UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
Commission File No. 0-16761
-----------
HIGHLANDS BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
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). [ ___ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of July 31, 2003: 1,436,874
shares of Common Stock, $5 Par Value.
1
HIGHLANDS BANKSHARES, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Income - Six Months
Ended June 30, 2003 and 2002 2
Unaudited Consolidated Statements of Income - Three Months
Ended June 30, 2003 and 2002 3
Unaudited Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 4
Unaudited Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2003 and 2002 5
Unaudited Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8K 25
SIGNATURES 26
2
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- ----------
Interest Income
Interest and fees on loans $ 8,505 $ 8,556
Interest on federal funds sold 123 96
Interest on time deposits 29 65
Interest and dividends on investment securities
Taxable 468 623
Nontaxable 81 103
---------- ---------
Total Interest Income 9,206 9,443
---------- ---------
Interest Expense
Interest on time deposits over $100,000 941 1,121
Interest on other deposits 2,376 2,863
Interest on borrowed money 108 103
---------- ---------
Total Interest Expense 3,425 4,087
---------- ---------
Net Interest Income 5,781 5,356
Provision for Loan Losses 755 260
---------- ---------
Net Interest Income After Provision
for Loan Losses 5,026 5,096
---------- ---------
Noninterest Income
Service charges 288 273
Other 394 291
---------- ---------
Total Noninterest Income 682 564
---------- ---------
Noninterest Expense
Salaries and employee benefits 2,142 2,066
Equipment and occupancy expense 566 517
Data processing 284 286
Other 936 948
---------- ---------
Total Noninterest Expense 3,928 3,817
---------- ---------
Income Before Income Taxes 1,780 1,843
Provision for Income Taxes 564 581
---------- ---------
Net Income $ 1,216 $ 1,262
========== =========
Per Share Data--*
Net Income $ .85 $ .86
Cash Dividends $ .28 $ .23
Weighted Average Common Shares Outstanding 1,436,874 1,474,458
*--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 STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
(Unaudited)
Three Months Ended
June 30,
2003 2002
---------- ----------
Interest Income
Interest and fees on loans $ 4,280 $ 4,277
Interest on federal funds sold 63 42
Interest on time deposits 15 32
Interest and dividends on investment securities
Taxable 234 304
Nontaxable 38 51
---------- ---------
Total Interest Income 4,630 4,706
---------- ---------
Interest Expense
Interest on time deposits over $100,000 456 541
Interest on other deposits 1,155 1,340
Interest on borrowed money 57 50
---------- ---------
Total Interest Expense 1,668 1,931
---------- ---------
Net Interest Income 2,962 2,775
Provision for Loan Losses 545 140
---------- ---------
Net Interest Income After Provision
for Loan Losses 2,417 2,635
---------- ---------
Noninterest Income
Service charges 150 144
Other income 189 141
---------- ---------
Total Noninterest Income 339 285
---------- ---------
Noninterest Expense
Salaries and employee benefits 1,055 1,017
Equipment and occupancy expense 281 265
Data processing expense 140 141
Other 477 514
---------- ---------
Total Noninterest Expense 1,953 1,937
---------- ---------
Income Before Income Taxes 803 983
Provision for Income Taxes 247 321
---------- ---------
Net Income $ 556 $ 662
========== =========
Per Share Data--*
Net Income $ .39 $ .46
Cash Dividends $ .14 $ .11
Weighted Average Common Shares Outstanding 1,436,874 1,439,970
=
*--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.
