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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended Commission File No. 0-16761
-----------
March 31, 2003
HIGHLANDS BANKSHARES, INC.
West Virginia 55-0650793
- ----------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 929
Petersburg, West Virginia 26847
(304) 257-4111
----------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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
requirement for the past 90 days. Yes ..X. No ....
Indicate by check mark whether the issuer is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ___ ]
The aggregate market value of the 1,323,687 shares of Common Stock of the
registrant issued and outstanding held by nonaffiliates on April 30, 2003 was
approximately $ 34,217,309 based on the closing sales price of $ 25.85 per share
on April 30, 2003. For purposes of this calculation, the term "affiliate" refers
to all directors and executive officers of the registrant.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of April 30, 2003:
1,436,874 shares of Common Stock, $5 Par Value.
1
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2003 and 2002 2
Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Controls and Procedures 21
PART II OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibit and Reports on Form 8K 22
SIGNATURES 23
Certification of Chief Executive Officer 24
Certification of Executive Officer 25
Certification of Executive Officer 26
Certification of Principal Financial Officer 27
2
Part I Financial Information
Item 1. Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
March 31,
2003 2002
-------- --------
Interest Income
Interest and fees on loans $ 4,226 $ 4,279
Interest on federal funds sold 59 54
Interest on time deposits 15 33
Interest and dividends on investment securities
Taxable 233 319
Nontaxable 43 52
-------- --------
Total Interest Income 4,576 4,737
-------- --------
Interest Expense
Interest on time deposits over $100,000 486 580
Interest on other deposits 1,221 1,523
Interest on borrowed money 51 53
-------- --------
Total Interest Expense 1,758 2,156
-------- --------
Net Interest Income 2,818 2,581
Provision for Loan Losses 210 120
-------- --------
Net Interest Income After Loan Losses 2,608 2,461
-------- --------
Noninterest Income
Service charges 138 129
Other 205 150
--------- ---------
Total Noninterest Income 343 279
--------- ---------
Noninterest Expense
Salaries and employee benefits 1,085 1,049
Equipment and occupancy expense 285 252
Data processing 145 145
Other 459 434
--------- ---------
Total Noninterest Expense 1,974 1,880
--------- ---------
Income Before Income Taxes 977 860
Provision for Income Taxes 317 260
--------- ---------
Net Income $ 660 $ 600
========= =========
Per Share Data (1)
Net Income $ .46 $ .40
========= =========
Cash Dividends $ .14 $ .12
========= =========
Weighted Average Common Shares Outstanding 1,436,874 1,505,694
========= =========
(1) Prior year's per share figures restated to reflect stock split in form of
dividend in third quarter 2002.
The accompanying notes are an integral part of these statements.
3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
2003 2002
-------- --------
ASSETS
Cash and due from banks - noninterest bearing $ 7,637 $ 8,226
Time deposits in other banks 6,032 4,500
Federal funds sold 21,405 14,625
Securities held to maturity (note 2) 1,367 1,369
Securities available for sale (note 3) 29,226 23,496
Other investments (note 4) 845 672
Loans, net of unearned interest (note 5) 225,104 225,754
Less allowance for loan losses (note 6) (1,916) (1,793)
-------- --------
Net Loans 223,188 223,961
Bank premises and equipment 6,745 6,873
Interest receivable 1,943 1,821
Investments in insurance contracts 5,387 5,338
Other assets 1,413 1,466
------- -------
Total Assets $305,188 $292,347
======= =======
LIABILITIES
Deposits:
Noninterest bearing demand deposits $ 33,849 $ 31,785
Interest bearing
Money market and checking 21,328 20,936
Money market savings 17,803 16,996
Savings 30,850 29,503
Time deposits over $100,000 48,569 45,392
All other time deposits 117,165 112,899
------- -------
Total Deposits 269,564 257,511
Borrowed money 3,900 4,030
Accrued expenses and other liabilities 2,400 1,890
------- -------
Total Liabilities 275,864 263,431
------- -------
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 3,000,000 shares
authorized) 7,184 7,184
Surplus 1,662 1,662
Retained earnings 20,309 19,850
Accumulated other comprehensive income 169 220
------- -------
Total Stockholders' Equity 29,324 28,916
------- -------
Total Liabilities and Stockholders' Equity $305,188 $292,347
======= =======
The accompanying notes are an integral part of these statements.
4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
Balances, December 31, 2002 $7,184 $1,662 $19,850 $220 $28,916
Comprehensive Income
Net income 660 660
Net change in unrealized
appreciation on investment
securities available for sale,
net of taxes (51) (51)
------
Total Comprehensive Income 609
Dividends paid (201) (201)
----- ----- ------ ----- ---- ------
Balances, March 31, 2003 $7,184 $1,662 $20,309 $169 $29,324
====== ====== ======= ==== ===== ======
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
Balances, December 31, 2001 $2,734 $1,662 $24,624 $283 (993) $28,310
Comprehensive Income
Net income 600 600
Net change in unrealized
appreciation on investment
securities available for sale,
net of taxes (70) (70)
------
Total Comprehensive Income 530
Dividends paid (186) (186)
----- ----- ------ ----- ----- ------
Balances, March 31, 2002 $2,734 $1,662 $25,038 $213 (993) $28,654
====== ====== ======= ==== ==== ======
The accompanying notes are an integral part of these statements.
