UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Pursuant to 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, 2004
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
(Address of Principal Executive Offices, Including Zip Code)
(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). Yes No X
---- ----
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, 2004: 1,436,874
shares of Common Stock, $5 Par Value
1
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Income - Six Months
Ended June 30, 2004 and 2003 2
Unaudited Consolidated Statements of Income - Three Months
Ended June 30, 2004 and 2003 3
Unaudited Consolidated Balance Sheet - June 30, 2004 and
Audited Consolidated Balance Sheet--December 31, 2003 4
Unaudited Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2004 and 2003 5
Unaudited Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8K 24
SIGNATURES 25
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,
2004 2003
Interest Income
Interest and fees on loans $ 8,228 $ 8,505
Interest on federal funds sold 83 123
Interest on time deposits 8 29
Interest and dividends on investment securities 411 549
------- ------
Total Interest Income 8,730 9,206
------- ------
Interest Expense
Interest on deposits 2,281 3,317
Interest on borrowed money 128 108
------- ------
Total Interest Expense 2,409 3,425
------- ------
Net Interest Income 6,321 5,781
Provision for Loan Losses 405 755
------- ------
Net Interest Income After Provision for Loan Losses 5,916 5,026
------- ------
Noninterest Income
Service charges 382 288
Other 362 394
------- ------
Total Noninterest Income 744 682
------- ------
Noninterest Expense
Salaries and employee benefits 2,342 2,142
Equipment and occupancy expense 591 566
Data processing 344 284
Legal and professional fees 180 115
Directors fees 179 131
Other 754 690
------- ------
Total Noninterest Expense 4,390 3,928
------- ------
Income Before Income Taxes 2,270 1,780
Provision for Income Taxes 761 564
------- ------
Net Income $ 1,509 $ 1,216
======= ======
Per Share Data
Net Income $ 1.05 $ .85
Cash Dividends $ .30 $ .28
Weighted Average Common Shares Outstanding 1,436,874 1,436,874
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,
2004 2003
Interest Income
Interest and fees on loans $ 4,157 $ 4,280
Interest on federal funds sold 41 63
Interest on time deposits 4 15
Interest and dividends on investment securities 197 272
------- ------
Total Interest Income 4,399 4,630
------- ------
Interest Expense
Interest on deposits 1,094 1,611
Interest on borrowed money 66 57
------- ------
Total Interest Expense 1,160 1,668
------- ------
Net Interest Income 3,239 2,962
Provision for Loan Losses 210 545
------- ------
Net Interest Income After Provision for Loan Losses 3,029 2,417
------- ------
Noninterest Income
Service charges 214 150
Other income 196 189
------- ------
Total Noninterest Income 410 339
------- ------
Noninterest Expense
Salaries and employee benefits 1,187 1,055
Equipment and occupancy expense 304 281
Data processing expense 167 140
Legal and professional fees 108 65
Directors Fees 92 72
Other 368 340
------- ------
Total Noninterest Expense 2,226 1,953
------- ------
Income Before Income Taxes 1,213 803
Provision for Income Taxes 416 247
------- ------
Net Income $ 797 $ 556
======= ======
Per Share Data
Net Income $ .55 $ .39
Cash Dividends $ .15 $ .14
Weighted Average Common Shares Outstanding 1,436,874 1,436,874
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,
2004 2003
(unaudited) (audited)
ASSETS
Cash and due from banks - noninterest bearing $ 6,821 $ 7,214
Time deposits in other banks 1,317 1,187
Federal funds sold 15,653 16,718
Securities held to maturity (note 2) 1,364 1,366
Securities available for sale (note 2) 27,932 32,631
Other investments (note 3) 963 933
Loans (note 4) 233,431 226,635
Allowance for loan losses (note 5) (2,338) (2,463)
Bank premises and equipment 7,017 7,210
Interest receivable 1,551 1,718
Investments in insurance contracts (note 6) 5,659 5,559
Other assets 2,172 2,460
------- -------
Total Assets $301,542 $301,168
======= =======
LIABILITIES
Deposits:
Noninterest bearing demand deposits $ 37,189 $ 32,936
Interest bearing
Money market and checking 24,099 22,958
Money market savings 19,903 16,953
Savings 35,469 32,187
Time deposits (note 7) 144,954 157,651
------- -------
Total Deposits 261,614 262,685
Borrowed money 6,091 5,295
Accrued expenses and other liabilities 3,383 3,639
------- -------
Total Liabilities 271,088 271,619
------- -------
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 3,000,000 shares
authorized) 7,184 7,184
Surplus 1,662 1,662
Retained earnings 21,805 20,727
Accumulated other comprehensive loss (197) (24)
-------- --------
Total Stockholders' Equity 30,454 29,549
------- -------
Total Liabilities and Stockholders' Equity $301,542 $301,168
======= =======
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
Comprehensive
Common Retained Income
Stock Surplus Earnings (Loss) Total
------- -------- ------- ---------- -----
Balances, December 31, 2003 $ 7,184 $ 1,662 $ 20,727 $ (24) $29,549
Comprehensive Income
Net income 1,509 1,509