4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
2003 2002
-------- --------
ASSETS (Unaudited) (Audited)
Cash and due from banks - noninterest bearing $ 6,982 $ 8,226
Time deposits in other banks 6,536 4,500
Federal funds sold 23,525 14,625
Securities held to maturity (note 2) 1,367 1,369
Securities available for sale (note 3) 30,441 23,496
Other investments (note 4) 892 672
Loans (note 5) 226,062 225,754
Allowance for Loan Losses (note 6) (2,376) (1,793)
Bank premises and equipment 6,724 6,873
Interest receivable 1,768 1,821
Investments in insurance contracts (note 7) 5,435 5,338
Other assets 1,589 1,466
------- -------
Total Assets $308,945 $292,347
======= =======
LIABILITIES
Deposits:
Noninterest bearing demand deposits $ 37,048 $ 31,785
Interest bearing
Money market and checking 21,329 20,936
Money market savings 17,405 16,996
Savings 30,959 29,503
Time deposits over $100,000 49,067 45,392
All other time deposits 116,333 112,899
------- -------
Total Deposits 272,141 257,511
Borrowed money 4,963 4,030
Accrued expenses and other liabilities 2,151 1,890
------- -------
Total Liabilities 279,255 263,431
------- -------
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 3,000,000 shares
authorized, 1,436,874 outstanding) 7,184 7,184
Surplus 1,662 1,662
Retained earnings 20,664 19,850
Accumulated other comprehensive income 180 220
------- -------
Total Stockholders' Equity 29,690 28,916
------- -------
Total Liabilities and Stockholders' Equity $308,945 $292,347
======= =======
The accompanying notes are an integral part of these statements.
5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
(Unaudited)
Accumulated
Other
Common Treasury Retained Comprehensive
Stock Surplus Stock Earnings income Total
Balances, December 31,
2002 $7,184 $ 1,662 $ 0 $19,850 $ 220 $28,916
Comprehensive
Income
Net income 1,216 1,216
Net change in
unrealized
appreciation on
investment
securities
available for
sale, net of
taxes (40) (40)
----- ------ ---- ------ ------- ------
Total Comprehensive
Income 1,176
Dividends paid (402) (402)
----- ------ ---- ------- ------ ------
Balances, June 30,
2003 $7,184 $ 1,662 $ 0 $20,664 $ 180 $29,690
===== ====== ==== ====== ====== ======
Accumulated
Other
Common Treasury Retained Comprehensive
Stock Surplus Stock Earnings Income Total
Balance, December 31,
2001 $ 2,734 $ 1,662 $(993) $24,624 $ 283 $28,310
Comprehensive
Income
Net Income 1,262 1,262
Net change in
unrealized
appreciation on
investment
securities
available for
sale, net of
taxes 34 34
------ ------ ---- ---- ----- -----
Total Comprehensive
Income 1,296
Treasury stock
purchased (1,217) (1,217)
Dividends paid (364) (364)
------ ------ ----- ----- ----- -------
Balances, June 30,
2002 $ 2,734 $ 1,662 $(2,210) $25,522 $ 317 $28,025
====== ====== ======= ====== ===== ======
The accompanying notes are an integral part of these statements.
6
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- --------
Cash Flows from Operating Activities:
Net income $ 1,216 $ 1,262
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 297 264
Net securities amortization 226 148
Provision for loan losses 755 260
Income from insurance investments (97) (88)
Decrease (Increase) in interest receivable 53 (108)
Increase in other assets (123) (616)
Increase in accrued expenses 262 423
------- ------
Net Cash Provided by Operating Activities 2,589 1,545
------- ------
Cash Flows from Investing Activities:
Net change in time deposits in other banks (2,036) 548
Net change in federal funds sold (8,900) 7,495
Proceeds from maturities of securities
available for sale 8,619 4,481
Proceeds from maturities of securities
held to maturity 2 31
Purchase of securities available for sale (15,831) (3,376)
Purchase of other investments (220) (67)
Net change in loans (480) (10,659)
Purchase of property and equipment (148) (140)
-------- ------
Net Cash Consumed by Investing Activities (18,994) (1,687)
-------- ------
Cash Flows from Financing Activities:
Net change in time deposits 7,109 (8,769)
Net change in other deposits 7,521 10,791
Dividends paid in cash (402) (364)
Purchase of treasury stock (1,217)
Additional borrowed money 1,200
Repayment of borrowed money (267) (247)
--------- --------
Net Cash Provided by Financing Activities 15,161 194
------- ------
Net Increase (Decrease) in Cash and Cash Equivalents (1,244) 52
Cash and Cash Equivalents, Beginning of Period 8,226 6,492
------- ------
Cash and Cash Equivalents, End of Period $ 6,982 $ 6,544
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 608 $ 430
Interest 3,345 4,052
The accompanying notes are an integral part of these statements.