5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Three Months Ended
March 31,
2003 2002
-------- --------
Cash Flows from Operating Activities:
Net income $ 660 $ 600
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 148 132
Income from insurance contracts (49) (43)
Net amortization of securities 118 68
Provision for loan losses 210 120
Increase in interest receivable (122) (244)
(Increase) decrease in other assets 53 (93)
Increase in accrued expenses 510 468
-------- --------
Net Cash Provided by Operating Activities 1,528 1,008
-------- --------
Cash Flows from Investing Activities:
Net change in federal funds sold (6,780) 408
Proceeds from maturities of securities
available for sale 3,487 2,636
Proceeds from maturities of securities
held to maturity 1 1
Purchase of securities available for sale (9,386) (3,063)
Proceeds from redemption of other investments (173)
Net change in time deposits in other banks (1,532) 911
Net change in loans 562 (4,229)
Purchase of property and equipment (18) (89)
--------- --------
Net Cash Used in Investing Activities (13,839) (3,425)
--------- --------
Cash Flows from Financing Activities:
Net increase in deposits 12,053 2,867
Dividends paid in cash (201) (186)
Repayment of borrowed money (130) (122)
--------- --------
Net Cash Provided by Financing Activities 11,722 2,559
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (589) 142
Cash and Cash Equivalents, Beginning of Period 8,226 6,492
-------- --------
Cash and Cash Equivalents, End of Period $ 7,637 $ 6,634
======== ========
Supplemental Disclosures:
Cash Paid For:
Income taxes $ $ 5
Interest 1,761 2,424
The accompanying notes are an integral part of these statements.
6
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to U. S. generally
accepted accounting principles and to general industry practices. In
the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of March 31,
2003 and the results of operations for the three month periods ended
March 31, 2003 and 2002.
The notes included herein should be read in conjunction with the
notes to financial statements included in the 2002 annual report to
stockholders of Highlands Bankshares, Inc.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and market value of securities held to maturity
as of March 31, 2003 and December 31, 2002, are as follows (in
thousands):
2003 2002
---- ----
Amortized Market Amortized Market
Cost Value Cost Value
Mortgage-backed
securities $ 2 $ 3 $ 4 $ 4
Obligations of states and
political subdivisions 1,365 1,465 1,365 1,447
------ ------ ----- ------
Total $ 1,367 $ 1,468 $1,369 $ 1,451
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of March 31, 2003 and December 31, 2002 are as follows (in
thousands):
2003 2002
---- ----
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US Government
corporations and
agencies $17,084 $17,186 $8,844 $ 8,961
Mortgage-backed
securities 4,735 4,874 5,410 5,582
Obligations of states and
political subdivisions 3,493 3,558 4,238 4,350
Other investments 3,531 3,608 4,540 4,603
------ ------ ----- ------
Total $28,843 $29,226 $23,032 $23,496
====== ====== ====== ======
7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS:
Other investments totaling $845,000 include investments in the
Federal Home Loan Bank and other governmental entities whose
transferability is restricted.
NOTE 5 LOANS OUTSTANDING:
A summary of loans outstanding as of March 31, 2003 and December
31, 2002, is as follows (in thousands):
2003 2002
---- ----
Commercial $ 46,668 $ 47,089
Real estate - construction 5,339 6,813
- mortgages 124,234 121,558
Consumer installment 48,908 50,351
------- -------
Total 225,149 225,811
Unearned interest (45) (57)
-------- --------
Net loans outstanding $225,104 $225,754
======= =======
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2003 and 2002 follows (in thousands):
2003 2002
---- ----
Balance, beginning of period $ 1,793 $ 1,602
Provisions charged to operating expenses 210 120
Loan recoveries 63 23
Loan charge-offs (150) (122)
-------- -------
Balance, end of period $ 1,916 $ 1,623
======= =======
8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 INVESTMENT IN INSURANCE CONTRACTS:
Investment in insurance contracts consists of single premium
insurance contracts which have the dual purposes of providing a rate
of return to the Company which approximately equals the Company's
average cost of funds and providing life insurance and retirement
benefits to employees. The carrying value of these investments was
$5,387,000 at March 31, 2003 and $5,338,000 at December 31, 2002.
NOTE 8 CAPITAL STOCK TRANSACTIONS:
In the second quarter of 2002, the Company repurchased stock from
unrelated parties in two separate transactions. Total shares
repurchased were 22,940 (68,820 on an after-split basis) at a cost of
$1,217,000.
In June 2002, the Company approved a stock split effected in the
form of a dividend which was distributed September 3, 2002 to
shareholders of record as of August 1, 2002. This transaction resulted
in an increase of shares outstanding from 478,958 as of June 30, 2002
to 1,436,874 as of September 30, 2002. Earnings per share and
dividends per share calculations for prior periods have been adjusted
for this stock dividend. The Board of Directors also voted to retire
67,806 shares of treasury stock in the third quarter of 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
financial statements contained within these statements are, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. In
addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of these transactions would be the same,
the timing of events that would impact these transactions could change.
The allowance for loan losses is an estimate of the losses that may be
sustained in the loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires
that losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Recent Accounting Pronouncements
In December 2001, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") no. 01-6, Accounting by Certain
Entities (Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others, to reconcile and conform the accounting and financial
reporting provisions established by various AICPA industry audit guides. SOP No.
01-6 is effective for annual and interim financial statements issued for fiscal
years beginning December 15, 2001 and did not have a material impact on the
Company's consolidated financial statements.
All other recent accounting pronouncements had no material impact on the
Company's consolidated financial statements.
Forward Looking Statements
This filing may contain certain forward-looking statements (as defined in
the Private Securities Litigation Act of 1995), which reflect management's
beliefs and expectations based on information currently available. These
forward-looking statements are inherently subject to significant risks and
uncertainties. These risks and uncertainties can include, but are not limited
to, changes in general economic and financial market conditions, the
Company's ability to effectively carry out business plans, changes in regulatory
or legislative requirements, or changes in competitive conditions. Although
Management believes the expectations reflected in such
forward-looking statements are reasonable, actual results may differ
materially.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Overview
The Company's net income was $660,000 in the first quarter of 2003, an
increase of 10.00% compared to the first quarter of 2002. Earnings per share
were $.46 for the first quarter of 2003 compared to $.40 per share for the same
quarter in 2002. The Company's annualized return on average equity was 9.01% in
the first quarter of 2003 compared to 8.43% for the first quarter of 2002.