Net change in unrealized
depreciation on investment
securities available for sale,
net of taxes (173) (173)
------
Total Comprehensive Income 1,336
Dividends paid (431) (431)
----- ----- ------ ----- ------
Balances, June 30, 2004 $ 7,184 $ 1,662 $ 21,805 $ (197) $30,454
===== ===== ====== ===== ======
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
------- ------- ------- ------------ ----
Balances, December 31, 2002 $ 7,184 $ 1,662 $ 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 $ 20,664 $ 180 $29,690
===== ===== ====== ===== ======
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,
2004 2003
Cash Flows from Operating Activities:
Net income $ 1,509 $ 1,216
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 335 297
Net securities amortization 267 226
Provision for loan losses 405 755
Income from insurance investments (100) (97)
Decrease in interest receivable 167 53
Increase (decrease) in other assets 289 (123)
Increase (decrease) in accrued expenses (255) 262
-------- ------
Net Cash Provided by Operating Activities 2,617 2,589
------- ------
Cash Flows from Investing Activities:
Net change in time deposits in other banks (129) (2,036)
Net change in federal funds sold 1,065 (8,900)
Proceeds from maturities of securities
available for sale 9,432 8,619
Proceeds from maturities of securities held
to maturity 1 2
Purchase of securities available for sale (5,172) (15,831)
Purchase of other investments (30) (220)
Net change in loans (7,326) (480)
Purchase of property and equipment (144) (148)
-------- ------
Net Cash Consumed by Investing Activities (2,303) (18,994)
-------- -------
Cash Flows from Financing Activities:
Net change in time deposits (12,698) 7,109
Net change in other deposits 11,626 7,521
Dividends paid in cash (431) (402)
Additional borrowed money 1,000 1,200
Repayment of borrowed money (204) (267)
--------- --------
Net Cash Provided by (Used in) Financing Activities (707) 15,161
-------- ------
Net Increase (Decrease) in Cash and Cash Equivalents (393) (1,244)
Cash and Cash Equivalents, Beginning of Period 7,214 8,226
------- ------
Cash and Cash Equivalents, End of Period $ 6,821 $ 6,982
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 519 $ 608
Interest 2,492 3,345
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, 2004 and the results of
operations for the three month and six month periods ended June 30,
2004 and 2003.
The notes included herein should be read in conjunction with the notes
to financial statements included in the 2003 annual report on Form
10-K.
NOTE 2 SECURITIES:
The amortized cost and market value of securities held to maturity as
of June 30, 2004 and December 31, 2003, are as follows (in thousands):
2004 2003
---- ----
Amortized Market Amortized Market
Cost Value Cost Value
Mortgage-backed
securities $ 1 $ 1 $ 2 $ 2
Obligations of states and
political subdivisions 1,363 1,407 1,364 1,435
------ ------ ----- ------
Total $ 1,364 $ 1,408 $1,366 $ 1,437
====== ====== ===== ======
The amortized cost and fair value of securities available for sale
as of June 30, 2004 and December 31, 2003 are as follows (in
thousands):
2004 2003
---- ----
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities
and obligations of
US Government
corporations and
agencies $20,411 $20,330 $23,132 $23,240
Mortgage-backed
securities 5,675 5,699 6,686 6,758
Obligations of states
and political
subdivisions 1,870 1,876 2,567 2,604
Other investments 32 27 32 29
------ ------ ----- ------
Total $27,988 $27,932 $32,417 $32,631
====== ====== ====== ======
8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SECURITIES (continued):
Taxable and non-taxable interest and dividends on investment
securities for the three month periods ended June 30, 2004 and 2003
and for the six month periods ended June 30, 2004 and 2003 are as
follows (in thousands):
Six Months Ended June 30, Three Months Ended June 30,
2004 2003 2004 2003
---- ----- ----- ------
Taxable $ 345 $ 468 $ 165 $ 234
Non-taxable 66 81 32 38
----- ------ ------ ------
Total $ 411 $ 549 $ 197 $ 272
===== ===== ===== =====
NOTE 3 OTHER INVESTMENTS:
Other investments totaling $ 963,000 include investments in the
Federal Home Loan Bank and other governmental entities whose
transferability is restricted.
NOTE 4 LOANS:
A summary of loans outstanding as of June 30, 2004 and December 31,
2003 is as follows (in thousands):
2004 2003
Commercial $ 47,000 $ 42,911
Real estate - construction 6,270 7,552
- mortgages 134,465 129,670
Consumer 45,696 46,502
------- -------
Net loans outstanding $233,431 $226,635
======= =======
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
six months ended June 30, 2004 and 2003, follows:
2004 2003
Balance, beginning of period $ 2,463 $ 1,793
Provisions charged to operating expenses 405 755
Loan recoveries 189 121
Loan charge-off (719) (293)
------ --------
Balance, end of period $ 2,338 $ 2,376
======= =======
9
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 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
certain executives. The carrying value of these investments was
$5,659,000 at June 30, 2004 and $5,559,000 at December 31, 2003.