7
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 necessary to present
fairly the financial position as of June 30, 2003 and the results of
operations for the three month periods and six month periods ended
June 30, 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 fair value of securities held to maturity as
of June 30, 2003 and December 31, 2002, are as follows (in thousands):
2003 2002
---- ----
Amortized Fair Amortized Fair
Cost Value Cost Value
Mortgage-backed
securities $ 3 $ 3 $ 4 $ 4
Obligations of states and
political subdivisions 1,364 1,463 1,365 1,447
------ ------ ----- ------
Total $ 1,367 $ 1,466 $1,369 $ 1,451
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of June 30, 2003 and December 31, 2002 are as follows (in
thousands):
2003 2002
---- ----
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of US
Government corporations
and agencies $15,820 $15,968 $8,844 $ 8,961
Mortgage-backed securities 8,175 8,306 5,410 5,582
Obligations of states and
political subdivisions 3,773 3,867 4,238 4,350
Other investments 2,273 2,300 4,540 4,603
------ ------ ----- ------
Total $30,041 $30,441 $23,032 $23,496
====== ====== ====== ======
8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS
Other investments totaling $ 892,000 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 June 30, 2003 and December 31,
2002, is as follows (in thousands):
2003 2002
---- ----
Commercial $ 45,814 $ 47,089
Real estate - construction 6,412 6,813
- mortgages 125,309 121,558
Consumer installment 48,564 50,351
------- -------
Total 226,099 225,811
Unearned interest (37) (57)
-------- --------
Net loans outstanding $226,062 $225,754
======= =======
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
six months ended June 30, 2003 and 2002, follows:
2003 2002
---- ----
Balance, beginning of period $ 1,793 $ 1,603
Provisions charged to operating expenses 755 260
Loan recoveries 121 96
Loan charge-offs (293) (236)
-------- -------
Balance, end of period $ 2,376 $ 1,723
======= =======
NOTE 7 INVESTMENT IN INSURANCE CONTRACTS:
Investment in insurance contracts consist 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
$5,435,000 at June 30, 2003 and $5,338,000 at December 31, 2002.
9
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CAPITAL STOCK TRANSACTIONS:
In separate transactions during the second quarter of 2002, the
Company repurchased stock from two unrelated parties. 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.
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 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 was 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.
10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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.
Overview
Year to Date
The Company's year to date net income was $1,216,000, a decrease of 3.65%
compared to 2002. Earnings per weighted average share were $.85 for 2003
compared to $.86 per share for 2002. The Company's annualized return on average
equity was 8.25% in 2003 compared to 9.03% for 2002 and 9.17% for 2001. Return
on average assets was .80% for 2003, .92% for 2002 and .94% for 2001.
Due to regulatory guidance and the recognition by Management of a need for
additional allowance for loan losses because of increased delinquencies and the
threat of continued economic decline, the provision for loan losses charged
against income during the first half of 2003 was $755,000, up from $260,000
during the first half of 2002. Net interest margin increased 7.94% as average
balances of earning assets grew 10.76% compared to average balances in the first
six months of 2002 while average balances of interest bearing liabilities grew
4.93% compared to 2002. This net increase in earning assets to interest bearing
liabilities was offset in part by average rates on earning assets falling 89
basis points while rates paid on interest bearing deposits declined by 77 basis
points. Non-interest income increased 20.92% due to increases in trust fees and
returns earned by HBI Life Insurance Company. Non-interest expense increased
2.91% as data processing and other expense remained flat, salary expense grew by
a modest 3.63% and equipment and occupancy expense grew 9.48%.
Quarter Ending June 30
Net income for the quarter ending June 30, 2003 decreased 16.01% to $556,000
compared to 2002 income of $662,000. Earnings per share for the second quarter
of 2003 were $.39 versus $.46 in 2002. Provisions for loan losses taken during
the second quarter of 2003 were $545,000 compared to $140,000 during the same
period in 2002. Net interest income increased 6.77%, while non-interest income
increased 18.95% and non-interest expenses remained relatively unchanged with a
..88% increase.
