Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 0-27622
HIGHLANDS BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1796693
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 1128
Abingdon, Virginia 24212-1128
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (276) 628-9181
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.)
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
2,650,786 shares of common stock, par value $1.25 per share,
outstanding as of May 12, 2003
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended March 31, 2003
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002 (Note 1) . . .3
Consolidated Statements of Income (Unaudited)
for the Three Months Ended
March 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended
March 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . .5
Consolidated Statements of Changes in
Stockholders' Equity (Unaudited) for the Three
Months Ended March 31, 2003 and 2002 . . . . . . . . . . . . .6
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . .10-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 12-13
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .14
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . .14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . .14
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . .14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . .14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
SIGNATURES AND CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . 15-19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(Amounts in thousands)
(Unaudited) (Note 1)
ASSETS March 31, 2003 December 31, 2002
-------------- -----------------
Cash and due from banks $ 13,539 $ 13,369
Federal funds sold 9,202 5,132
-------- --------
Total Cash and Cash Equivalents 22,741 18,501
-------- --------
Investment securities available for sale (amortized
cost $110,074 as of March 31, 2003, $101,211 as of
December 31, 2002) 112,183 102,743
Other investments, at cost 2,368 2,182
Loans, net of allowance for loan losses of $4,042 at
March 31, 2003, $3,877 at December 31, 2002 340,714 335,644
Premises and equipment, net 13,237 13,157
Interest receivable 2,734 2,708
Other assets 11,041 10,668
-------- --------
Total Assets $505,018 $485,603
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 56,820 $ 55,597
Interest bearing 370,906 354,704
-------- --------
Total Deposits 427,726 410,301
-------- --------
Interest, taxes and other liabilities 3,085 2,309
Other short-term borrowings 19,086 19,094
Long-term debt 14,195 14,200
Capital securities 7,500 7,500
-------- --------
Total Other Liabilities 43,866 43,103
-------- --------
Total Liabilities 471,592 453,404
-------- --------
STOCKHOLDERS' EQUITY
Common stock (2,651 and 2,648 shares issued and
outstanding, respectively) 3,313 3,309
Additional paid-in capital 6,172 6,150
Retained earnings 22,549 21,729
Accumulated other comprehensive income 1,392 1,011
-------- --------
Total Stockholders' Equity 33,426 32,199
-------- --------
Total Liabilities and Stockholders' Equity $505,018 $485,603
======== ========
See accompanying Notes to Consolidated Financial Statements
3
Consolidated Statements of Income
(Amounts in thousands, except for per share data)
(Unaudited)
Three Months Three Months
Ended March 31, Ended March 31,
2003 2002
---- ----
INTEREST INCOME
Loans receivable and fees on loans $ 6,236 $ 6,610
Securities available for sale:
Taxable 718 904
Exempt from taxable income 392 288
Other investment income 26 32
Federal funds sold 31 16
------- -------
Total Interest Income 7,403 7,850
------- -------
INTEREST EXPENSE
Deposits 2,688 3,168
Federal funds purchased -- 3
Other borrowed funds 649 568
------- -------
Total Interest Expense 3,337 3,739
------- -------
Net Interest Income 4,066 4,111
------- -------
Allowance for Loan Losses 470 412
------- -------
Net Interest Income after Allowance for Loan Losses 3,596 3,699
------- -------
NON-INTEREST INCOME
Securities gains (losses), net 102 (24)
Service charges on deposit accounts 607 509
Other service charges, commissions and fees 182 149
Other operating income 204 21
------- -------
Total Non-Interest Income 1,095 655
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,870 1,751
Occupancy expense of bank premises 204 144
Furniture and equipment expense 411 366
Other operating expense 783 843
------- -------
Total Non-Interest Expense 3,268 3,104
------- -------
Income Before Income Taxes 1,423 1,250
Income Tax Expense 338 332
------- -------
Net Income $ 1,085 $ 918
=======
Basic Earnings Per Common Share - Weighted Average $ 0.41 $ 0.35
======= =======
Earnings Per Common Share - Assuming Dilution $ 0.39 $ 0.33
======= =======
See accompanying Notes to Consolidated Financial Statements
4
Consolidated Statements of Cash Flows
(Amounts in thousands)
Unaudited
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,085 $ 918
Adjustments to reconcile net income to net cash provided by operating
Activities
Provision for loan losses 470 412
Depreciation and amortization 240 243
Net realized (gains) losses on available-for-sale securities (102) 24
Net amortization on securities 34 36
Amortization of capital issue costs 3 3
(Increase) in interest receivable (26) (5)
(Increase) in other assets (578) (158)
Increase in interest, taxes and other liabilities 511 35
-------- --------
Net cash provided by operating activities 1,637 1,508
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of debt and equity securities 2,350 7,316