NOTE 7 DEPOSITS:
Balances of time deposits over $100,000 and time deposits less than
$100,000 at June 30, 2004 and December 31, 2003 are set forth below
(in thousands):
2004 2003
----- -----
Time deposits over $100,000 $ 40,099 $ 47,345
All other time deposits 104,855 110,306
------- -------
Total Time Deposits $144,954 $157,651
======= =======
Interest expense for time deposits over $100,000 for the six month and
three month periods ended June 30, 2004 and June 30, 2003 are set
forth below (in thousands):
Six Months Three Months
Ended June 30 Ended June 30
2004 2003 2004 2003
---- ------ ----- ------
$ 639 $ 941 $ 289 $ 456
The following is a summary of the maturity distribution of all time
deposits of $100,000 or more as of June 30, 2004 (in thousands):
Amount
0-90 Days $ 6,654
91-365 Days 14,720
1-3 Years 11,658
3-5 Years 7,067
------
Total $40,099
======
10
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion focuses on significant results of the Company's
operations and significant changes in our financial condition or results of
operations for the periods indicated in the discussion. This discussion should
be read in conjunction with our audited financial statements and Report on Form
10-K for the period ended December 31, 2003.
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.
The Company has invested in and owns life insurance polices on certain officers.
The policies are designed so that the company recovers the interest expenses
associated with carrying the polices and the officer will, at the time of
retirement, receive any earnings in excess of the amounts earned by the Company.
The Company recognizes as an asset the net amount that could be realized under
the insurance contract as of the balance sheet date. This amount represents the
cash surrender value of the policies less applicable surrender charges. The
portion of the benefits which will be received by the executives at the time of
their retirement is considered, when taken collectively, to constitute a
retirement plan. Therefore the Company accounts for these policies using
guidance found in Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Post Retirement Benefits Other Than Pensions."
SFAS No. 106 requires that an employers' obligation under a deferred
compensation agreement be accrued over the expected service life of the employee
through their normal retirement date. Assumptions are used in estimating the
present value of amounts due officers after their normal retirement date. These
assumptions include the estimated income to be derived from the investments and
an estimate of the Company's cost of funds in these future periods. In addition,
the discount rate used in the present value calculation will change in future
years based on market conditions.
Recent Accounting Pronouncements
No recent accounting pronouncements had a material impact on the Company's
consolidated financial statements.
11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Prior Period Adjustment
During the fourth quarter of 2003, the Company, based on new information and
regulatory guidance, made changes to the way it accounts for the life insurance
policies owned by the Company on key officers. These adjustments apply solely to
periods prior to the first quarter of 2003. Beginning balances of certain
financial statements and certain tabular data contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations in this
quarterly filing on Form 10-Q may have been restated based on these adjustments
as compared to certain previous quarterly filings on Form 10-Q. Information
contained herein should be read in conjunction with the notes to financial
statements included in the 2003 annual report on Form 10-K.
Forward Looking Statements
Certain statements in this report may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are statements that include projections, predictions,
expectations or beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by the
use of qualified words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate" or other similar words. Although the
Company believes that its expectations with respect to certain forward-looking
statements are based upon reasonable assumptions within the bounds of its
existing knowledge of its business and operations, there can be no assurance
that actual results, performance or achievements of the Company will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Actual future results and trends may
differ materially from historical results or those anticipated depending on a
variety of factors, including, but not limited to, the effects of and changes
in: general economic conditions, the interest rate environment, legislative and
regulatory requirements, competitive pressures, new products and delivery
systems, inflation, changes in the stock and bond markets, technology, downturns
in the trucking and timber industries, effects of mergers and/or downsizing in
the poultry industry in Hardy County, and consumer spending and savings habits.
Additionally, actual future results and trends may differ from historical or
anticipated results to the extent: (1) the pending closure of the turkey
processing facility near Harrisonburg, Virginia unexpectedly adversely impacts
the company's market area; (2) any significant downturn in certain industries,
particularly the trucking and timber industries are experienced; (3) loan demand
decreases from prior periods; (4) the company may incur additional loan loss
provision due to negative credit quality trends in the future that may lead to a
deterioration of asset quality; (5) the company may not continue to experience
significant recoveries of previously charged-off loans or loans resulting in
foreclosure; and (6) the company is unable to control costs and expenses as
anticipated. The Company does not update any forward-looking statements that may
be made from time to time by or on behalf of the Company.