11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income
Year to Date
The Company's net yield on interest earning assets on a tax equivalent basis
was 4.07% through June 30, 2003 compared to 4.19% for the first six months of
2002.
Average loan volumes during this period were 7.51% higher than in 2002 due
to stable overall loan balances through the first six months of 2003 coupled
with strong loan growth throughout the last six months of 2002. Average rates on
loans continue to drop due to continued rate cuts by the Federal Reserve Bank
("The Fed"). Average yields on loans were 61 basis points lower during the first
six months of 2003 as compared to the first six months of 2002.
Deposit volume growth continues to remain strong. Average balances of
interest bearing deposits grew 11.71% from 2002, with the largest increases seen
in money market checking accounts (16.47%) and savings accounts
(14.97%). Average rates paid on interest bearing deposits fell 96 basis points
during the first six months of 2003 when compared to the first six months of
2002.
Recent increases in deposits volumes, coupled with slowing loan growth in
2003, contributed to average balances of Fed Funds sold being 86.40% higher
during the first six months of 2003 compared to the same period a year ago. This
increase in balances was offset by a 52 basis point reduction in yields on Fed
Funds sold, with a net increase of 28.13% in interest earned.
During 2002, loan growth was funded in part by reductions in balances of
securities and Fed Funds sold. As loan growth has now stabilized while deposit
growth remains strong, balances of securities have been replenished. Average
balances of securities during the first six months of 2003 were 5.31% higher
than during the first six months of 2002. However, drastically reduced yields on
investment opportunities contributed to average yields on taxable securities
falling 162 basis points. Average yields on non-taxable rose 32 basis points.
As business needs dictate, the Company will from time to time borrow amounts
from the FHLB at fixed rates of interest and loan these monies to customers on a
fixed rate basis. Capon Valley Bank also borrowed from the FHLB at a fixed rate
to fund renovations to its main office in Wardensville, WV. Average volumes of
borrowed money fell slightly (1.50%) during the six month period ended June 30,
2003 as compared the six months ended 2002. Balances fell only slightly as
repayment of the debt was offset by a $1.2 million increase in borrowing during
May of 2003. Average rates paid on these borrowings increased slightly from 2002
to 2003, due in large part to the transition from a variable rate debt facility
to a fixed rate on the borrowing related to Capon Valley Bank's renovation.
Quarter Ending June 30
The Company's net interest income on a tax equivalent basis of $2,985,000
was 4.12% of average earning assets for the quarter ending June 30, 2003
compared to net interest income of $2,805,000 (4.31% of average earning assets)
for the same period in 2002.
Income from loans grew slightly as average loan balance growth of 5.91% was
offset by a 44 basis point decrease in yields. Balances of Fed Funds sold
increased 121.18%. Average balances of deposits increased 11.71% as compared to
2002 and this increase, coupled with the lesser increase in loan growth,
contributed to the increase in average balances of Fed Funds sold, a 15.10%
increase in average balances of securities investments and a 13.36% increase in
interest bearing deposits in other banks. The growth in balances of Fed Funds
sold was offset in part by a 55 basis point drop in yields during the second
quarter of 2003 as compared to the second quarter of 2002, with a net result of
a 50.00% increase in earnings on Fed Funds sold. Yields on taxable securities
fell 185 basis points and yields on non-taxable securities rose 21 basis points
when compared to 2002.
12
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Quarter Ending June 30 (Continued)
Interest costs on deposits continue to fall. During the second quarter of
2003, compared to the second quarter of 2002, average rates on interest bearing
demand accounts fell 32 basis points, average rates on savings accounts fell 47
basis points and average rates on time deposits fell 115 basis points. As long
term, high rate CDs continue to mature, Management expects this trend of
reduction in average rates paid on time deposits to continue in the short term.
A complete yield analysis is shown as Table I on pages 22 & 23.
Noninterest Income
Year to Date
Noninterest income for the first six months of 2003 rose $118,000 from the
same period in 2002. Service charge income increased 5.49%, as average volumes
of deposit accounts and other banking services grew. Other operating income
increased by 35.40% largely because of an increase of $13,000 in trust fees and
an increase of $76,000 in insurance income.