Proceeds from maturities of debt and equity securities 6,102 6,041
Purchase of debt and equity securities (17,247) (10,591)
Purchase of other investments (185) --
Net increase in loans (5,540) (8,436)
Premises and equipment expenditures (315) (332)
-------- --------
Net cash used in investing activities (14,835) (6,002)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 5,177 (1,132)
Net increase in demand, savings and time deposits 12,248 2,985
Repayment of short-term borrowings (8) --
Proceeds from issuance of long-term debt -- 5,000
Repayment of long-term debt (5) (11)
Proceeds from exercise of common stock options 23 12
Proceeds from issuance of common stock through Dividend Reinvestment and
Stock Purchase Plan 3 --
-------- --------
Net cash provided by financing activities 17,438 6,854
-------- --------
Net increase in cash and cash equivalents 4,240 2,360
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,501 12,241
-------- --------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 22,741 $ 14,601
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year
for:
Interest $ 3,327 $ 4,166
======== ========
Income taxes $ -- $ 35
======== ========
See accompanying Notes to Consolidated Financial Statements
5
Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands)
Unaudited
Accumulated
Common Stock Additional Other Total
------------ Paid-in Retained Comprehensive Stockholders'
Shares Par Value Capital Earnings Income Equity
------ --------- ------- -------- ------ ------
Balance December 31, 2001 2,644 $ 3,304 $ 6,063 $ 17,863 $ 222 $ 27,452
Comprehensive income:
Net income - - - 918 - 918
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income tax benefit of $57 - - - - (122) (122)
Less: reclassification adjustment - - - - 12 12
------ --------
Total comprehensive income - - - - - $ 808
--------
Common stock issued for stock options
exercised, net - 1 11 - - 12
Common stock issued for dividend
reinvestment and optional cash
purchase plan - - - - - -
Cash dividend
- - - (238) - (238)
----- ------- ------- -------- ------ --------
Balance, March 31, 2002 2,644 $ 3,305 $ 6,074 $ 18,543 $ 112 $ 28,034
===== ======= ======= ======== ====== ========
Balance, December 31, 2002 2,648 $ 3,309 $ 6,150 $ 21,729 $1,011 $ 32,199
Comprehensive income:
Net income - - - 1,085 - 1,085
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income tax expense of
$230 - - - 448 448
Less: reclassification adjustment - - - (67) (67)
------ --------
Total comprehensive income - - - - - 1,466
Common stock issued for stock options
exercised, net 3 4 19 - - 23
Common stock issued for dividend
reinvestment and optional cash
purchase plan - - 3 - - 3
Cash dividend - - - (265) - (265)
--- ---
Balance, March 31, 2003 2,651 $ 3,313 $ 6,172 $ 22,549 $ 1,392 $ 33,426
=== ===== ======= ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements
6
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
Note 1. - General
The consolidated financial statements conform to United States generally
accepted accounting principles and to industry practices. The accompanying
consolidated financial statements are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of the consolidated financial
statements have been included. All such adjustments are of a normal and
recurring nature. The consolidated balance sheet as of December 31, 2002 has
been extracted from the audited financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. The notes
included herein should be read in conjunction with the notes to consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
Note 2. - Allowance for Loan Losses
A summary of transactions in the consolidated allowance for loan losses for the
three months ended March 31, is as follows:
2003 2002
---- ----
Balance, January 1 $ 3,877 $ 3,418
Provision 470 412
Recoveries 30 60
Charge-offs (335) (363)
------- ------
Balance, March 31 $ 4,042 $ 3,527
======= =======
Note 3. - Income Taxes
Income tax expense for the three months ended March 31 is different than the
amount computed by applying the statutory corporate federal income tax rate of
34% to income before taxes. The reasons for these difference are as follows:
2003 2002
---- ----
Tax expense at statutory rate $ 484 $ 431
Increase (reduction) in taxes from:
Tax-exempt interest (133) (98)
Other, net (13) (1)
------ ------
Provision for income taxes $ 338 $ 332
====== ======
7
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
Note 4. - Capital Requirements
Regulators of the Company and its subsidiaries have implemented risk-based
capital guidelines which require the maintenance of certain minimum capital as a
percent of assets and certain off-balance sheet items adjusted for predefined
credit risk factors. The regulatory minimum for Tier 1 and combined Tier 1 and
Tier 2 capital ratios are 4.0% and 8.0%, respectively. Tier 1 capital includes
tangible common stockholders' equity reduced by goodwill and certain other
intangibles. Tier 2 capital includes portions of the allowance for loan losses,
not to exceed Tier 1 capital. In addition to the risk-based guidelines, a
minimum leverage ratio (Tier 1 capital as a percentage of average total
consolidated assets) of 4.0% is required. This minimum may be increased by at
least 1.0% or 2.0% for entities with higher levels of risk or that are
experiencing or anticipating significant growth. The following table contains
the capital ratios for the Company and its subsidiary as of March 31, 2003.