Return on average assets was .88% for 2003 and .86% for 2002.
Net interest income before provision for loan loss increased 9.18% over the
first quarter of 2002. Increasing loan balances required a provision for loan
losses $90,000 greater than that taken during the first quarter of 2002. Even
with the increase in the loan loss provision, net interest income after the
provision for loan losses increased 5.97% from the first quarter of 2002.
Taxable equivalent net interest income increased 8.85% over the first quarter of
2002 as an 83 basis point decline in taxable interest income was offset by a 102
basis point decline in interest expense on liabilities. Noninterest income
increased 22.94% as trust fees and insurance income increased. Noninterest
expenses increased 5.00% as expanded loan and deposit volumes required greater
operating expenses and regular annual merit increases caused an increase
in salary and benefit expense.
Net Interest Income
The Company's net interest margin before provision for loan loss
increased from $2,581 during the first quarter of 2002 to $2,818,000 during the
first quarter of 2003. The Company's net yield on interest earning assets on a
tax equivalent basis was 4.10% in the first quarter of 2003 compared to 4.08%
for the first quarter of 2002.
Strong loan demand throughout the latter part of 2002 contributed to average
loan balances being 8.44% higher when compared to the first quarter of 2002.
The average rates earned on loans dropped 75 basis points. Commercial loan rates
decreased 63 basis points, rates on real estate loans decreased 58 basis points
and rates on consumer lending fell 82 basis points.
Balances of federal funds sold increased dramatically over 2002 levels due
to a recent slowing of loan demand and increased deposit volume. The increase in
federal funds sold is intended to act as a source of funding should maturing,
high rate certificates leave the Banks. This increase in balances caused income
earned on federal funds sold to increase 9.26% over first quarter 2003 levels.
The increase in balances offset a 57 basis point decline in rates. Earnings on
interest bearing deposits decreased 136 basis points over 2002 due to a
combination of repositioning of time deposits of HBI Life and Highlands
Bankshares Trust from external institutions to the Company's subsidiary banks,
the general decline of interest rates, and a change in the composition of
interest bearing deposits from CDs to interest bearing demand deposit accounts
held by the subsidiary banks at the Federal Home Loan Bank.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (continued)
Balances of securities at March 31, 2003 were 23.04% higher than at December
31, 2002 and only 2.07% lower than at March 31, 2002 This was due largely to
increased securities purchases late in the quarter. Average balances of
securities were 14.02% lower during the first quarter of 2003 than during the
same period in 2002. Securities balances have been lower in recent periods
because high loan growth during 2002 was funded in part by reductions in
securities and because the depressed interest rate environment has significantly
decreased opportunities for securities investments which earn an acceptable
rate of return vis-a-vis the Company's other opportunities. Management
has been reluctant to invest in long term securities because of the expectation
that interest rates will begin to rise over the next 12 months.
In recent quarters, customers have appeared to be reluctant to commit to
long-term, fixed rates on certificates when rates are at historical lows and
instead placed their deposits in accounts that are highly liquid and will allow
them to respond quickly when rates increase. Although interest rates remain at
or near historical lows, in the latter months of 2002 and during the first
quarter of 2003, the Company's subsidiary banks nonetheless experienced
significant deposit growth as customers now appear to be more rate sensitive
when making decisions regarding selection of financial institutions
within which to place deposits. Levels of competition for deposits in the
Company's service area have caused the Company's subsidiary banks to
traditionally pay higher rates on deposits than larger, statewide financial
institutions. Although steps have been taken in recent years to reduce this
differential and have been moderately successful, the subsidiary banks remain
marginally above the competition in rates paid on deposits and these higher
rates appear to have drawn deposit customers to the Company's subsidiary banks
during recent months. Average balances of interest bearing liabilities during
the first quarter of 2003 increased 9.59% from 2002 and total deposit balances
at March 31, 2003 were 4.68% higher than at December 31, 2002. Rates paid on
deposits during the first quarter of 2003 were 106 basis points lower than
during the first quarter of 2002. As higher rate CDs continued to mature, the
rates paid on time deposits fell 120 basis points as compared to the same period
a year ago. Combined average interest bearing transaction accounts, savings
accounts and money market accounts increased 20.77% while rates paid on these
accounts fell 35 basis points.
The Company borrows from the Federal Home Loan Bank at fixed rates of
interest and uses to proceeds to monies to customers on a fixed rate basis. The
Company anticipates continuing to use this approach as a mechanism to provide
long-term financing to customers and limit market rate risk. In addition, monies
were borrowed on a short-term, variable rate basis to fund the renovation and
expansion at the Capon Valley Bank. In the third quarter of 2002, this variable
rate debt was refinanced on a ten year fixed rate loan at 3.94%.
A complete yield analysis is shown as Table I on page 19.
Provision for Loan Losses
The Company's provision for loan losses was $210,000 for the first quarter
of 2003 compared to $120,000 for first quarter of 2002. Net loan charge-offs
were $87,000 in 2003 compared to $99,000 in 2002. As loan balances have
increased 7.40% since March 31, 2002 a larger provision for loan loss has been
necessary to maintain what management feels are acceptable ratios of allowance
for loan losses to total loans, even as net charge-offs decreased from the same
period a year ago. In addition, the slowing economy and increased delinquencies
have required a large allowance for loan losses.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest Income
Noninterest income during the first quarter of 2003 rose 22.94% over the
same period a year ago. Service charge income increased 6.98% as deposits
continue to grow. Other income increased 36.67% over first quarter 2002 levels
and was due primarily to increases in underwriting revenue of HBI Life
Insurances company and an increase in trust fees by Highlands Bankshares Trust
Company.