Quarter Ending June 30
Noninterest interest income for the quarter ending June 30, 2003
increased 18.95%. Service charge income increased 4.17% and other operating
income increased 34.04% largely due to increases in trust and insurance income.
Noninterest Expenses
Year to Date
Non-interest expense increased 2.91% in 2003. Equipment and occupancy
expense increased 9.48%. largely related to recent efforts at upgrading internal
information systems. Data processing expense and other
miscellaneous operating expenses were relatively flat (.70% and 1.27%
declines respectively) as the rapid growth in loans and deposits experienced
during recent years began to stabilize and additional costs associated with this
growth also stabilized. Also, rising costs seen in recent years from the
addition of new banking locations were not repeated. Salary and related expense
increased 3.64% as a 2.73% reduction in full time equivalent employees was
offset by a 6.54% increase in cost per employee due to annual merit increases.
Quarter Ending June 30
Non-interest expenses increased .83% for the quarter ending June 30, 2003
compared to the quarter ending June 30, 2002. Salaries and benefit costs
increased 3.74% compared to 2002 while equipment expense increased 6.04%. Data
processing expense declined slightly (.71%) and miscellaneous operating expense
fell 7.20% compared to the second quarter of 2002.
13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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, Hampshire,
and Pendleton counties in West Virginia and Frederick County in 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.
Growth in loan balances has been flat during the first half of 2003, with
total loan balances growing .14% since December 31, 2002. Local economic
activity has slowed, and refinancing and home purchase activity spurred by the
low interest rates has declined somewhat from 2002 levels. Balances of mortgage
loans and real estate construction loans rose 2.61% since December 31, 2002
compared to a growth of 6.98% during the first six months of 2002. This increase
was offset by declines in both commercial loans (2.71%) and consumer lending
(3.55%). The loan to deposit ratio was 83.07% at June 30, 2003 compared to
87.67% at December 31, 2002. Loan demand is expected to remain satisfactory in
the near future barring any significant declines in the local or national
economies.
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.
The following table summarizes the company's non-performing loans for the
periods ended June 30, 2003 and December 31, 2002.
June 30 December 31,
(in thousands) 2003 2002
---- ----
Non-accrual loans $ 1,224 $ 299
Restructured Loans 646 662
Loans past due 90 days or more
and still accruing interest 2,098 1,918
Total $ 3,968 $ 2,879
======== ========
14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Asset Quality and Risk Elements (Continued)
The substantial increase in non-accrual loans is due in large part to the
moving of 2 large commercial real estate loans to non-accrual status. Since June
30, the real estate collateralizing one of these loans has been foreclosed and
sold with nearly full recovery of the loan amount. Loans 90 days and more
delinquent have increased significantly during 2003 as economic conditions have
deteriorated. It is Management's belief that as economic conditions are
projected to improve during the coming months, that a large portion of these
loans remain collectable in full. However, Management will continue to monitor
these loans closely to prevent the promulgation of significant loan losses.
Real estate acquired through foreclosure was $188,000 at June 30, 2003 and
$517,000 at December 31, 2002. All foreclosed property held 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 June 30, 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
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.
15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
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. 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.
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 1.05% at June 30, 2003 compared to .85% at March 31, 2003 and
..79% at December 31, 2002. The allowance for loan losses of $2,376,000 at June
30, 2003, was up $583,000 from its level at December 31, 2002 and up $460,000
from its level at March 31, 2003.
As economic conditions continue to be stagnant, delinquencies have
continued to rise and loans which have not previously been classified as
impaired, doubtful, substandard, or special mention in recent periods have been
moved into one of these categories. This increase in delinquencies, coupled with
a request by bank examiners of Capon Valley Bank to increase that Bank's
allowance for loan loss led to a $545,000 provision charged against income in
the second quarter of 2003.
In early 2003, during the course of routine examination of the Company's
two subsidiary banks, The Grant County Bank and Capon Valley Bank, examiners
identified certain supervisory issues. Results of these regulatory examinations
are not published or publicly available. During these examinations,
one of the regulatory agencies which exerts supervisory control on the Company's
subsidiary banks indicated that a requirement for an increased allowance for
loan losses would be directed to Capon Valley Bank. In prior 10Q and 10K
filings, the Company indicated that Management of the Bank did not agree with
the regulator's conclusions, that the regulatory directive did not meet the
requirements of GAAP, and was in the process of appealing those conclusions.
