) resulting
            from:
              Tax-exempt income                  (71,484)    (61,331)  (69,759)
              Partially exempt income            (30,125)    (27,497)  (39,429)
              State income taxes, net            100,227      90,004    80,113
              Income from life insurance
                contracts                        (51,515)    (15,096)
              Capital losses incurred (utilized) (53,346)               45,343

              Other                                8,150       2,127     2,099
                                                --------    --------  --------

              Income tax expense              $1,049,291  $1,018,558 $ 996,390
                                               =========   =========   ========


<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 1999,  1998 or 1997. The amounts of the prepaid expense
          or  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.

          Deferred  compensation  expenses  for the above  benefits  charged  to
          operations totaled $244,743 in 1999,  $196,172 in 1998 and $189,595 in
          1997.

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,  2000,  the banks  could pay  dividends  to the  Company of
          approximately   $3,362,000   without   permission  of  the  regulatory
          authorities.

NOTE 13   TRANSACTIONS WITH RELATED PARTIES:

          During the year,  officers and directors (and companies  controlled by
          them) were customers of and had transactions with the subsidiary Banks
          in the normal  course of  business.  These  transactions  were made on
          substantially  the same terms as those  prevailing for other customers
          and did not involve any abnormal risk.  The aggregate  amount of loans
          to related  parties of $1,352,558 at December 31, 1998,  was increased
          $1,301,834 by new loans and reduced $960,604 by payments, resulting in
          an ending balance of $1,693,788 at December 31, 1999.


<PAGE> 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 14   COMMITMENTS AND GUARANTEES:

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

                                                        1999        1998

          Commitments to extend credit              $6,212,000  $6,516,000
          Standby letters of credit                    215,000     541,000

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

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

NOTE 15   CONCENTRATIONS:

          The Banks grant commercial, residential real estate and consumer loans
          to customers  located primarily in the eastern portion of the State of
          West Virginia. Although the Banks have a diversified loan portfolio, a
          substantial  portion of its debtors'  ability to honor their contracts
          is  dependent  upon  the  agribusiness  economic  sector.   Collateral
          required by the Banks is determined on an individual  basis  depending
          on  the  purpose  of the  loan  and  the  financial  condition  of the
          borrower.  The  ultimate  collectibility  of the  loan  portfolios  is
          susceptible to changes in local economic conditions. Approximately 58%
          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  $6,669,749 and $15,178,758 at December 31,
          1999 and 1998, respectively.


<PAGE> 40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 16   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

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

          Cash, Due from Banks and Money Market Investments

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

          Securities

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

          Loans

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

          Deposits

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

          Interest Payable and Receivable

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


<PAGE> 41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


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

          Off-Balance-Sheet Items

          The  carrying  amount and  estimated  fair value of  off-balance-sheet
          items were not material at December 31, 1999.

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

<CAPTION>
                                                    1999                        1998
                                                         Estimated                    Estimated
                                             Carrying       Fair        Carrying        Fair
                                              Amount        Value         Amount        Value

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

          Financial Assets:
            Cash and due from banks        $ 7,312,241   $ 7,312,241   $ 5,111,863   $ 5,111,863
            Interest bearing deposits        2,436,271     2,436,271     3,431,523     3,431,523
            Federal funds sold               2,702,633     2,702,633    12,374,283    12,374,283
            Securities held to maturity      3,176,547     3,175,918     3,503,965     3,621,218
            Securities available for sale   25,892,783    25,892,783    29,757,841    29,757,841
            Other investments                  745,550       745,550       730,950       730,950
            Loans, net                     165,295,723   164,368,631   147,028,527   150,145,023
            Interest receivable              1,627,874     1,627,874     1,556,347     1,556,347

          Financial Liabilities:
            Demand and savings
              deposits                      73,908,182    73,908,182    72,639,882    72,639,882
            Term deposits                  118,436,806   117,846,983   111,947,483   112,041,093
            Borrowed money                   2,567,958     2,346,150     2,319,544     2,287,194
            Interest payable                   663,522       663,522       688,888       688,888
</TABLE>


NOTE 17   REGULATORY MATTERS:

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

          Quantitative  measures  established  by regulation  to ensure  capital
          adequacy  require the Company to maintain  minimum  amounts and ratios
          (set forth in the table below) of total and Tier I capital (as defined
          in the regulations) to risk-weighted assets (as defined),  and of Tier
          I capital (as  defined)  to average  assets (as  defined).  Management
          believes,  as of December 31, 1999, that the Company meets all capital
          adequacy requirements to which it is subject.


<PAGE> 42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 17   REGULATORY MATTERS (CONTINUED):

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

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

                                            Actual      Regulatory Requirements
                                           December      Adequately    Well
                                        1999     1998   Capitalized Capitalized

          Total risk-based ratio        17.35%   18.02%     8.00%    10.00%
          Tier 1 risk-based ratio       16.60%   17.00%     4.00%     6.00%
          Total assets leverage ratio   10.99%   10.83%     4.00%     5.00%

          Capital ratios and amounts are applicable  both at the individual bank
          level  and  on a  consolidated  basis.  At  December  31,  1999,  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 18   PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

                                 BALANCE SHEETS

          Assets                                            December 31,
                                                    -----------------------
                                                        1999         1998

            Cash                                    $   34,476   $   15,754
            Investment in subsidiaries              24,028,470   22,681,509
            Other investments                          100,000      100,000
            Other assets                                 1,115        1,740
            Income taxes receivable                    113,268
            Due from subsidiaries                                    48,017
                                                     ---------    ---------

            Total Assets                           $24,277,329  $22,847,020
                                                    ==========   ==========


          Liabilities

            Income taxes payable                    $            $      473
            Due to subsidiaries                        53,282
                                                    ---------     ---------