Noninterest Expenses
Overall noninterest expense increased 5.00% in 2003 compared to 2002. Salary
and benefit expense increased 1.62% due to annual merit increases and increased
pension costs. Occupancy and equipment increased 13.10% due largely to
ongoing efforts to upgrade systems. Data processing expense was unchanged from a
year ago. Miscellaneous non-interest expenses increased 10.14% as increased
costs were seen in postage costs due to expanded operations and the June 2002
postal rate hike, and general increases due to expanding operations. These
increases were offset in part by decreases in advertising and marketing
expenses, professional and legal fees, and stationery and office supply
expense.
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, Randolph, Mineral,, and
northern Pendleton counties in West Virginia, Frederick County in Virginia
and portions of western Maryland. The Company's secondary service area includes
Hampshire County in West Virginia. 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 decreased $650,000 or .29% during the first quarter in
2003. The first quarter of any year is traditionally slow as farming and logging
operations are hampered by weather conditions and retail borrowing in the first
quarter is put on hold until the spring. Mortgage loan balances increased 2.20%
from December 31, 2002 to December 31, 2003. Balances of all other types of
loans contracted during the first quarter with real estate construction loans
falling 21.64% from December 31, 2002 to March 31, 2003, commercial loans fell
..89% and consumer installment declined 2.87%.
Asset Quality and Risk Elements
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 suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have been changed due to
financial hardship of the borrower.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Asset Quality and Risk Elements (continued)
The following table summarizes the company's non-performing loans for the
periods ended March 31, 2003 and December 31, 2002.
March 31 December 31,
(in thousands) 2003 2002
---- ----
Non-accrual loans $ 734 $ 299
Restructured Loans 655 662
Loans past due 90 days or more
and still accruing interest 2,402 1,918
Total $ 3,791 $ 2,879
======== ========
Balances of non-performing loans increased 31.68% from December 31, 2002 to
March 31, 2003 as balances of non accrual loans and delinquent loans increased
145.48% and 25.23% respectively. Restructured loans are comprised of two
commercial loans for which it was necessary to refinance in order to recoup
timely payment of principal. In neither case were any principal amounts
forgiven.
Real estate acquired through foreclosure fell from $517,000 at December 31,
2002 to $220,000 at March 31, 2003 following the disposal of several foreclosed
properties. All foreclosed property held as of March 31, 2003 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.
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 March 31, 2003, management is not aware of any significant potential problem
loans in which the debtor is currently meeting their obligations as stated in
the loan agreement but which may change in future periods.
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 .85% at March 31, 2003 compared to .79% at December 31, 2002.
The allowance for credit losses of $1,915,521 at March 31, 2003, was up $122,000
from its level at December 31, 2002.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
The allowance for loan losses is an estimate of the losses in the current
loan portfolio. The allowance is based on two principles of accounting: (i) SFAS
5, Accounting for Contingencies which requires that losses be accrued when they
are probable of occurring and estimatable and (ii) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that loans be identified
which have characteristics of impairment as individual risks, (e.g. the
collateral, present value of cash flows or observable market values are less
than the loan balance).
Each of Company's banking subsidiaries, Capon Valley Bank and The Grant
County Bank, determines its allowance for loan losses independently. Each bank
pays particular attention to individual loan performance, collateral values,
borrower financial condition and overall national and local economic conditions.
The determination of adequate allowance at each bank is done in a three step
process. The first step is to identify problem loans above a certain threshold
and estimated losses are calculated based on collateral values and projected
cash flows. The second step is to identify loans above a certain threshold which
are problem loans due to the borrowers' payment history or deteriorating
financial condition. Losses in this category are determined based on historical
loss rates adjusted for current economic conditions. The final step is to
calculate a loss for the remainder of the portfolio using historical
loss information for each type of loan classification. The determination
of specific allowances and weights is in some part subjective and actual losses
may be greater or less than the amount of the allowance. However, management
believes that the allowance represents a fair assessment of the losses that
exist in the loan portfolio.
Both banks classify loans into the following categories: impaired,
doubtful, substandard, special mention and other loans past due 90+ days and
assign loss rates to each. Within these categories, Real Estate, Installment
Loans, Commercial Loans and Lines of Credit are assigned a specific loss rate
based on historical losses and management's estimate of losses. The allowance
associated with loans classed as impaired is calculated at 100% of the
identified impairment.
Loans 90 days or more past due and nonaccrual loans are included in one of
the five categories above. Credit card balances 90 days or more past due are
categorized as substandard and are assigned a loss rate of 50%. Generally, all
loans in excess of $250,000 are evaluated individually as well as any loan
regardless of size that is classified as loss, doubtful, substandard or special
mention. This detailed review identifies each applicable loan for
specific impairment and a specific allocation for that impaired amount is set
aside as the first element in the calculation. Rates assigned each category may
vary over time and between the banks as historical loss rates, loan structure
and economic conditions change.
The remaining portfolio balances are assigned a loss factor based on the
historical net loss after recoveries over the last five years. Loss
experience per classification varies significantly based on risk and
collateral. Installment and commercial loans generally have higher loss volumes
than secured real estate loans. These actual loss experience factors are weighed
by the average life of the loan category. Installments have a two to three year
carrying life, real estate loans a five to six year life; and commercial loans a
three to four year life. The net result creates a low and high range of
allocated allowance. The Company's actual allowance balance is compared to this
range and adjusted as deemed necessary.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
The adequacy of the allowance for loan losses is computed quarterly and the
allowance adjusted prior to the issuance of the quarterly financial statements.
