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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 June 30, 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

(State or Other Jurisdiction of

Incorporation or Organization)

54-1796693

(I.R.S. Employer

Identification No.)


P.O. Box 1128

Abingdon, Virginia  

(Address of Principal Executive Offices)



24212-1128

(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.


2,653,886 shares of common stock, par value $1.25 per share, outstanding as of August 12, 2003




Highlands Bankshares, Inc.


FORM 10-Q

For the Quarter Ended June 30, 2003


INDEX


PART I. FINANCIAL INFORMATION                                                        PAGE


     Item 1.  Financial Statements


          Consolidated Balance Sheets

               June 30, 2003 (Unaudited) and December 31, 2002 (Note 1) …. . . . . . . . .3

 

          Consolidated Statements of Income (Unaudited)

               for the Three Months and Six Months Ended

               June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

.

          Consolidated Statements of Cash Flows (Unaudited)

               for the Six Months Ended

               June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5


          Consolidated Statements of Changes in

                Stockholders’ Equity (Unaudited) for the Three Months and

                Six Months Ended June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . .  . . 6-7


Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . 8-10


     Item 2. Management’s Discussion and Analysis of

                  Financial Condition and Results of

                  Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-13


     Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . 13-14


     Item 4.  Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

 

PART II.  OTHER INFORMATION


     Item 1.  Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15


     Item 2.  Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . .15


     Item 3.  Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15


     Item 4.  Submission of Matters to a Vote of

                   Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15


     Item 5.  Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15


     Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 15-16


SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17



PART I. FINANCIAL INFORMATION

 ITEM 1.  FINANCIAL STATEMENTS


Consolidated Balance Sheets

(Amounts in thousands)


ASSETS

 

(Unaudited)

June 30, 2003

 

(Note 1)

December 31,

2002

     

Cash and due from banks

 

$     13,529

 

     $      13,369

Federal funds sold

 

     1,185

 

          5,132

     

   Total Cash and Cash Equivalents

 

   14,714

 

        18,501

     

Investment securities available for sale  (amortized cost $112,940 as of June 30, 2003, $101,211 as of December 31, 2002)

 

115,067

 

102,743

Other investments, at cost

 

2,368

 

2,182

Loans, net of allowance for loan losses of $4,155 at June 30, 2003, $3,877 at December 31, 2002

 

357,355

 

335,644

Premises and equipment, net

 

13,422

 

13,157

Interest receivable

 

2,836

 

2,708

Other assets

 

   11,513

 

        10,668

     

    Total Assets

 

$   517,275

 

$    485,603

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

    
     

LIABILITIES

    
     

Deposits:

    

  Non-interest bearing

 

$     61,247

 

$      55,597

  Interest bearing

 

 379,523

 

     354,704

     

    Total Deposits

 

 440,770

 

     410,301

     

Interest, taxes and other liabilities

 

2,329

 

2,309

Other short-term borrowings

 

19,008

 

19,094

Long-term debt

 

14,189

 

14,200

Capital securities

 

     6,300

 

         7,500

     

    Total Other Liabilities

 

   41,826

 

       43,103

     

    Total Liabilities

 

 482,596

 

     453,404

     

STOCKHOLDERS’ EQUITY

    
     

Common stock (2,654 and 2,648 shares issued and outstanding, respectively)

 

3,317

 

3,309

Additional paid-in capital

 

6,226

 

6,150

Retained earnings

 

23,732

 

21,729

Accumulated other comprehensive income

 

    1,404

 

         1,011

     

  Total Stockholders’ Equity

 

34,679

 

       32,199

     

    Total Liabilities and Stockholders’ Equity

 

$  517,275

 

$   485,603

     


See accompanying Notes to Consolidated Financial Statements


Consolidated Statements of Income

(Amounts in thousands, except for per share data)

(Unaudited)


 

Three Months Ended June 30, 2003

Three Months Ended June 30, 2002

Six Months Ended June 30, 2003

Six Months

Ended June 30, 2002

INTEREST INCOME

    

Loans receivable and fees on loans

$    6,190

$    6,549

$  12,426

$  13,159

Securities available for sale:

    

  Taxable

598

860

1,316

1,765

  Exempt from taxable income

519

308

911

596

Other investment income

30

30

56

61

Federal funds sold

           20

           20

           51

           36

     