Entity Tier 1 Combined Capital Leverage
------ ------ ---------------- --------
Highlands Union Bank 10.13% 11.38% 6.58%
Highlands Bankshares, Inc. 12.08% 13.32% 7.87%
Note 5 - Capital Securities
The Company completed a $7.5 million capital issue on January 23, 1998. These
trust preferred debt securities were issued by Highlands Capital Trust, a wholly
owned subsidiary of Highlands Bankshares, Inc. These securities were issued at a
9.25% fixed rate with a 30 year term and a 10 year call provision at the
Company's discretion. This capital was raised to meet current and future
opportunities of the Company. During the first quarter of 2003, the Company
received regulatory approval to re-purchase 48,000 shares or 16% of these
securities. The shares were repurchased in April 2003 at a price of $26.15 per
share which is equal to the 2008 call price. For future regulatory capital
purposes, this $1.2 million par value of trust preferred securities will not be
eligible to be included in Tier 1 or Tier 2 capital of the Company.
Note 6 - Earnings Per Share
The following table contains information regarding the Company's computation of
basic earnings per share and diluted earnings per share for March 31, 2003 and
2002.
Basic EPS Number of Shares Diluted EPS Number of Shares
--------- ---------------- ----------- ----------------
March 31, 2003 $ 0.41 2,782,083 $ 0.35 2,784,004
March 31, 2002 $ 0.39 2,746,783 $ 0.33 2,752,068
8
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
Note 7 - Dividend Reinvestment and Stock Purchase Plan
On March 1, 2002 the Company initiated a Dividend Reinvestment and Stock
Purchase Plan for its shareholders. This plan will enable shareholders to
reinvest their cash dividends to purchase additional shares of the Company's
common stock. Shareholders also have the option to make additional cash
purchases of stock ranging from $100 to $5,000 per quarter. Shares in the Plan,
which covers 50,000 shares of common stock, are purchased in the open market or
directly from the Company. As of May 12, 2003, the Plan has received $95,142.78
in reinvested dividends and optional cash purchases from plan participants for
the first quarter 2003 plan purchase. The Plan will make the purchase for the
2003 first quarter participants the middle of May, 2003.
Note 8 - Commitments and Contingencies
The Bank is party to various financial instruments with off-balance sheet risk
arising in the normal course of business to meet the financing need of its
customers. Those financial instruments include commitments to extend credit and
standby letters of credit. Those commitments include: standby letters of credit
of approximately $2.52 million; equity lines of credit of $4.38 million; credit
card lines of credit of $3.39 million; commercial real estate, construction and
land development commitments of $4.51 million; and other unused commitments to
fund loans of $21.16 million.
The Bank is also in the process of constructing a branch office in Blountville,
Tennessee. It is estimated that this branch will be constructed and put into
service by July 2003. The Bank closed on the purchase of this branch site on
October 31, 2002. The purchase of this property was completed by a cash payment
of $315 thousand and the swap of a Bank owned piece of property valued at $300
thousand for a total of $615 thousand.
As of March 31, 2003 the Bank had entered into a commitment to purchase a piece
of property in Banner Elk, North Carolina for use as a future branch site. The
purchase price of this piece of property is approximately $525 thousand. The
Bank has placed an option on this piece of property contingent upon receiving a
clean environmental assessment as well as all of the necessary construction and
regulatory approvals.