During recent months, a directive for an increase in the allowance,
significantly reduced from earlier indications, was presented to the Bank. This
reduced amount, coupled with a continued rise in delinquencies and loan
impairments, prompted a Management decision to comply with the reduced
requirement and to increase the allowance for loan losses during the second
quarter of 2003.
16
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
Because of its large impact on the local economy, 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 June of 2003, Pilgrim's Pride Corporation announced
the purchase of certain divisions of ConAgra Foods, Inc. including processing
facilities operated by ConAgra in Hardy County. Management anticipates that this
purchase will have no adverse impact on operations of either subsidiary bank or
on the operations of the non-bank subsidiaries. In the fall of 2002, Perdue
Farms, Inc. ceased operations at its 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 12.20% in May of 2003,
the last month for which data are available. 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.
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 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.
An analysis of the loan loss allowance for the six month periods ended June
30, 2003 and June 30, 2002 and for the quarters ended June 30, 2003 and June 30,
2002 is set forth in the following table (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
------------------ --------------------
Allowance for loan losses 2003 2002 2003 2002
------------------------- ---- ---- ---- ----
Balance, beginning of period $ 1,916 $ 1,623 $ 1,793 $ 1,603
Net charge-offs (recoveries)
Charge-offs (143) (114) (293) (236)
Recoveries 58 74 121 96
------ ------ ------ ------
Total net charge-offs (85) (40) (172) (140)
Provision for loan losses 545 140 755 260
------ ------ ------ ------
Balance, End of Period $ 2,376 $ 1,723 $ 2,376 $ 1,723
====== ====== ====== ======
17
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
An analysis of the components of net charge-offs for the six month periods
ended June 30, 2003 and June 30, 2002 and for the quarters ended June 30, 2003
and June 30, 2002 is set forth in the following table (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
------------------ --------------------
2003 2002 2003 2002
---- ---- ---- ----
Components of net charge-offs:
Real estate $ (26) $ 22 $ (33) $ 13
Commercial 16 (2) 11 (18)
Installment (75) (60) (150) (135)
------- ------ ------- ------
Total $ (85) $ (40) $ (172) $ (140)
======= ====== ======= ======
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 June
30, 2003 and December 31, 2002:
June 30, 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 $ 693 29% 20% $ 543 30% 21%
Mortgage 809 34% 59% 504 28% 57%
Consumer 734 31% 21% 652 37% 22%
Unallocated 140 6% % 94 5% %
----- ---- --- ----- --- ---
Totals $2,376 100% 100% $1,793 100% 100%
===== ==== === ===== === ===
18
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Securities
The Company's securities portfolio serves numerous purposes. Portions of
the portfolio may secure certain public and trust deposits. The remaining
portions are held as investments or used to assist the Company in liquidity and
asset/liability management. Total securities at June 30, 2003 were $32,700,000
compared to $25,537,000 at December 31, 2002. Securities as a percentage of
total assets were 10.58% at June 30, 2002 compared to 8.74% at December 31,
2002.
During 2002, high loan demand caused the Company to fund loan growth
through reductions in balances of fed funds sold and securities. As a result,
securities balances dropped dramatically during 2002. During the first six
months 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 to participate 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 are reflected as changes
in stockholders' equity, net of the deferred tax effect. As of June 30, 2003,
the fair value of the securities available for sale exceeded their cost by
$400,000 ($252,000 after tax considerations).
Deposits
The Company's main source of funds remains deposits received from
individuals, governmental entities and businesses located within the
Company's service area.
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 appeared 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. Total deposits increased 5.68%
between December 31, 2002 and June 30, 2003.