Overview
Net income for the first six months of 2004 increased 24.10% compared to the
same period a year ago, and for the quarter ended June 30, 2004, income was
43.35% higher than the same quarter ended June 30, 2003. Annualized return on
average assets (ROAA) for the six months ended June 30, 2004 was 1.01% and
annualized return on average equity (ROAE) was 9.93% compared to an ROAA of .80%
and an ROAE of 8.25% for the same period in 2003. Annualized return on average
assets for the quarter ended June 30, 2004 was 1.06% and annualized return on
average equity was 10.31%.
12
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Overview (continued)
Net interest income before provision for loan losses increased 9.34% for the
first six months of 2004 as compared to the first six months of 2003. This
increase came in spite of a small decline in average balances of earning assets
during the first six months of 2004 as compared to the same period in 2003.
Closer management of assets and liabilities, especially the management of
deposits, caused the decrease in average earning assets to be more than offset
by a decrease in interest bearing liabilities resulting in an increase in net
interest income and a 46 basis point increase in tax-equivalent net interest
margin.
During the first six months of 2003, the Company recognized a provision against
earnings for loan losses of $755,000 as compared to a provision of $405,000
during 2004. Enhanced efforts at improving the quality of the Company's loan
portfolio have reduced the Company's balance of loans over 30 days delinquent
plus non-accrual loans as a percent of gross loans to 2.91% at June 30, 2004
compared to 5.17% at June 30, 2003 and 4.73% at December 31, 2003.
Non-interest income grew as an increase in the per transaction charge for
insufficient funds checks offset declines in insurance income and trust fees.
Projects aimed at updating operational infrastructure and a continuation of
increases in active customer accounts caused equipment and data processing
expenses to rise. Increases in legal and professional fees and directors fees
were significant contributors to an 11.76% increase in non-interest 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, Hampshire, Mineral, Randolph,
and northern Pendleton counties in West Virginia and Frederick County, 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.
Credit Quality
Due to increased collection efforts, balances of non-performing loans decreased
69.61% from December 31, 2003 to June 30, 2004. At December 31, 2003, loans 30
days or more delinquent and non-accrual loans were 4.73% of gross loan balances
and at June 30, 2004, these loans represented 2.91% of gross loans. Restructured
loans at December 31, 2003 were comprised of two commercial loans on which
refinancing was necessary in order to recoup timely payment of principal. In
neither case were any principal amounts forgiven. As of June 30, 2004, these
loans which had previously been classified as restructured had timely payments
for more than a twelve month period and terms were not better than those that
would be offered in a competitive environment, and therefore were no longer
classified as restructured.
Loans are typically placed on non-accrual status once they have reached certain
levels of delinquency, depending on loan type, and it is no longer reasonable to
expect collection of principal and interest because collateral is insufficient
to cover both the principal and interest due. After loans are placed on
non-accrual status, they are returned to accrual status if obligation is brought
current by the borrower, or they are charged off if payment is not made current
and management believes that collection of the amounts due is doubtful.
Charged-off loans are charged against the allowance for loan losses. Any
subsequent collection or sale of repossessed collateral is added to the
allowance as a recovery.
The carrying value of foreclosed property at June 30, 2004 was $252,000. All
foreclosed property held as of June 30, 2004 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.
13
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Credit Quality (continued)
An inherent risk in the lending of money is that the borrower will not be able
to repay the loan under the terms of the original agreement. The allowance for
loan losses (see subsequent section) provides for this risk and is reviewed
periodically for adequacy. This review also considers concentrations of loans in
terms of geography, business type or level of risk. While lending is
geographically diversified within the service area, the Company does have some
concentration of loans in the area of agriculture (primarily poultry farming),
timber and related industries. Management recognizes these concentrations and
considers them when structuring its loan portfolio.
As of June 30, 2004, the Company did not have any potential problem loans as
defined in SEC Industry Guide III that would require disclosure. In July, the
Company received notice that a large commercial customer had filed for Chapter
11 bankruptcy protection. Terms of the bankruptcy proceedings have not been
finalized. Depending upon the outcome of the bankruptcy proceedings, the Company
may be forced to move the loans made to this customer, which total approximately
$1.4 million, to non-accrual status. If these loans are moved to non-accrual,
this will have a negative impact on interest revenue and net income. The loans
to this customer are deemed by Management to be well secured, and if a
foreclosure is required, the Company at this time expects there to be no loss on
the sale of the collateral when compared to current loan balances to the
customer.
The following table summarizes the company's non-performing loans as of June 30,
2004 and December 31, 2003.
June 30, December 31,
(in thousands) 2004 2003
---- ----
Non-accrual loans $ 757 $ 1,664
Restructured Loans 631
Loans past due 90 days or more and
still accruing interest 426 1,598
Total $ 1,183 $ 3,893
======== ========
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.