All loan losses charged to the allowance are approved by the boards of directors
of each bank at their regular meetings. The allowance is reviewed for adequacy
after considering historical loss rates, current economic conditions (both
locally and nationally) and any known credit problems that have not been
considered under the above formula. The Company believes that its allowance must
be viewed in its entirety and, therefore, is available for potential credit
losses in its entire portfolio, including loans, credit-related commitments and
other financial instruments. In the opinion of management, the allowance, when
taken as a whole, is adequate to absorb reasonably estimated credit losses
inherent in the Company's portfolio.
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.. Loan requests for poultry house loans or
expansion continue to be presented for approval. In the fall of 2002, Perdue
Farms, Inc. ceased operations at it's Petersburg processing plant. At present,
this facility sits idle. In part because of this closure, the unemployment rate
in Grant County has grown from 6.7% in October of 2002 to 12.50% in March of
2003, the last month for which data are available. The March unemployment rate
for Grant County is down from 15.00% in February. While management believes that
this closure has contributed to the slow-down in loan growth, the overall impact
of the closure on the Company has been minimized by the Company's geographic
diversity as the other counties in the Company's primary service area maintain
healthy economies and that the impact of this closure on loan defaults will not
be material.
An analysis of the loan loss allowance is set forth in the following table
(in thousands):
Quarter Ended
March 31,
2003 2002
Balance, beginning of period $ 1,793 $ 1,602
Net charge-offs (recoveries)
Charge-offs (150) (122)
Recoveries 63 23
------ ------
Total net charge-offs * (87) (99)
Provision for credit losses 210 120
------ ------
Balance, End of Period $ 1,916 $ 1,623
====== ======
* Components of net charge-offs:
Real estate $ (8) $ (8)
Commercial (5) (16)
Consumer (74) (75)
------- ------
Total $ (87) $ (99)
======= ======
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
The Company believes that its allowance must be viewed in its entirety and,
therefore, is available for potential credit losses in its entire portfolio,
including loans, credit-related commitments and other financial instruments. In
the opinion of management, the allowance, when taken as a whole, is adequate to
absorb reasonably estimated credit losses inherent in the Company's portfolio.
During the course of routine examination of the Company's two subsidiary
banks, The Grant County Bank and Capon Valley Bank, under the normal examination
cycle by regulatory agencies, examiners have identified certain supervisory
issues. Results of these regulatory examinations are not published or
publicly available. Requirements of regulatory agencies in regards to certain
calculated amounts such as the allowance for loan losses may at times differ
from GAAP requirements. One of the regulatory agencies which exerts supervisory
control on the Company's subsidiary banks has indicated that a requirement for
an increased allowance for loan losses will be directed to Capon Valley Bank.
Management of the Bank does not agree with the regulator's conclusions and is in
the process of appealing those conclusions.
The Company believes that the allowance for loan losses shown in these
statements is adequate to cover potential losses in the current loan portfolio
using guidance set forth in SFAS Nos. 5 and 114. As such, the current
methodology for calculating the allowance for loan loss will be continued until
such time as GAAP requirements change. If one or more of the regulatory agencies
require materially differing amounts of allowance for loan losses than that
which would be calculated under GAAP requirements, the subsidiary bank to which
this requirement might apply will calculate its allowance for loan losses for
regulatory filings based on the regulatory guidance, while the Company will
continue to report its results based on generally accepted accounting principles
as promulgated by the FASB, the SEC and other accounting authorities.
The following table shows the allocation of loans in the loan portfolio and
the corresponding amounts of the allowance allocated by loan types as of March
31, 2003 and December 31, 2002:
March 31, 2003 December 31, 2002
-------------- -----------------
Loan Allowance Percentage Percentage of Allowance Percentage Percentage of
Type Allocation of Allowance Total Loans Allocation of Allowance Total Loans
Commercial $ 593 31% 21% $ 543 30% 21%
Mortgage 541 28% 57% 504 28% 57%
Consumer 686 36% 22% 652 37% 22%
Unallocated 96 5% % 94 5% %
----- --- ---- ----- --- ---
Totals $1,916 100% 100% $1,793 100% 100%
===== === ==== ===== === ===
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Securities
The Company's securities portfolio serves several purposes. Portions of the
portfolio secure certain public and trust deposits while the remaining portions
are held as investments or used to assist the Company in liquidity and asset
liability management. Total securities and other investments at March 31, 2003
were $30,593,000 compared to $24,865,000 at December 31, 2002. This is an
increase of 23.04%. Total securities and other investments as a percentage of
total assets were 10.30% at March 31, 2003 compared to 8.74% at December 31,
2002.
During 2002, loan demand outstripped deposit growth, and the Company funded
loan growth through reductions in balances of fed funds sold and securities. As
a result, securities balances dropped dramatically during 2002. In the first
quarter of 2003, as loan demand slowed and deposit balances increased, the
Company took steps to increase it's security portfolio to former levels. As
interest rates remain low, the Company has been reluctant to purchase securities
with long term maturities.
The securities portfolio consists of three components, specifically,
securities held to maturity, securities available for sale and other
investments. 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. Other investments include restricted securities whose
ownership is required for participation in certain governmental programs. The
Company's recent purchases of all securities have generally been limited to
securities of high credit quality with short to medium term maturities. Changes
in the market values of securities available for sale, net of the deferred tax
effect, are reflected as changes in accumulated other comprehensive income. As
of March 31, 2003, the market value of the securities available for sale
exceeded their cost by $383,000. ($241,000 after tax effect).