    Total Interest Income

7,357

      7,767

14,760

15,617

     

INTEREST EXPENSE

    

Deposits

2,644

2,917

5,332

6,085

Federal funds purchased

-

-

-

3

Other borrowed funds

         635

         634

        1,284

        1,202

     

    Total Interest Expense

      3,279

      3,551

6,616

7,290

     

    Net Interest Income

      4,078

      4,216

      8,144

      8,327

     

Allowance for Loan Losses

         510

         575

         980

         987

     

    Net Interest Income after Allowance for Loan Losses

      3,568

      3,641

      7,164

      7,340

     

NON-INTEREST INCOME

    

Securities gains (losses), net

280

27

382

3

Service charges on deposit accounts

677

681

1,284

1,190

Other service charges, commissions and fees

201

187

383

336

Other operating income

         159

           27

         304

           48

    

    

    Total Non-Interest Income

      1,317

         922

      2,353

         1,577

     

NON-INTEREST EXPENSE

    

Salaries and employee benefits

1,883

1,817

3,753

3,568

Occupancy expense of bank premises

147

148

292

292

Furniture and equipment expense

425

480

836

846

Other operating expense

         909

         745

         1,692

         1,588

     

    Total Non-Interest Expense

      3,364

3,190

      6,573

      6,294

     

    Income Before Income Taxes

1,521

1,373

2,944

2,623

     

Income Tax Expense

         338

         371

         676

         703

     

    Net Income

$    1,183

$       1,002

$    2,268

$      1,920

     

Basic Earnings Per Common Share – Weighted Average

$      0.45

$      0.38

$      0.86

$      0.73

     

Earnings Per Common Share – Assuming Dilution

$      0.43

$      0.36

$      0.82

$      0.70

     


See accompanying Notes to Consolidated Financial Statements



Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

Six Months Ended

June 30, 2003

Six Months Ended

June 30, 2002

CASH FLOWS FROM OPERATING  ACTIVITIES:

  

Net income

$       2,268 

$       1,920 

Adjustments to reconcile net income to net cash provided by operating

  

  Activities

  

Provision for loan losses

980 

987 

Depreciation and amortization

482 

482 

Net realized (gains) on available-for-sale securities

(382)

(3)

Net amortization on securities

105 

78 

Amortization of capital issue costs

6 

5 

(Increase) decrease in interest receivable

(128)

59 

(Increase) in other assets

(1,081)

(7,264)

Increase in interest, taxes and other liabilities

          20 

             (749)

   

Net cash provided by operating activities

       2,270 

        (4,485)

   

CASH FLOWS FROM INVESTING ACTIVITIES:

  

Securities available for sale:

  

Proceeds from sale of debt and equity securities

4,759 

8,694 

Proceeds from maturities of debt and equity securities

12,874 

11,046 

Purchase of debt and equity securities

(29,085)

(14,831)

Purchase of other investments

(186)

(211)

Net increase in loans

(22,691)

(10,896)

Premises and equipment expenditures

        (719)

        (510)

   

Net cash used in investing activities

   (35,048)

     (6,708)

   

CASH FLOWS FROM FINANCING ACTIVITIES:

  

Net increase (decrease) in time deposits

9,203 

(13,949)

Net increase in demand, savings and time deposits

21,266 

18,450 

Repayment of short-term borrowings

(86)

(71)

Proceeds from issuance of long-term debt

- 

10,000 

Repayment of long-term debt

(11)

(23)

Cash dividends paid

(265)

(238)

Repurchase of capital securities

(1,200)

-

Proceeds from exercise of common stock options

68 

13 

Proceeds from issuance of common stock through Dividend Reinvestment and

  

   Stock Purchase Plan

               16 

           14 

   

Net cash provided by financing activities

      28,991 

       14,196 

   

Net increase (decrease) in cash and cash equivalents

(3,787)

3,003 

   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

      18,501 

      12,241 

   

CASH AND CASH EQUIVALENTS AT END OF QUARTER

$    14,714 

$    15,244 

   

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

  

Cash paid during the year for:

  

Interest

$      6,741 

$      8,479 

Income taxes

$         650 

$         830 

   


See accompanying Notes to Consolidated Financial Statements



Consolidated Statements of Changes in Stockholders’ Equity

(Amounts in thousands)