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. During the spring of 2004, Pilgrim's Pride Corporation announced the
pending closure of its turkey processing facilities near Harrisonburg, VA. This
closure will impact the local economy because turkey growers currently
contracted with Pilgrim's Pride will either be forced to cease growing
operations or turn to alternative contractual arrangements. The possible plant
closure may have an impact on the local economy in the case that workers at this
facility may become unemployed for prolonged periods if the facility remains
closed. Although Management will closely monitor the effect on our operations of
the potential closure of this facility, the impact on unemployment in our
primary service area is expected to be minimal and the number of direct grower
loans held by the Company and impacted by this potential closure is small.
Several of these growers have already made alternative contractual arrangements
with another poultry processing firm.
In recent periods, the Company's loan portfolio has also begun to reflect a
concentration in loans collateralized by heavy equipment, particularly in the
trucking and timber industries. In part because of rising fuel costs, and
because of continued stagnant economic conditions, the trucking sector has
experienced a recent downturn. However, the Company has experienced no material
losses related to foreclosures of loans collateralized by heavy equipment. While
close monitoring of this sector is necessary, management expects no significant
losses in the foreseeable future.
14
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Net Interest Income
Year To Date
Although interest rates remain near forty year lows, a stability in market rates
over the last year has slowed the decline in average rates earned on assets
while at the same time, higher rate time deposits continue to mature and are
renegotiated at lower rates. As a result, average rates earned on assets during
the first six months of 2004 as compared to 2003 decreased 22 basis points as
compared to a decline of 76 basis points on interest bearing liabilities.
In recent periods, the Company has found itself in a favorable short-term
liquidity position as average balances of fed funds sold topped $18 million
during the first six months of 2004 and were over $21 million during the first
six months of 2003. Loan growth has also been lower in recent periods. As a
result, the Company has been able to remain at or often below competitors rates
paid on deposits as the need for greater liquidity was not present. Rates paid
on deposits during the first six months of 2004 compared to 2003 fell 80 basis
points and average balances of interest bearing deposits during the first six
months of 2004 fell 4.35% compared to 2003, with the largest declines being in
balances of time deposits.
Although demand for new loans over the past twelve months has been lower than
that experienced in recent years, Management expects loan demand to remain
adequate to maintain current balances or cause balances to increase slightly. If
loan demand remains adequate to maintain current balances, and as older, higher
rate time deposits mature and are replaced by lower rate deposits, management
expects net interest margin to remain at current levels or increase slightly
during the coming months.
The table on the following page summarizes the Company's net interest margin for
six month period ended June 30, 2004 as compared to 2003.
Quarter Ending June 30
Net interest income, on a fully taxable equivalent basis, for the second quarter
of 2004 increased 9.15% over the same period a year ago and net interest margin
increased 51 basis points. Although average balances of earning assets decreased
overall and average rates earned on earning assets fell 15 basis points, this
was offset by a decrease of 4.82% in average balances of interest bearing
liabilities and a 74 basis point decline in rates paid on interest bearing
liabilities.
Average loan balances increased $5.5 million during 2004 as compared to the same
period in 2003, but this increase was offset by a decline in average rates to
result in a slight decrease in earnings on loans. The increase in average loan
balances was funded by reductions in balances of interest bearing deposits, fed
funds sold and securities investments.
Balances of interest bearing deposits decreased 5.30%, although balances of
interest bearing transaction accounts increased. Balances of time deposits fell
12.21% and average rates paid on time deposits decreased 75 basis points.
As the return on short term investments (fed funds sold and interest bearing
deposits) has fallen and the returns on securities have declined in line with
deposit rates, the Company has chosen to fund loan growth through the reduction
in balances of these assets in lieu of funding loan growth through new deposits.
The table on page 16 summarizes the Company's net interest margin for the three
month period ended June 30, 2004 as compared to 2003.
15
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Net Interest Income (continued)
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2004 AND 2003
(Dollar Amounts in Thousands)
June 30, 2004 June 30, 2003
Average Income/ Average Income/
Balance Expense Rate Balance Expense Rate
Interest Income
Loans 1,3 $ 229,198 $8,228 7.22% $ 225,729 $ 8,505 7.54%
Federal funds
sold 18,241 83 .92% 21,551 123 1.14%
Interest bearing
deposits 1,525 8 1.05% 5,694 29 1.02%
Investments
Taxable 4 29,555 345 2.35% 28,920 468 3.24%
Tax exempt 2,4 3,803 105 5.55% 4,202 128 6.09%
----- ----- ---- ----- ----- -----
Total Earning
Assets 282,322 8,769 6.25% 286,096 9,253 6.47%
------- ----- ---- ------- ----- ------
Interest Expense
Money markets 23,259 40 .35% 21,430 89 .83%
Savings 52,179 141 .54% 47,798 240 1.00%
Time deposits 149,210 2,101 2.83% 165,640 2,988 3.61%
Other borrowed
money 5,479 127 4.66% 4,280 108 5.05%
------ ------ ---- ------- ------ -------
Total Interest
Bearing
Liabilities 230,127 2,409 2.11% 239,148 3,425 2.86%
------- ------ ----- ------- ----- ------
Net Interest Income 6,360 5,828
===== =====
Net Yield on Interest
Earning Assets 4.53% 4.07%
==== =====
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.