Customers appear to be reluctant to commit to long-term, fixed rates on
certificates when rates are at historical lows and instead are placing their
deposits in accounts that are highly liquid and will allow them to respond
quickly when rates increase. Accordingly, non-interest demand
deposit balances grew 16.56% from December 31, 2002 to June 30, 2003, while
interest bearing transaction account and savings account balances increased
3.35% and time deposit balances increased 4.49%. Time deposits continue to make
up the bulk of deposit balances as time deposits equaled 60.78% of total
deposits at June 30, 2003 and 61.47% of total deposits at December 31, 2002.
19
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 June 30, 2003, the Company's total risk based capital
ratio was 14.52% which is far above the regulatory minimum of 8.0%. The leverage
ratio of total capital to total assets was 9.65% at June 30, 2003.
Dividends
At its regular meeting on August 12, 2003, the Company's Board of Directors
declared a dividend of 14 cents per share payable on September 30, 2003 to
shareholders of record as of September 2, 2003.
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 liquidity exposure. 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 insignificant. In the past,
growth in deposits has been sufficient to fund the net increase in loans and
investment securities
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 June 30, 2003 the Company had a negative gap position through the first
three months, shifting to a positive gap by the end of one year. With the
largest amount of interest sensitive assets and liabilities repricing within one
year, the Company believes it is in an excellent position to respond to rapid
market rate changes quickly. 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 actions to reposition it when necessary.
20
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Regulatory Matters
On August 13, 2003, a Memorandum of Understanding between the Board of
Directors of Capon Valley Bank, the Federal Reserve Bank of Richmond and The
West Virginia Division of Banking was presented to the Directors of Capon Valley
Bank by representatives of the Federal Reserve Bank of Richmond. This Memorandum
addressed issues cited by Federal Reserve examiners in their January 2003
examination. The Memorandum requires that certain management functions,
including selected credit functions and internal control
procedures, be improved within time frames set by the Federal Reserve Bank of
Richmond. The Memorandum also requires that progress reports be filed on a
scheduled basis with the Federal Reserve Bank of Richmond by the Management and
Board of Capon Valley Bank and that Capon Valley Bank increase it's Allowance
for Loan Losses (previously discussed under the Allowance for Loan Loss Section
of Management Discussion and Analysis).
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).
21
Table 1
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Interest Income
Loans 1, 3
Commercial5 $ 10,424 $ 475 9.11% $ 11,568 $ 461 7.97%
Consumer 49,016 2,594 10.58% 54,207 3,147 11.61%
Real estate5 166,289 5,436 6.54% 144,180 4,948 6.86%
------- ----- ----- ------- ----- ------
Total 225,729 8,505 7.54% 209,955 8,556 8.15%
Federal funds
sold 21,551 123 1.14% 11,562 96 1.66%
Interest bearing
deposits 5,694 29 1.02% 5,324 65 2.44%
Investments
Taxable 4 28,920 468 3.24% 25,756 623 4.84%
Tax exempt 2,4 4,202 128 6.09% 5,695 163 5.77%
------ ----- ---- ------- ----- -----
Total Earning
Assets 286,096 9,253 6.47% 258,292 9,503 7.36%
------- ----- ----- ------- ----- -----
Interest Expense
Money markets 21,430 89 .83% 18,399 106 1.15%
Savings 47,798 240 1.00% 41,575 305 1.47%
Time deposits 165,640 2,988 3.61% 150,276 3,573 4.76%
Other borrowed
money 4,280 108 5.05% 4,344 103 4.74%
------ ----- ---- ------- ----- -----
Total Interest
Bearing
Liabilities 239,148 3,425 2.86% 214,594 4,087 3.81%
------- ------ ---- ------- ----- ----
Net Interest Income $ 5,828 $5,416
====== =====
Net Yield on
Interest Earning
Assets 4.07% 4.19%
==== ====
1 Interest income on loans includes loan fees.
2 On a taxable equivalent basis based on a tax rate of 37%.
3 Average Balances include non-accrual loans
4 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
5 Loans classified as Commercial loans in this analysis are loans for
commercial purposes not secured by real estate. Loans for commercial
purposes and secured by real estate may be classified as Commercial
loans elsewhere in this document.