The Bank has also entered into an option agreement to purchase a piece of
property adjacent to its Commonwealth Avenue branch office in Bristol, Virginia
for $42 thousand. This option to purchase is contingent upon a clean
environmental assessment as well as rezoning approval. The Bank plans to use
this property as additional parking for the Commonwealth Avenue branch office
9
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis is provided to address information about
the Company's financial condition and results of operations that is not
otherwise apparent from the consolidated financial statements incorporated by
reference or included in this report. Reference should be made to those
statements for an understanding of the following discussion and analysis.
Results of Operations
Results of operations for the three-month period ended March 31, 2003 reflected
net income of $1.09 million or an increase of 18.19% over the corresponding
period for 2002. This increase was in part due to the Bank's ability to maintain
a net interest margin that approximated the prior year. During the last two
years, the Bank has been in a liability sensitive position. Over this time
period, the Bank's interest-bearing liabilities have been repricing at a quicker
pace than its interest-earning assets as interest rates have fallen. This trend
has slowed over the past few months. Total interest income is approximately $447
thousand lower than the comparable 2002 period due to new loan and investment
securities volume being recorded at lower rates and existing adjustable rate
loans and investment securities repricing down to lower rates. The Company's
total interest expense has decreased by approximately $402 thousand due to new
interest-bearing deposits being recorded at lower rates and existing
interest-bearing deposits repricing lower as they mature or reprice. However,
during the first three months of 2003, the Bank has also increased its
non-interest income by $440 thousand over the corresponding period for 2002.
This increase was primarily due to increased non-sufficient funds income,
earnings related to Bank-Owned Life Insurance, earnings related to its equity
ownership in Virginia Title Center, LLC, security gains, and increased merchant
and debit card fee income. Operating results of the Company when measured as a
percentage of average equity reveals an increase in return on average equity for
the three-month period from 13.15% in 2002 to 13.24% for the corresponding
period in 2003.
Return on average assets at 0.87% reflects an increase of 7.4% over the
comparable 2002 period.
Net interest income for the three-months ended March 31, 2003 decreased a slight
1.09% or $45 thousand from the corresponding 2002 period. Average
interest-earning assets increased approximately $29.5 million from March 31,
2002 to the current period while average interest-bearing liabilities increased
$30.5 million from the same date. The tax-equivalent yield on average
interest-earning assets was 6.58% in 2003 representing a decrease of 81 basis
points over the yield of 7.39% in 2002. The yield on average interest-bearing
liabilities decreased 70 basis points to 3.29% in 2003 as compared to 3.99% in
2002.
The three-month's provision for possible loan losses totaled $470 thousand, a
$58 thousand increase from the corresponding period in 2002. The Company
continually monitors the loan portfolio for signs of credit weaknesses or
developing collection problems. Levels for each period are determined after
evaluating the loan portfolio and determining the level necessary to absorb
current charge-offs and maintain the reserve at adequate levels. Net charge-offs
for the first quarter of 2003 were $305 thousand compared with $303 thousand in
2002. Year-to-date net charge-offs were the same at .09% and .09% of total loans
for the periods ended March 31, 2003 and March 31, 2002. Loan loss reserves
increased 10.38% to $4.04 million at March 31, 2003 from the comparable 2002
period. The Company's allowance for loan loss reserves at March 31, 2003 has
increased to 1.17% of total loans versus 1.06% for the comparable 2002 period.
As of December 31, 2002, the allowance for loan loss reserve as a percentage of
total loans was 1.14%.
10
Financial Position
Total loans have increased from $333.6 million at March 31, 2002 to $344.8
million at March 31, 2003. For the three month period ended March 31, 2003,
total loans have increased $5.2 million. The loan to deposit ratio has decreased
from 84.68% at March 31, 2002 to 80.60% at March 31, 2003. The loan to deposit
ratio at December 31, 2002 was 82.75%. The main reason for the decrease in the
loan to deposit ratio is due to a significant increase in customer deposits due
to the volatility in the equity markets. Investor confidence seems to be very
low and it appears that individual investors are placing their money in more
stable and liquid investments such as interest checking, savings and time
deposit accounts. Likewise, with the less favorable economic environment,
customers are not borrowing money as readily as they have in past years. The
majority of the Company's loan growth for the first three months of 2003 has
primarily been in real estate secured loans. This group of loans has grown $6.1
million or 2.5% from December 31, 2002. During this same time period consumer
loans have decreased by $2.02 million or 3.65%. Loan demand continues at a
moderate pace even during a period of economic uncertainty and within a
competitive market area. Deposits as of March 31, 2003 have increased $17.43
million since December 31, 2002 and $33.78 million since March 31, 2002.