16
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Net Interest Income (continued)
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS FOR THE THREE MONTH PERIODS
ENDED JUNE 30, 2004 AND 2003
(Dollar Amounts in Thousands)
June 30, 2004 June 30, 2003
--------------------- -----------------------
Average Income/ Average Income/
Balance Expense Rate Balance Expense Rate
Interest Income
Loans 1,3 $ 232,022 $4,157 7.21% $ 226,756 $4,280 7.55%
Federal funds sold 17,210 41 .96% 21,625 63 1.17%
Interest bearing
deposits 1,658 4 .97% 6,008 14 .93%
Investments
Taxable 4 28,513 170 2.40% 31,361 234 2.98%
Tax exempt 2,4 3,646 43 4.74% 4,242 61 5.75%
----- ----- ---- ----- ----- -----
Total Earning
Assets 283,049 4,415 6.27% 289,992 4,652 6.42%
------- ----- ---- ------- ----- ------
Interest Expense
Money markets 23,617 21 .36% 21,759 41 .75%
Savings 54,648 74 .54% 48,816 114 .93%
Time deposits 145,420 999 2.76% 165,640 1,456 3.51%
Other borrowed
money 5,714 66 4.65% 4,614 57 4.94%
------ ----- ---- ------- ----- -------
Total Interest
Bearing
Liabilities 229,399 1,160 2.03% 240,829 1,668 2.77%
------- ------ ----- -------- ----- ------
Net Interest Income 3,255 2,984
===== =====
Net Yield on Interest
Earning
Assets 4.63% 4.12%
===== =====
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.
17
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 estimable 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 the adequacy of 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 an 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 current loan portfolio.
An analysis of the components of net charge-offs for the six month periods ended
June 30, 2004 and June 30, 2003 and for the quarters ended June 30, 2004 and
June 30, 2003 is set forth in the following table (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
------------------ --------------
2004 2003 2004 2003
---- ---- ---- ----
Components of net charge-offs:
Real estate $ (242) $ (26) $ (265) $ (33)
Commercial (53) 16 (65) 11
Installment (110) (75) (200) (150)
------- ------ ------- ------
Total $ (405) $ (85) $ (530) $ (172)
======= ====== ======= ======
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,
2004 and December 31, 2003:
June 30, 2004 December 31, 2003
------------- ----------------
Allowance Percentage Allowance Percentage
Loan Type Allocation of Loans Allocation of Loans
--------- ----------- --------- ---------- ---------
Commercial $ 952 20% $ 779 19%
Mortgage 745 60% 725 61%
Consumer 572 20% 819 20%
Unallocated 69 140
----- ---- ----- ------
Totals $2,338 100% $2,463 100%
===== ==== ===== ===
18
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Discontinuation of Trust Operations
During the fourth quarter of 2003, the Board of Directors of Highlands
Bankshares, Inc. (HBI) decided to close Highlands Bankshares Trust Company, Inc.
(HBTI).The demand for trust services in the Company's primary and secondary
service areas had been less than anticipated. As of May 31, 2004, Highlands
Bankshares Trust Company, a wholly owned subsidiary of Highlands Bankshares,
Inc. had ceased operations.
On an unconsolidated basis, at the time of it's closing, HBTI had an accumulated
net loss of $3,217. This loss, in combination with an initial capital
contribution by HBI of $2,143,576, resulted in a net investment by HBI at the
time of closing of $2,140,359. Upon the cessation of operations of HBTI, this
capital investment was returned to Highlands Bankshares, Inc. in the form of
cash. At its regularly scheduled meeting in July, the Highlands Board of
Directors voted to invest this capital, less amounts used to pay second quarter
shareholder dividends, in the existing subsidiary banks.
Non Interest Income
Income from service charges increased 32.65% for the first six months of 2004 as
compared to 2003 and 42.67% for the second quarter of 2004 as compared to the
second quarter of 2003. In both instances, the increase was largely due to an
increase in the rate on insufficient funds charged to checking account
customers. During early 2004, both subsidiary banks increased the per
transaction charge for insufficient funds.
Insurance related earnings fell 10.19% for the first six months of 2004 compared
to 2003. Due to increased competition for consumer loans from banks and other
types of financing businesses, the volume of new consumer loans has fallen in
recent years. As credit life and accident and health insurance are sold
primarily to these loan customers, the volume of new insurance business has also
decreased.
Because of the closing of the trust subsidiary, trust fees fell from $20,000
during the first six months of 2003 to $3,000 during the first six months of
2004. There were no trust fees earned during the second quarter of 2004 as
compared to $11,000 during the second quarter of 2003.