            Total Liabilities                           53,282          473
                                                     ---------    ---------

          Stockholders' Equity

            Common stock, par value $5 per share
              authorized 1,000,000 shares; 546,764
              shares issued                         $2,733,820   $2,733,820
            Surplus                                  1,661,987    1,661,987
            Retained earnings                       21,067,191   19,324,019
            Other accumulated comprehensive income    (246,250)     119,422
                                                     ---------    ---------

                                                    25,216,748   23,839,248
            Less treasury stock (at cost, 44,866
              shares in 1999 and 1998)                (992,701)    (992,701)
                                                     ---------    ---------

            Total Stockholders' Equity              24,224,047   22,846,547
                                                    ----------   ----------

            Total Liabilities and Stockholders'

              Equity                               $24,277,329  $22,847,020
                                                    ==========   ==========


<PAGE> 44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 18   PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):


                  STATEMENTS OF INCOME AND RETAINED EARNINGS

                                                Years Ended December 31,
                                             1999        1998        1997
                                        -------------------------------------
          Income

            Dividends from subsidiaries   $ 666,652   $ 623,525  $1,055,054
            Other dividends                   1,680         735         630
                                           --------    --------    --------

            Total                           668,332     624,260   1,055,684

          Expenses

            Professional fees                34,056      27,032      37,980
            Directors' fees                  25,500      24,050      17,450
            Other expenses                   33,905      36,749      27,698
                                           --------    --------    --------

            Total                            93,461      87,831      83,128

          Net income before income tax benefit
            and undistributed income of
            subsidiaries                    574,871     536,429     972,556

          Income tax benefit                 37,866      29,360      30,211
                                           --------    --------    --------

          Income before undistributed income
            of subsidiaries                 612,737     565,789   1,002,767

          Undistributed income of
            subsidiaries                  1,712,632   1,446,093     877,378
                                           ---------   ---------   --------

            Net Income                    2,325,369   2,011,882   1,880,145

          Retained earnings,
            Beginning of period          19,324,019  17,854,185  16,478,655
            Dividends paid                 (582,197)   (542,048)   (504,615)
                                           --------    --------    --------

          Retained Earnings,
            End of Period               $21,067,191 $19,324,019 $17,854,185
                                         ==========  ==========  ==========


<PAGE> 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HIGHLANDS BANKSHARES, INC.


NOTE 18   PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):


                            STATEMENTS OF CASH FLOWS

                                             Years Ended December 31,

                                               1999        1998        1997

          Cash Flows from Operating Activities:

            Net income                       $2,325,369  $2,011,882 $1,880,145

            Adjustments

              Undistributed subsidiary
                income                       (1,712,632) (1,446,093)  (877,378)
              Depreciation                          624         583        181
              Increase in payables               52,809         473
              Increase in receivables           (65,251)    (25,413)   (10,569)
              Increase in other assets                       (2,325)

            Net Cash Provided by Operating
              Activities                        600,919     539,107    992,379
                                               --------    --------   --------


          Cash Flows from Financing Activities:
            Dividends paid                     (582,197)   (542,048)  (504,615)

            Purchase of treasury stock                                (498,888)

            Net Cash Used in Financing
              Activities                       (582,197)   (542,048)(1,003,503)

          Net Increase (Decrease) in Cash        18,722      (2,941)   (11,124)

          Cash, Beginning of Year                15,754      18,695     29,819
                                               --------    --------   --------

          Cash, End of Year                   $  34,476   $  15,754  $  18,695
                                               ========    ========   ========


<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, 1999 and 1998,  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,
1999.  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, 1999 and 1998,  and the
consolidated  results of their  operations  and their cash flows for each of the
years in the three year period  ended  December  31, 1999,  in  conformity  with
generally accepted accounting principles.

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




January 14, 2000
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 13, 2000.

Item 10. Executive Compensation

     We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 13, 2000.

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 13, 2000.

Item 12. Certain Relationships and Related Transactions

     We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 13, 2000.

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

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

Part IV

Item 13. Exhibits and Reports on Form 8-K

     a)  Exhibits

         Exhibit No.                        Description

             2              Not applicable

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

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


<PAGE> 48

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

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

         Exhibit No.                        Description

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

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

             4              Not applicable

             9              Not applicable

            10              Not applicable

            11              Not applicable

            12              Not applicable

            16              Not applicable

            18              Not applicable

            21              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 1999.


<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 28, 2000
                                             --------------



                                        By   CLARENCE E. PORTER

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

                                        Date March 28, 2000
                                             --------------

   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 28, 2000
---------------------------                                   --------------
Leslie A. Barr                          President
                                & Chief Executive Officer
                                        Director

THOMAS B. MCNEIL, SR.                                        March 28, 2000
---------------------------                                  --------------
Thomas B. McNeil, Sr.                   Director


GEORGE B. MOOMAU                                             March 28, 2000
---------------------------                                  --------------
George B. Moomau                        Director


CLARENCE E. PORTER                                           March 28, 2000
---------------------------                                  --------------
Clarence E. Porter                 Secretary/Treasurer
                                     Chief Financial
                                 and Accounting Officer

                                        Director

COURTNEY R. TUSING                                           March 28, 2000
---------------------------                                  --------------
Courtney R. Tusing                      Director


JOHN G. VANMETER                                             March 28, 2000
---------------------------                                  --------------
John G. VanMeter                  Chairman of the Board
                                        Director

JACK H. WALTERS                                              March 28, 2000
--------------------------                                   --------------
Jack H. Walters                         Director


L. KEITH WOLFE                                                March 28, 2000
---------------------------                                   --------------
L. Keith Wolfe                          Director