Consumers have continued to invest their monies primarily in savings and
checking accounts due to the continued market uncertainty.
Non-performing assets are comprised of loans on non-accrual status, loans
contractually past due 90 days or more and still accruing interest, other real
estate owned and repossessions. Non-performing assets were $4.23 million or 1.23
% of total loans at March 31, 2003 compared with $3.11 million or 0.92% of total
loans at December 31, 2002 and $2.17 million or 0.65% of total loans at March
31, 2002. This increase in non-performing assets at March 31, 2003 can be
attributed in large part to less favorable economic conditions within the
Company's primary market areas. The downturn in the economy has resulted in a
number of plant layoffs and downsizings that have contributed to this increase
in non-performing assets.
Securities totaled approximately $114.55 million (market value) at March 31,
2003, which reflects an increase of $9.63 million or 9.17% from the December 31,
2002 total of $104.92 million. The majority of the Company's investment
purchases during the quarter were tax-exempt municipals and adjustable rate
mortgage-backed securities. Investment securities available for sale and other
investments, as of March 31, 2003 are comprised of mortgage backed securities
(approximately 53.32% of the total securities portfolio), municipal issues
(approximately 31.51%) , collateralized mortgage obligations (CMO's)
(approximately 1.38%), corporate bonds (approximately 2.39%), SBA backed
securities and asset-backed securities (approximately 1.23%), U. S. government
agencies (approximately 0.44%), and equity securities (approximately 7.66%). The
Company's entire securities portfolio is classified as available for sale for
both 2003 and 2002. Other investments include the Bank's holdings of Federal
Reserve, Federal Home Loan Bank and Community Bankers' Bank stock. These
investments (carrying value of $2.37 million and approximately 2.07% of the
total) are considered to be restricted as the Company is required to hold these
investments and the only market for these investments is the issuing agency.
In June 2002, the Company purchased $7.00 million of Bank Owned Life Insurance
covering the lives of selected officers as well as the Directors of the
Corporation. The monthly earnings related to the insurance policies will be used
to offset future employee benefit costs. An additional $380 thousand of BOLI was
purchased during the third quarter of 2002.
In April 2002, the Company became an equity owner in the Virginia Title Center,
LLC, headquartered in Roanoke, Virginia. Virginia Title Center, LLC was formed
for the purpose of issuing title insurance and is owned by several Virginia
banks. It is anticipated that this investment will help to generate on-going
non-interest income for the Company.
Total stockholders' equity of the Company was $33.43 million at March 31, 2003,
representing an increase of $5.39 million or 19.23% over March 31, 2002. Total
stockholders' equity at December 31,
11
2002 was $32.2 million. The Company maintains a significant level of liquidity
in the form of cash and cash equivalents ($22.74 million at March 31, 2003) and
investment securities available for sale ($112.18 million). Cash and cash
equivalents are immediately available for satisfaction of deposit withdrawals,
customer credit needs, and operations of the Company. The Company also maintains
a significant amount of available credit with both the Federal Home Loan Bank
and several correspondent financial institutions. Investment securities
available for sale represent a secondary level of liquidity available for
conversion to liquid funds in the event of extraordinary needs.
Forward-Looking Information
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally identified by phrases such as
"the Company expects," "the Company believes" or words of similar import. These
statements speak only as of the date of this report. The statements are based on
current expectations, are inherently uncertain, are subject to risks, and should
be viewed with caution. Such forward-looking statements involve known and
unknown risks including, but not limited to, changes in general economic and
business conditions, interest rate fluctuations, competition within and from
outside the banking industry, new products and services in the banking industry,
risk inherent in making loans such as repayment risks and fluctuating collateral
values, problems with technology utilized by the Company, changing trends in
customer profiles and changes in laws and regulations applicable to the Company.
Although the Company believes that its expectations are based upon reliable
assumptions within the bounds of its 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.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk (IRR) and Asset Liability Management
The Company's profitability is dependent to a large extent upon its net interest
income (NII), which is the difference between its interest income on
interest-bearing assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Company,
like other financial institutions, is subject to interest rate risk to the
degree that its interest-earning assets reprice differently than its
interest-bearing liabilities. The Company manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.