Non Interest Expense
The costs of salaries and benefits for the first six months of 2004 were
$201,000 higher than the same period in 2003 and $132,000 higher during the
second quarter of 2004 as compared to the same period in 2003. The largest
portion of these increases was due to higher costs of health insurance and
higher pension costs.
Occupancy and equipment expense increased due mainly to higher costs associated
with the implementation of new operating equipment. As the number of deposit
customers continued to expand, the costs of data processing rose 21.12% for the
first six months of 2004 as compared to the same period in 2003 and 19.28% for
the second quarter of 2004 as compared to 2003.
Legal and professional fees rose due to expanded internal audit procedures.
Management expects that since these increased procedures were substantially
implemented during the latter parts of 2003, that the year over year increase
will stabilize in the coming quarters and that costs of legal and professional
fees during the second half of 2004 will remain roughly equivalent to the costs
experienced during the first half of 2004 and the second half of 2003.
19
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Non Interest Expense (continued)
At its meeting in April of 2003, the Company's Board of Directors approved an
increase in directors fees for the directors of both the Company and its
subsidiaries. This increase, coupled with an increase in the number of directors
at the subsidiary banks, caused an increase in directors fees of 36.65% for the
first six months of 2004 compared to the same time period in 2003 and a 27.77%
increase for the second quarter of 2004 as compared to the second quarter of
2003.
Borrowed Money
The Company periodically borrows money from the Federal Home Loan Bank (FHLB).
These borrowings are typically used to fund loan growth but have also been used
to fund the renovation of the Capon Valley Bank's main office building. Although
the Company has found itself in an extremely favorable liquidity position such
that new loans could be funded through the decline in balances of more liquid
lower earning assets such as fed funds sold, the Company during 2003 and 2004
chose to fund certain larger fixed rate commercial loans by borrowing from the
Federal Home Loan Bank (FHLB). In borrowing from the FHLB at fixed rates and
maturity periods similar to these larger commercial loans, the Company has
attempted to minimize future interest rate risk.
Liquidity
Operating liquidity is the ability to meet present and future financial
obligations. Short term liquidity is provided primarily through cash balances,
deposits with other financial institutions, federal funds sold, non-pledged
securities and loans maturing within one year. Additional sources of liquidity
available to the Company include, but are not limited to, loan repayments, the
ability to obtain deposits through the adjustment of interest rates and the
purchasing of federal funds. To further meet its liquidity needs, the Company
also maintains lines of credit with correspondent financial institutions, the
Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Pittsburgh.
Historically, the Company's primary need for additional levels of operational
liquidity has been to fund increases in loan balances. The Company has normally
funded increases in loans by increasing deposits and decreases in secondary
liquidity sources such as balances of Fed Funds sold and balances of securities.
Although total deposit balances have decreased slightly in recent periods, the
Company has substantially maintained or increased levels of these secondary
liquidity resources and does not anticipate that an unexpectedly high level of
loan demand in coming periods would impact liquidity to the extent that the
Company would be required to pay above market rates to obtain deposits.
The parent Company's operating funds, funds with which to pay shareholder
dividends and funds for the exploration of new business ventures have been
supplied primarily through dividends paid by the Company's subsidiary banks
Capon Valley Bank (CVB) and The Grant County Bank (GCB). The various regulatory
authorities impose restrictions on dividends paid by a state bank. A state bank
cannot pay dividends without the consent of the relevant banking authorities in
excess of the total net profits of the current year and the combined retained
profits of the previous two years. As of July 1, 2004, the subsidiary banks
could pay dividends to Highlands Bankshares, Inc. of approximately $3,423,000
without permission of the regulatory authorities. A summary of the amounts
available follows (in thousands):
Total
2002 2003 2004 Available
Income Dividend Income Dividend Income Dividend For Dividends
------ -------- ------ -------- ------ -------- ------------
CVB $1,076 975 $ 475 $ -- $ 537 $ 158 $ 955
GCB 1,627 975 1,801 905 1,033 158 $2,423
20
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, 2004 the Company was above the regulatory minimum levels
of capital. The table below summarizes the capital ratios for the Company and
its subsidiary banks as of June 30, 2004 and December 31, 2003:
June 30, 2004 December 31, 2003
Actual Regulatory Actual Regulatory
Ratio Minimum Ratio Minimum
Total Risk Based
Capital Ratio
Highlands Bankshares 14.53% 8.00% 14.55% 8.00%
Capon Valley Bank 11.89% 8.00% 11.93% 8.00%
The Grant County Bank 14.56% 8.00% 13.89% 8.00%
Tier 1 Leverage Ratio
Highlands Bankshares 9.71% 3.00% 9.42% 3.00%
Capon Valley Bank 7.72% 3.00% 7.31% 3.00%
The Grant County Bank 9.75% 3.00% 9.05% 3.00%
Tier 1 Risk Based
Capital Ratio
Highlands Bankshares 13.45% 4.00% 13.40% 4.00%
Capon Valley Bank 10.70% 4.00% 10.68% 4.00%
The Grant County Bank 13.56% 4.00% 12.81% 4.00%
Effects of Inflation
Inflation primarily affects industries having high levels of property, plant and
equipment or inventories. Although the Company is not significantly affected in
these areas, inflation does have an impact on the growth of assets. As assets
grow rapidly, it becomes necessary to increase equity capital at proportionate
levels to maintain the appropriate equity to asset ratios. Traditionally, the
Company's earnings and high capital retention levels have enabled the Company to
meet these needs.