Deposits
The Company's main source of funds is customer deposits received from
individuals, governmental entities, and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit.
Total deposits increased 4.68% between December 31, 2002 and March 31,
2003. The cost of funds for the first quarter of 2003 was 2.93% compared to
3.98% for the same quarter in 2002 as the effects of declining interest rates
offset the increase in deposit balances. Time deposits continue to make up the
bulk of deposit balances as time deposits equaled 61.48% of total deposits at
March 31, 2003 and 61.47% of total deposits at December 31, 2002.
Capital
The Company seeks to maintain a strong capital base to expand facilities,
promote public confidence, support current operations and grow at a
manageable level. As of March 31, 2003, the Company's total risk based capital
ratio was 14.26% which is above the regulatory minimum of 8.0%. The leverage
ratio of total capital to total assets was 9.57% at March 31, 2003 which is in
line with the Company's peer group.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 and the Federal Reserve Bank of
Richmond. Both subsidiary banks have lines of credit with the Federal Home Loan
Bank of Pittsburgh although utilization has been limited. In the past, growths
in deposits and proceeds from the maturity of investment securities have been
sufficient to fund the net increase in loans.
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 March 31, 2003 the Company had a negative gap position through the first
90 days, with this negative gap position shifting to a positive gap position
with 12 months. With the largest amount of interest sensitive assets and
liabilities repricing within three years, the Company monitors these areas very
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 review its positions
regularly and takes necessary actions to correct when necessary.
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 that file electronically with the Commission, including Highlands
Bankshares, Inc., and the address is (http://www.sec.gov).
19
TABLE I
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
-------------------- --------------------
Average Income/ Average Income/
Balance2 Expense Rates Balance2 Expense Rates
Interest Income
Loans
Commercial $ 14,666 $ 296 8.07% $ 10,802 $ 235 8.70%
Consumer 53,583 1,413 10.55 55,203 1,569 11.37
Real estate 155,213 2,517 6.49 140,058 2,475 7.07
------- ------ ----- ------- ----- ------
Total Loans 223,462 4,226 7.56 206,063 4,279 8.31
Federal funds sold 21,576 59 1.09 13,012 54 1.66
Interest bearing
deposits 5,406 15 1.11 5,348 33 2.47
Investments
Taxable 22,567 233 4.14 26,408 319 4.83
Tax exempt 1 4,525 67 5.92 5,101 82 6.43
------- ------ ----- ------ ----- ------
Total Earning
Assets 1 277,536 4,600 6.63 255,932 4,767 7.46
------- ------ ----- ------- ----- ------
Interest Expense
Interest bearing
demand deposits 21,398 49 .92 17,611 48 1.09
Savings and
money market 46,679 126 1.08 38,760 147 1.52
Time deposits 164,768 1,532 3.72 155,243 1,908 4.92
Other borrowed
money 3,961 51 5.15 4,467 53 4.75
------- ------ ----- ------ ----- ------
Total Interest
Bearing
Liabilities $236,806 1,758 2.97 $216,081 2,156 3.99
======= ------ ----- ======= ----- ------
Net Interest Margin $ 2,842 $2,611
====== =====
Net Yield on Interest
Earning Assets 1 4.10% 4.08%
====== ======
1 Yields are on a taxable equivalent basis.
2 Includes loans in nonaccrual status.
20
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31, 2003
(In Thousands of Dollars)
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5or Without
Days Days Years Years Maturity Total
EARNING ASSETS
Loans $38,252 $103,727 $54,556 $15,814 $12,756 $225,105
Fed funds sold 21,405 21,405
Securities 6,571 9,899 9,565 2,956 2,447 31,438
Time deposits in
other banks 6,032 6,032
----- ------ ------ ------ ------ -------
Total 72,260 113,626 64,121 18,770 15,203 283,980
------ ------- ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Transaction accounts 21,328 21,328
Money market savings 17,803 17,803
Savings accounts 30,850 30,850
Time deposits more
than $100,000 10,156 19,090 10,058 9,265 48,569
Time deposits less
than $100,000 18,289 57,133 27,644 14,099 117,165
Other borrowed money 134 299 985 752 1,730 3,900
----- ------ ------ ------ ------ -------
Total 98,560 76,522 38,687 24,116 1,730 239,615
------ ------ ------ ------ ------ -------
Rate sensitivity GAP (26,300) 37,104 25,434 (5,346) 13,473 44,365
Cumulative GAP (26,300) 10,804 36,238 30,892 44,365
Ratio of cumulative
interest sensitive
assets to
cumulative interest
sensitive liabilities 73.32% 106.17% 116.95% 112.99% 118.52%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
21
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such
as Highlands Bankshares, Inc. that file periodic reports under the Securities
Exchange Act of 1934 (the "Act") are now required to include in those reports
certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws.
Under rules adopted by the Securities and Exchange Commission effective
August 29, 2002, these disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports it files or submits
under the Act, is communicated to the issuer's management, including its
principal executive officer or officers and principal financial officer or
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
We have established our disclosure controls and procedures to ensure that
material information related to Highlands Bankshares, Inc. is made known to
our principal executive officers and principal finance officer on a regular
basis, in particular during the periods in which our quarterly and annual
reports are being prepared. These disclosure controls and
procedures consist principally of communications between and among the
President and the Finance Officer, and the other executive officers of
Highlands Bankshares, Inc. and its subsidiaries to identify any new
transactions, events, trends, contingencies or other matters that may be
material to the Company's operations. As required, we will evaluate the
effectiveness of these disclosure controls and procedures on a quarterly
basis, and most recently did so as of April 30, 2003, a date within 90 days
prior to the filing of this quarterly report. Based on this evaluation, the
management of Highlands Bankshares, Inc., including the Finance Officer,
concluded that such disclosure controls and procedures were operating
effectively as designed as of the date of such evaluation.
