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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, 2004

[   ] 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)

276-628-9181

(Registrant’s telephone number, including area code)  

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 practicable date.

2,661,787 shares of common stock, par value $1.25 per share,

outstanding as of May 13, 2004

Highlands Bankshares, Inc.

FORM 10-Q

For the Quarter Ended March 31, 2004

INDEX

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PART I. FINANCIAL INFORMATION

 ITEM 1.  FINANCIAL STATEMENTS

Consolidated Balance Sheets

(Amounts in thousands)

See accompanying Notes to Consolidated Financial Statements

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Consolidated Statements of Income

(Amounts in thousands, except for per share data)

(Unaudited)

See accompanying Notes to Consolidated Financial Statements

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Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

See accompanying Notes to Consolidated Financial Statements

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Consolidated Statements of Changes in Stockholders’ Equity

(Amounts in thousands)

(Unaudited)

See accompanying Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

(Unaudited)

(in thousands, except share, per share and percentage data)

Note 1.  -  General

The consolidated financial statements of Highlands Bankshares, Inc. (the “Company”) 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, 2003 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, 2003 (the “2003 Form 10-K”). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2003 Form 10-K. The results of operations for the three-month periods ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year.

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:

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 differences are as follows:

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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, including Highlands Union Bank (the “Bank”), 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 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 the Bank as of March 31, 2004.

Note 5 - Capital Securities

The Company completed a $7.5 million capital issue of trust preferred debt securities on January 23, 1998.  These securities were issued by Highlands Capital Trust, a wholly owned subsidiary of the Company, at a price per share of $25.00.  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, the $1.2 million par value of these repurchased 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 the three months ended March 31, 2004 and 2003.

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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 (the “Plan”) for its shareholders. The Plan enables 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. The Plan has not received any reinvested dividends and optional cash purchases from Plan participants for the 2004 calendar year. The Plan has been widely accepted by the shareholder base.

Note 8 – Commitments and Contingencies

The Bank is a party to various financial instruments with off-balance sheet risk arising in the normal course of business to meet the financing needs 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 $3.52 million; equity lines of credit of $7.11 million; credit card lines of credit of $3.59 million; commercial real estate, construction and land development commitments of $1.26 million; and other unused commitments to fund interest earning assets of $20.70 million.

As of March 31, 2004, the Bank had completed construction and opened a branch office in Banner Elk, North Carolina. The purchase of this property was completed in August 2003 by a cash payment of $270 thousand and a seller financed note payable in the amount of $250 thousand.

Note 9 – Summary of Significant Accounting Policy Update For Certain Required Disclosures

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of Financial Accounting Standard 5, "Accounting for Contingencies", relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying value that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of this interpretation, including, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, subordinated interests in a special purpose entity, and guarantees of a company's own future performance.  

Other guarantees are subject to the disclosure requirements of FIN 45 but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under FAS 133, a parent company's guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance rather than price. FIN 45 requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee.  The requirements of FIN 45 did not have a material impact on results of operations, financial position, or liquidity in the first three months of 2004.

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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.

Critical Accounting Policies

The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to Consolidated Financial Statements and management’s discussion and analysis are, to a large degree, dependent upon the accounting policies of the Company.  The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.  

Presented below is a discussion of those accounting policies that management believes are the most important to the portrayal and understanding of the Company’s financial condition and results of operations.  These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain.  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.  See also Note 1 of the Notes to Consolidated Financial Statements in the 2003 Form 10-K.

Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan and lease portfolio.  The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance:  the systematic methodology used to determine the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

The Company evaluates various loans individually for impairment as required by Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures.  Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management.  The evaluations are based upon discounted expected cash flows or collateral valuations.  If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.  If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies, with a group of loans that have similar characteristics.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS No. 5.  Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type.  A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan.  The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans and leases, including:  borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.  

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The amounts of estimated impairment for individually evaluated loans and groups of loans are added together for a total estimate of loans and lease losses.  This estimate of losses is compared to the allowance for loan and lease losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made.  If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates.  If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses.  The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties  and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high.  If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.  