22
Table I (Continued)
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Interest Income
Loans 1, 3
Commercial5 $ 10,895 $ 255 9.36% $ 11,708 $ 226 7.72%
Consumer 48,607 1,181 9.72% 53,837 1,578 11.72%
Real estate5 167,254 2,844 6.80% 148,558 2,473 6.67%
------- ----- ---- ------- ------ ------
Total 226,756 4,280 7.55% 214,103 4,277 7.99%
Federal funds
sold 21,625 63 1.17% 9,777 42 1.72%
Interest bearing
deposits 6,008 14 .93% 5,300 32 2.42%
Investments
Taxable 4 31,361 234 2.98% 25,104 304 4.84%
Tax exempt 2,4 4,242 61 5.75% 5,828 81 5.56%
------- ----- ---- ------- ----- -----
Total Earning
Assets 289,992 4,652 6.42% 260,112 4,736 7.28%
------- ------ ---- ------- ------ -----
Interest Expense
Money markets 21,759 41 .75% 19,767 56 1.14%
Savings 48,816 114 .93% 43,087 160 1.48%
Time deposits 165,825 1,456 3.51% 146,032 1,665 4.56%
Other borrowed
money 4,614 57 4.94% 4,221 50 4.74%
------- ----- ---- ------- ----- -----
Total Interest
Bearing
Liabilities 241,014 1,668 2.77% 213,107 1,931 3.62%
------- ------ ----- ------- ------ -----
Net Interest
Income $ 2,985 $ 2,805
====== ======
Net Yield on
Interest Earning
Assets 4.12% 4.31%
==== =====
1 Interest income on loans includes loan fees.
2 On a taxable equivalent basis based on a tax rate of 37%.
3 Average Balances include non-accrual loans
4 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
5 Loans classified as Commercial loans in this analysis are loans for
commercial purposes not secured by real estate. Loans for commercial
purposes and secured by real estate may be classified as Commercial loans
elsewhere in this document.
23
Table II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 2003
(In Thousands of Dollars)
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or no
Days Days Years Years Maturity Total
EARNING ASSETS
Loans $38,566 $ 99,352 $61,619 $11,882 $14,643 $226,062
Fed funds sold 23,525 23,525
Securities 10,029 11,690 7,316 726 2,939 32,700
Time deposits in
other banks 6,336 200 6,536
------ ------ ----- ----- ----- -------
Total 78,456 111,242 68,935 12,608 17,582 288,823
------ ------- ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Transaction
accounts 21,329 21,329
Money market
savings 17,405 17,405
Savings accounts 30,959 30,959
Time deposits more
than $100,000 6,222 23,003 12,096 7,746 49,067
Time deposits less
than $100,000 21,229 53,077 30,805 11,222 116,333
Other borrowed money 142 425 1,134 1,134 2,128 4,963
------ ------ ------ -------- ------- -------
Total 97,286 76,505 44,035 20,102 2,128 240,056
------ ------ ------ ------ ----- -------
Rate sensitivity GAP (18,830) 34,737 24,900 (7,494) 15,454
Cumulative GAP (18,830) 15,907 40,807 33,313 48,767
Ratio of cumulative
interest sensitive
assets to cumulative
interest sensitive
liabilities 80.65% 109.15% 118.73% 114.00% 120.32%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
24
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4 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. 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.
25
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 -
On April 8, 2003, the stockholders held their annual meeting. The
following items were approved by the shareholders by the required
majority:
1) Election of the Board of Directors as proposed in the proxy material
without any additions or exceptions.
Thomas B. McNeill, Sr. 948,290 For 20,597 Against
Clarence E. Porter 964,480 For 4,407 Against
L. Keith Wolfe 965,620 For 3,624 Against
Steven C. Judy 965,380 For 3,507 Against
2) Ratification of S. B. Hoover & Company, L.L.P. as auditors for the
year ending December 31, 2003; 965,200 For, 2,607 Against, 1,080
Abstain
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.
3 (ii) Bylaws of Highlands Bankshares, Inc. are incorporated by reference to
Exhibit 3(ii) to Highland Bankshares, Inc.'s Form 10-Q filed May 15,
2003.
31.1 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).
31.2 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).
31.3 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).
31.4 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).
32.1 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 June 30,
2003--None
26
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: August 13, 2003