Changes in Internal Controls
During the period reported upon, there were no significant changes in the
internal controls of Highlands Bankshares, Inc. pertaining to its
financial reporting and control of its assets or in other factors that could
significantly affect these controls.
22
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K -
(a) Exhibits
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;
amended on December 8, 1997 and incorporated in 1997
Form 10-KSB.
3 (ii) Bylaws of Highlands Bankshares, Inc. as amended
January 14, 2003 are attached.
99.1 Statement of Chief Executive Officer and Financial Officer
Pursuant to 18 U.S.C.ss.1350.
(b) Reports on Form 8-K filed during the three months ended
March 31, 2003.
None
23
Signature
Pursuant to the requirements 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.
/s/ LESLIE A. BARR
---------------------------------
Leslie A. Barr
President
/s/ R. ALAN MILLER
---------------------------------
R. Alan Miller
Finance Officer
Date: May 14, 2003
---------------
24
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Leslie A. Barr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
------------------
/s/ LESLIE A. BARR
------------------
Leslie A. Barr
President
25
CERTIFICATION
OF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Clarence E. Porter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
-----------------
/s/ CLARENCE E. PORTER
----------------------
Clarence E. Porter
Treasurer
26
CERTIFICATION
OF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Alan L. Brill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
------------------
/s/ ALAN L. BRILL
-----------------
Alan L. Brill
Secretary
27
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, R. Alan Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
------------------
/s/ R. ALAN MILLER
------------------
R. Alan Miller
Finance Officer
28
Exhibit 99.1 Statement of Chief Executive Officer and Financial Officer
Pursuant to 18 U.S.C.ss.1350
The undersigned, as the Chief Executive Officer and Chief Financial
Officer, respectively, of Highlands Bankshares Inc., certify that the Quarterly
Report on Form 10-Q for the period ended March 31, 2003, which accompanies this
certification fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934 and the information contained
in the periodic report fairly presents, in all material respects, the financial
condition and results of operations of Highlands Bankshares Inc. at the dates
and for the periods indicated. The foregoing certification is made pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350) and no purchaser
or seller of securities or any other person shall be entitled to rely upon the
foregoing certification for any purpose. The undersigned expressly disclaim any
obligation to update the foregoing certification except as required by law.
/s/ LESLIE A. BARR
-------------------------
Leslie A. Barr
Chief Executive Officer
/s/ R. ALAN MILLER
-------------------------
R. Alan Miller
Finance Officer
Date: May 14, 2003
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Exhibit 3 (ii) BYLAWS OF HIGHLANDS BANKSHARES, INC.
Article I
Stockholders
Section 1. PLACE OF MEETINGS. All meetings of the stockholders shall be
held at the principal office of the corporation at 3 North Main Street, in the
City of Petersburg, County of Grant, State of West Virginia, 26847, or at such
other place as may be designated in writing by the President.
Section 2: VOTING. Stockholders shall be entitled to vote
at meetings, in person or by proxy, appointed by instrument in writing and
subscribed by the stockholder or by his duly authorized attorney, and shall be
entitled to one vote for each share of stock registered in his name on the books
of the corporation.
Section 3. QUORUM. Any number of stockholders holding together a majority
of the stock issued and outstanding, who shall be present in person or
represented by proxy at any meeting duly called, shall constitute a quorum for
the transaction of business.
Section 4. ADJOURNMENT OF MEETINGS. If less than a quorum shall be in
attendance, the meeting shall be adjourned from time to time by a majority vote
of the stockholders present or represented until a quorum shall attend. Any
meeting, at which a quorum is present, may also be adjourned in like manner for
such time or upon such call as may be determined by vote. At any adjourned
meeting, at which a quorum shall attend, any business may be transacted which
might have been transacted if the meeting had been held as originally called.
Section 5. ANNUAL ELECTION OF DIRECTORS. The annual meeting of the
stockholders for the election of directors and the transaction of other
business, shall be held at the office of the corporation at 3 North Main Street,
in the City of Petersburg, County of Grant, State of West Virginia, or at such
other place as may be designated by the President, on the second Tuesday of May
of each year after 2003.
Section 6. SPECIAL MEETINGS - HOW CALLED. Special meetings of the
stockholders may be called by the President, and shall be called upon a request
in writing stating the purposes thereof delivered to the President and signed by
a majority of the directors or by twenty-five percent in interest of the
stockholders, or by resolution and call of the directors.
Section 7. NOTICE OF STOCKHOLDERS' MEETINGS. Written notice stating the
place and time of the meeting and the general nature of the business to be
transacted shall be given by the Secretary to each stockholder at his last known
post office address at least ten days before the meeting and five days before
the meeting in the case of a special meeting. At any annual or other meeting of
the stockholders, action may be taken upon any subject which might be acted upon
at a special meeting called for the purpose, when, in the last mentioned case,
in the notice of such annual or other meeting, the purpose to consider and act
upon a special object is stated.
Section 8. CONSENTS. Any and all notices herein required, including the
time and place of the meeting and the nature of the business to be transacted,
may be waived by written instrument executed by all the stockholders. Further,
any action by the stockholders of the corporation may be taken without a meeting
by the unanimous written consent of all of the stockholders.
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ARTICLE II
Directors
Section 1. FIRST MEETING. The newly elected directors may hold their first
meeting for the purpose of organization and the transaction of business, if a
quorum be present, immediately after the annual meeting of the stockholders, at
such time and place as may be fixed by consent in writing of a quorum of all the
directors.