The Company's reported earnings results have been minimally affected by
inflation. The different types of income and expense are affected in various
ways. Interest rates are affected by inflation, but the timing and magnitude of
the changes may not coincide with changes in the consumer price index.
Management actively monitors interest rate sensitivity, as illustrated by the
gap analysis shown under the section titled Interest Rate Sensitivity in order
to minimize the effects of inflationary trends on interest rates. Other areas of
noninterest expenses may be more directly affected by inflation.
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. 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 quickly
to rapid market rate changes. 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 itself when necessary.
21
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Interest Rate Sensitivity (continued)
The following table illustrates the Company's sensitivity to interest rate
changes as of June 30, 2004 (in thousands):
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 2004
(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 $35,226 $94,939 $70,418 $16,752 $16,096 $233,431
Fed funds sold 15,653 15,653
Securities 11,033 8,690 9,677 365 494 30,259
Time deposits in other
banks 1,117 100 100 1,317
------ ------ ------ ------ ----- ------
Total 63,029 103,729 80,195 17,117 16,590 280,660
------ ------- ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Money market savings 24,099 24,099
Savings accounts 55,372 55,372
Time deposits 22,326 66,693 37,294 18,641 144,954
Other borrowed money 140 426 1,184 1,263 3,078 6,091
------ ------ ------ ------ ----- ------
Total 101,937 67,119 38,478 19,904 3,078 230,516
------- ------ ------ ------ ----- -------
Rate sensitivity GAP (38,908) 36,610 41,717 (2,787) 13,512 50,144
Cumulative GAP (38,908) (2,298) 39,419 36,632 50,144
Ratio of cumulative
interest sensitive
assets to
cumulative interest
sensitive liabilities 62.16% 98.96% 119.30% 116.38% 122.04%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
22
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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).
Item 3 Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to quantitative and qualitative
disclosures as they relate to market risk since the filing of the Company's
2003 Annual Report on form 10-K.
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. 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 Chief Executive
Officer and Chief Financial 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 the end of the period covered by this
report.
The Company's chief executive officer and chief financial officer, based on
their evaluation as of the end of the period covered by this Annual Report
of the Company's disclosure controls and procedures (as defined in Rule
13(a)-14(e) of the Securities Exchange Act of 1934), have concluded that
the Company's disclosure controls and procedures are adequate and effective
for purposes of Rule 13(a)-14(c) and timely, alerting them to financial
information relating to the Company required to be included in the
Company's filings with the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
23
Item 4 Controls and Procedures (continued)
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 any other factors that could
significantly affect these controls.
Due to the nature of the Company's business as stewards of assets of
customers, internal controls are of the utmost importance. The company has
established procedures undertaken during the normal course of business in an
attempt to reasonably ensure that fraudulent activity of either an amount
material to these results or in any amount is not occurring. In addition to
these controls and review by executive officers, the Company retains the
services of Yount, Hyde & Barbour, P.C., a public accounting firm, to
complete regular internal audits to examine the processes and procedures of
the Company and its subsidiary banks to ensure that these processes are both
reasonably effective to prevent fraud, both internal and external, and that
these processes comply with relevant regulatory guidelines of all relevant
banking authorities. The findings of Yount, Hyde & Barbour are presented both
to Management of the subsidiary banks and to the Audit Committee.
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 May 11, 2004, the stockholders held their annual meeting. The
following items were approved by the shareholders by the required
majority or plurality:
1) Election of the Board of Directors as proposed in the proxy material
without any additions or exceptions.
Leslie A. Barr 945,491 For; 53,659 Withhold Authority
Jack H. Walters 940,031 For; 59,119 Withhold Authority
Steven C. Judy 946,295 For; 52,855 Withhold Authority
2) Ratification of S. B. Hoover & Company, L.L.P. as auditors for the
year ending December 31, 2004; 991,094 For; 3,198 Against; 4,858
Abstain
Item 5 Other Information -- Not Applicable
24
Part II Other Information (continued)
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 by Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed during the three months ended June 30,
2004
None
25
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/ C.E. PORTER
---------------------------
C.E. Porter
President
/s/ R. ALAN MILLER
---------------------------
R. Alan Miller
Finance Officer
Date: August 13, 2004