(Unaudited)

     

Accumulated

 
   

Additional

 

Other

Total

 

Common Stock

Paid-in

Retained

Comprehensive

Stockholders’

 

Shares

Par Value

Capital

Earnings

Income

Equity

       

Balance March 31, 2002

2,644 

$    3,305 

$    6,074 

$    18,543 

$      112 

$    28,034 

       

Comprehensive income:

      

Net income

- 

- 

- 

1,002 

- 

1,002 

Change in unrealized gain (loss) on securities available for sale, net of deferred income tax benefit of $256

- 

- 

- 

- 

496 

496 

Less: reclassification adjustment

- 

- 

- 

- 

           (14)

            (14)

  net of deferred tax expense of $7

      

    Total comprehensive income

- 

- 

- 

- 

- 

$        1,484 

       

Common stock issued for stock options exercised, net

0 

0 

1 

- 

- 

1 

Common stock issued for dividend reinvestment and optional cash purchase plan

1 

1 

13 

-

- 

14 

Cash dividend

          - 

              - 

              - 

            - 

            - 

               - 

       

Balance, June 30, 2002

  2,645 

$    3,306 

$    6,088 

$     19,545 

$       594 

$    29,533 

       
       

Balance, March 31, 2003

2,651 

$    3,313 

$    6,172 

$   22,549 

$  1,392 

$    33,426 

       

Comprehensive income:

      

Net income

- 

- 

- 

1,183 

- 

1,183 

Change in unrealized gain (loss) on securities available for sale, net of deferred income tax expense of

   $101

- 

- 

- 

 

197 

197 

Less: reclassification adjustment

- 

- 

- 

 

        (185)

          (185)

  net of deferred tax expense of $95

      

    Total comprehensive income

- 

- 

- 

- 

- 

1,195 

       

Common stock issued for stock options exercised, net

2 

3 

42 

- 

- 

45 

Common stock issued for dividend reinvestment and optional cash purchase plan

1 

1 

12 

- 

- 

  13 

Cash dividend

- 

- 

- 

- 

- 

- 

       

Balance, June 30, 2003

   2,654 

$    3,317 

$    6,226 

$   23,732 

$   1,404 

$    34,679 

       


See accompanying Notes to Consolidated Financial Statements



(continued)





Consolidated Statements of Changes in Stockholders’ Equity (continued)

(Amounts in thousands)

(Unaudited)

     

Accumulated

 
   

Additional

 

Other

Total

 

    Common Stock

 

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

- 

- 

- 

1,920 

- 

1,920 

Change in unrealized gain (loss) on securities available for sale, net of deferred income tax expense of $192

- 

- 

-

- 

374 

374 

Less: reclassification adjustment

- 

- 

- 

- 

(2)

(2)

  net of deferred tax expense of $1

      

    Total comprehensive income

- 

- 

- 

- 

- 

$      2,292 

       

Common stock issued for stock options exercised, net

0 

1 

12 

- 

- 

13 

Common stock issued for dividend reinvestment and optional cash purchase plan

1 

1 

13 

- 

- 

14 

Cash dividend

          - 

              - 

              - 

       (238)

            - 

        (238)

       

Balance, June 30, 2002

  2,645 

$    3,306 

$    6,088 

$     19,545 

$       594 

$    29,533 

       
       

Balance, December 31, 2002

2,648 

$    3,309 

$    6,150 

$   21,729 

$  1,011 

$    32,199 

       

Comprehensive income:

      

Net income

- 

- 

- 

2,268 

- 

2,268 

Change in unrealized gain (loss) on securities available for sale, net of deferred income tax expense of

   $332 

- 

- 

- 

 

645 

645 

Less: reclassification adjustment

- 

- 

- 

 

(252)

(252)

  net of deferred tax expense of $130

      

    Total comprehensive income

- 

- 

- 

- 

- 

2,661 

       

Common stock issued for stock options exercised, net

5 

7 

61 

- 

- 

68 

Common stock issued for dividend reinvestment and optional cash purchase plan

1 

1 

15 

- 

- 

                    16 

Cash dividend

- 

- 

- 

(265)

- 

(265)

       

Balance, June 30, 2003

2,654 

$    3,317 

$    6,226

$   23,732 

$   1,404 

$    34,679