Section 2. ELECTION OF OFFICERS. At such meeting the directors shall elect
a President, and at their option a Chairman, and one or more Vice-Presidents
from their number, and shall also elect a Secretary and a Treasurer with such
assistants as may be desirable, who need not be directors. Unless sooner
removed, such officers shall hold offices until the next annual election of
officers and until their successors are elected and shall qualify. In case such
officers shall not be elected at such first meeting, they may be chosen at any
subsequent meeting called for the purpose.
Section 3. REGULAR MEETING. Regular meetings of the directors may be held
without notice on the second Tuesday of every month at The Capon Valley Bank
Branch Office, in the City of Moorefield, County of Hardy, State of West
Virginia, or elsewhere as designated by the President.
Section 4. SPECIAL MEETINGS - HOW CALLED - NOTICE. Special meetings of
directors may be called by the President, and shall be called by the Secretary
on the written request of any two directors. Three days notice to each director
shall be required. This notice may be waived by written consent of all the
directors.
Section 5. QUORUM. A majority of the directors shall constitute a
quorum for the transaction of business.
Section 6. PLACE OF MEETING. The directors may hold their meeting at
any office or offices of the corporation, or at any other place as they may
from time to time by resolution determine.
Section 7. GENERAL POWER OF DIRECTORS. The board of directors shall have
the management of the business of the corporation and subject to the
restrictions imposed by law, by the Articles of Incorporation or by the bylaws,
may exercise all the powers of the corporation.
Section 8. CONSENTS. Any and all notices herein required, including the
time and place of the meeting and the nature of the business to be transacted,
may be waived by written instrument executed by all the directors. Further, any
action by the directors of the corporation may be taken without a meeting by the
unanimous written consent of all of the directors.
Section 9. NUMBER The board of directors shall consist of not less than
ten nor more than fifteen directors, with the exact number within such minimum
and maximum to be fixed by the board of directors or the stockholders.
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ARTICLE III
Officers
Section 1. The officers of the corporation shall be a President, at the
option of the directors, a Chairman and one or more Vice Presidents, a Secretary
and a Treasurer. One person may hold the office of Secretary and Treasurer.
Section 2. PRESIDENT. The president shall preside at all meetings of the
directors and stockholders when present, and shall have power to call said
meetings of stockholders and directors for any purpose or purposes, make and
sign contracts in the name and on behalf of the corporation, subject to the
approval of the directors shall have general management and control of the
business and affairs of the corporation.
Section 3. VICE PRESIDENT. The First Vice President, if one be
selected by the board of directors, shall be vested with all the powers and
shall perform all the duties of the President in the absence or disability of
the latter, unless and until the directors shall otherwise determine. He shall
have such power to perform such other duties as shall be prescribed by the
directors. There may be additional Vice Presidents without executive power.
Section 4. SECRETARY. The Secretary shall give or cause to be given notice
of all meetings of stockholders and directors and all other notices required by
law or by these bylaws. He shall record the proceedings of the meetings of the
stockholders and of the directors in a book to be kept for that purpose and
shall perform such other duties as may be assigned to him by the directors or
the President. He shall sign the stock certificates of the corporation along
with the President, and he shall keep a register of the addresses of each
stockholder as furnished to him from time to time over the signature of the
stockholder as required by law, and shall make the proper changes in such
register, retaining and filing his authority for all such entries.
Section 5. TREASURER. The Treasurer shall have the custody of all funds,
securities and evidences of indebtedness. He shall receive and give or cause to
be given all acquaintances for monies paid in on account of the corporation. He
shall pay out of the funds of the corporation and keep full and accurate books
of account; whenever required by the President or the directors, shall render a
financial statement; and shall perform such other duties as may be prescribed by
the President or directors.
ARTICLE IV
Resignations, Filling of Vacancies, Removal of Directors
Section 1. RESIGNATIONS. Any director, member of a committee, or
other offices, may resign at any time. Such resignations shall be made in
writing and the acceptance of the resignation shall not be necessary to make
it effective.
Section 2. FILLING OF VACANCIES. If the office of any director
becomes vacant, the directors in office, except as otherwise provided by law,
may appoint any qualified person to fill such vacancy, who shall hold office
until the next annual meeting of stockholders.
Section 3. REMOVAL. The holders of at least eighty percent (80%) of
the outstanding capital stock shall have the power at any regular or special
meeting to remove any or all of the board of directors and may elect their
successors.
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ARTICLE V
Capital Stock
Section 1. ISSUE OF CERTIFICATES OF STOCK. The President shall cause
to be issued to each stockholder, one or more certificates under the seal of
the corporation, signed by the President and Secretary, certifying the number
of shares owned by the stockholder.
Section 2. TRANSFER OF SHARES. The shares of stock of the corporation
shall be transferable only upon its books by the holders thereof in person or
by their duly authorized attorneys.
Section 3. DIVIDENDS. The directors may declare dividends from
unreserved and unrestricted earned surplus when they deem expedient. Before
declaring any dividends there may be retained out of the accumulated profits
such sum or sums as the directors in their discretion think proper for their
working capital or as a reserve fund to meet contingencies, or for equalizing
dividends or for such other purposes as the directors shall think conductive
to the interest of the corporation.
ARTICLE VI
Bylaws
Section 1. BYLAWS. The stockholders by the affirmative vote of the
holders of a majority of the stock issued and outstanding or the directors by
the affirmative vote of a majority thereof may at any meeting, provided the
substance of the proposed amendments shall have been stated in the notice of
the meeting, amend or alter the bylaws. Bylaws made by the directors may be
altered or repealed by the stockholders.
ARTICLE VII
Fiscal Year
Section 1. FISCAL YEAR. The fiscal year of this corporation shall end
on December 31 of each year.