Specific strategies for management of interest rate risk (IRR) on the lending
side of the balance sheet have included the use of ballooning fixed rate loans
and maintaining a significant level of 1, 3 and 5-year adjustable rate
mortgages. On the investment side, the Company maintains a significant portion
of its portfolio in adjustable rate securities. These strategies help to reduce
the average maturity of the Company's interest-earning assets.
The Company attempts to control its IRR exposure to protect net interest income
and net earnings from fluctuations in the general level of interest rates. To
measure its exposure to IRR, the Company performs monthly simulations of NII
using financial models that project NII through a range of possible interest
rate environments including rising, declining, flat and most likely rate
scenarios. The results of these
12
simulations indicate the existence and severity of IRR in each of those rate
environments based upon the current balance sheet position and assumptions as to
changes in the volume and mix of interest-earning assets and interest-bearing
liabilities and management's estimate of yields attainable in those future rate
environments and rates which will be paid on various deposit instruments and
borrowings. The Company runs these rate shock scenarios for 12 and 24 month
projections out from the current month of the model.
Over the past 18 months, management has made a concerted effort to shift a
portion of its short-term liablilities to longer-term maturities. This is being
done to help maintain a favorable interest spread once interest rates rise in
the future. The Company has been able to achieve this balance sheet
restructuring in several ways. Beginning in August 2001, the Company began
offering higher than market rates on its 24-month, 36-month, 48-month and
60-month certificates of deposit accounts and individual retirement accounts. By
doing this the Company was able to shift existing customers' time deposits, as
well as attracting new time deposit customers, to longer term maturities. The
Company has also seen significant increases in its 1-4 family mortgage lending.
The increase in this loan category has been primarily in adjustable rate
mortgages with one and three-year interest rate resets.The earnings sensitivity
measurements completed on a monthly basis indicate that the performance criteria
against which sensitivity is measured, are currently within the Company's
defined policy limits. A more complete discussion of the overall interest rate
risk is included in the Company's Form 10-K annual report for December 31, 2002.
ITEM 4.
Controls and Procedures
On an on-going basis, senior management monitors and reviews the internal
controls established for the various operating segments of the Bank.
Additionally, the Company has created a Disclosure Review Committee to review
not only internal controls but the information used by the Company's financial
officers to prepare the Company's periodic SEC filings and corresponding
financial statements. The Committee is comprised of the Senior Management Team
of the Bank and meets at least quarterly. Internal audits conducted by the
Company's internal audit department are also reviewed by senior officers to
assist them in assessing the adequacy of the Company's internal control
structure. These audits are also discussed in detail with the Company's Audit
Committee. The Company feels that sufficient internal controls and disclosure
controls have been established and have reviewed such controls within the last
90 days.
Furthermore, management asserts that there have not been any significant changes
in the company's internal controls or in other factors that could significantly
affect these controls or other factors subsequent to the date of management's
most recent evaluation.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Description
99.1 Certification Statement of Executive Vice President
and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.
99.2 Certification Statement of Executive Vice President
and Cashier pursuant to 18 U.S.C. Section 1350.
99.3 Certification Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
99.4 Certification Statement of Vice President of
Accounting pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K--None
14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
(Registrant)
Date: May 12, 2003 /s/ Samuel L. Neese
------------------------------------------
Samuel L. Neese
Executive Vice President and
Chief Executive Officer
Date: May 12, 2003 /s/ James T. Riffe
------------------------------------------
James T. Riffe
Executive Vice President & Cashier
15
CERTIFICATIONS
I, Samuel L. Neese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /S/ Samuel L. Neese
Samuel L. Neese ---------------------------------
Executive Vice President and Chief Executive Officer
16
I, James T. Riffe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ James T. Riffe
--------------------------------
James T. Riffe
Executive Vice President and Cashier
17
I, Robert M. Little, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Robert M. Little, Jr.
--------------------------------
Robert M. Little, Jr.
Chief Financial Officer,
Highlands Bankshares, Inc.
18
I, James R. Edmondson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highlands
Bankshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ James R. Edmondson
--------------------------------
James R. Edmondson
Vice President of Accounting,
Highlands Bankshares, Inc.
19
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
99.1 Certification Statement of Executive Vice
President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
99.2 Certification Statement of Executive Vice
President and Cashier pursuant to 18 U.S.C.
Section 1350.
99.3 Certification Statement of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
99.4 Certification Statement of Vice President of
Accounting pursuant to 18 U.S.C. Section
1350.
20