Results of Operations

Results of operations for the three-month periods ended March 31, 2004 and March 31, 2003 reflected net income of $1.19 million and $ 1.09 million, respectively, an increase of 9.71%. This increase was in part due to the Company’s ability to increase its net interest income as well as reducing the amount of provision for loan losses over the corresponding 2003 period. During the last three years, the Company has been in a liability sensitive position. Over this time period, the Company’s interest-bearing liabilities have been repricing at a quicker pace than its interest-earning assets as interest rates have fallen and have remained at record lows. This trend has slowed over the past nine months. Total interest income for the three months ended March 31, 2004  was approximately $62 thousand less than the comparable 2003 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 $365 thousand due to new interest-bearing deposits being recorded at lower rates and existing interest-bearing deposits repricing lower as they mature or reprice. During the first three months of 2004, the Company’s non-interest income decreased by $64 thousand over the corresponding period for 2003. This decrease was primarily due to a drop in securities gains of $49 thousand over the comparable 2003 period. Operating results of the Company when measured as a percentage of average equity reveals a decrease in return on average equity from 13.24% for the three-month period ended March 31, 2003 to 13.07% for the corresponding period in 2004.

Return on average assets of 0.87% for the three months ended March 31, 2004 remained constant when compared to the same period in 2003.

Net interest income for the three-month period ended March 31, 2004 increased 7.45% or approximately $303 thousand as compared to the corresponding 2003 period.  Average interest-earning assets increased approximately $45.73 million from the period ended March 31, 2003 to the current period while average interest-bearing liabilities increased $39.33 million from the same period .. The tax-equivalent yield on average interest-earning assets was 6.04% in 2004 representing a decrease of 54 basis points over the tax-equivalent yield of 6.58% in 2003.  The yield on average interest-bearing liabilities decreased 62 basis points to 2.67% in 2004 as compared to 3.29% in 2003.

The provision for possible loan losses for the three-month period ended March 31, 2004 totaled $348 thousand. This represents a decrease of $122 thousand over the comparable period in 2003. The Company continually monitors the loan portfolio for signs of credit weaknesses or developing collection problems. Loan loss provisions 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 three months of 2004 were $343 thousand compared with $305 thousand for the

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corresponding period in 2003. Year–to–date net charge-offs were 0.09% and 0.09% of total loans for the periods ended March 31, 2004 and March 31, 2003, respectively. Loan loss reserves increased 5.87% to $4.28 million at March 31, 2004 from the same date in 2003.  

Financial Position

Total loans have increased from $344.76 million at March 31, 2003 to $379.42 million at March 31, 2004. For the three- month period ended March 31, 2004, total loans increased $1.61 million. The loan to deposit ratio increased from 80.60% at March 31, 2003 to 83.71% at March 31, 2004. The loan to deposit ratio at December 31, 2003 was 83.96%. The main reason for the increase in the loan to deposit ratio is due to a smaller increase in deposits due to the recent competition related to gathering customer deposits. Customers are also beginning to invest a portion of the funds back into the equity markets even though overall investor confidence seems to still be very low. Deposits as of March 31, 2004 increased $3.26 million since December 31, 2003 and $25.54 million since March 31, 2003. Likewise, with the less favorable economic environment, customers are not borrowing money as readily as they have in past years. Loan demand continues at a moderate pace even during a period of economic uncertainty and within a competitive market area.

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 $4.86 million or 1.28% of total loans at March 31, 2004 compared with $4.96 million or 1.31% of total loans at December 31, 2003 and $4.23 million or 1.23% of total loans at March 31, 2003. This increase, from March 31, 2003, in non-performing assets can be attributed in large part to less favorable economic conditions within the Company’s primary market areas as well as several large commercial loans that have gone past due greater than ninety days. 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.

Investment securities and other investments totaled approximately $135.79 million (market value) at March 31, 2004, which reflects an increase of $10.82 million or 8.66% from the December 31, 2003 total of $124.96 million. The majority of the Company’s investment purchases during the three- month period were fixed and adjustable rate mortgage-backed securities and tax-exempt municipals. Investment securities available for sale and other investments, as of March 31, 2004, are comprised of mortgage backed securities (approximately 47.16% of the total securities portfolio), municipal issues (approximately 36.32%), collateralized mortgage obligations (CMO’s) (approximately 0 ..03%), corporate bonds (approximately 4.77%), Small Business Administration backed securities and asset-backed securities (approximately 0.26%), U. S. government agencies (approximately 1.68%), and equity securities (approximately 7.87%).  The Company’s entire securities portfolio is classified as available for sale at both March 31, 2004 and 2003. Other investments include the Bank’s holdings of Federal Reserve, Federal Home Loan Bank and Community Bankers Bank stock. These investments (carrying value of $2.60 million and approximately 1.91% 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 Bank purchased $7 million of Bank- Owned Life Insurance covering the lives of selected officers as well as the Directors of the Bank .. 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 Bank 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 generate on-going non-interest income for the Bank.

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Liquidity and Capital Resources

Total stockholders’ equity of the Company was $37.33 million at March 31, 2004, representing an increase of $3.91 million or 11.69% over March 31, 2003.  Total stockholders’ equity at December 31, 2003 was $35.43 million. Liquidity is the ability to provide sufficient cash levels to meet financial commitments and to fund loan demand and deposit withdrawals. The Company maintains a significant level of liquidity in the form of cash and cash equivalents ($11.69 million at March 31, 2004) and investment securities available for sale ($133.19 million at March 31, 2004).  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. The Bank also has the ability to attract certificates of deposits outside its market area by posting rates on the internet. The primary investors utilizing this network are credit unions. Investment securities available for sale represent a secondary level of liquidity available for conversion to liquid funds in the event of extraordinary needs. The Company believes that it maintains sufficient liquidity to meet requirements and 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.

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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 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 24 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 2003 Form 10-K.

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.

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We have carried out an evaluation, under the supervision and the participation of our management, including our Executive Vice President and Chief Executive Officer, our Executive Vice President and Chief Operations Officer, our Chief Financial Officer and our Vice President of Accounting, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”) as of the period covered by this report. Based upon that evaluation, our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Vice President of Accounting concluded that our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Vice President of Accounting, as appropriate to allow timely decisions regarding required disclosure. The Company feels that sufficient internal controls and disclosure controls have been established and have evaluated such controls as of the end of the period covered by this report and believe them to be effective.

Management asserts that there have not been any changes in the Company’s internal controls over financial reporting during the first quarter of 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

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.  (a)

Exhibits

31.1

Rule 13a-14(a) Certification of Executive Vice President and Chief Executive Officer.

31.2

Rule 13a-14(a) Certification of Executive Vice President and Cashier.

31.3

Rule 13a-14(a) Certification of Chief Financial Officer - Highlands Bankshares, Inc.

31.4

Rule 13a-14(a) Certification of Chief Financial Officer - Highlands Union Bank.

32.1

Certification Statement of Executive Vice President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2

Certification Statement of Executive Vice President and Cashier pursuant to 18 U.S.C. Section 1350.

32.3

Certification Statement of Chief Financial Officer - Highlands Bankshares, Inc. pursuant to 18 U.S.C. Section 1350.

32.4

Certification Statement of Chief Financial Officer - Highlands Union Bank pursuant to 18 U.S.C. Section 1350.

(b)

Reports on Form 8-K – None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HIGHLANDS BANKSHARES, INC.

 (Registrant)

Date:  May 13, 2004

/s/ Samuel L. Neese          

Samuel L. Neese

Executive Vice President and

   Chief Executive Officer

Date:  May 13, 2004

/s/ James T. Riffe          

James T. Riffe

Executive Vice President & Cashier

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Exhibit Index

31.1

Rule 13a-14(a) Certification of Executive Vice President and Chief Executive Officer.

31.2

Rule 13a-14(a) Certification of Executive Vice President and Cashier.

31.3

Rule 13a-14(a) Certification of Chief Financial Officer - Highlands Bankshares, Inc.

31.4

Rule 13a-14(a) Certification of Chief Financial Officer - Highlands Union Bank.

32.1

Certification Statement of Executive Vice President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2

Certification Statement of Executive Vice President and Cashier pursuant to 18 U.S.C. Section 1350.

32.3

Certification Statement of Chief Financial Officer - Highlands Bankshares, Inc. pursuant to 18 U.S.C. Section 1350.

32.4

Certification Statement of Chief Financial Officer - Highlands Union Bank pursuant to 18 U.S.C. Section 1350.

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