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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, 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)



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, 2004



Highlands Bankshares, Inc.


FORM 10-Q

For the Quarter Ended June 30, 2004


INDEX


PART I. FINANCIAL INFORMATION                                                          PAGE


     Item 1.  Financial Statements


          Consolidated Balance Sheets

               June 30, 2004 (Unaudited) and December 31, 2003 (Note 1) . . . . . . . . . . . . .3

 

          Consolidated Statements of Income (Unaudited)

               for the Three Months and Six Months Ended

               June 30, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

.

          Consolidated Statements of Cash Flows (Unaudited)

               for the Six Months Ended

               June 30, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5


          Consolidated Statements of Changes in

                Stockholders’ Equity (Unaudited) for the Three Months and

                Six Months Ended June 30, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . .6-7


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


     Item 2. Management’s Discussion and Analysis of

                  Financial Condition and Results of

                  Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-14


     Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . .15


     Item 4.  Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

 

PART II.  OTHER INFORMATION


     Item 1.  Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17


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

                   Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17


     Item 3.  Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17


     Item 4.  Submission of Matters to a Vote of

                   Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17


     Item 5.  Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17


     Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-19


SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20


2

PART I.   FINANCIAL INFORMATION

 ITEM 1.   FINANCIAL STATEMENTS


Consolidated Balance Sheets

(Amounts in thousands)


ASSETS

 

(Unaudited)

June 30, 2004

 

(Note 1)

December 31, 2003

     

Cash and due from banks

 

$  11,944

 

 $     14,473

Federal funds sold

 

     913

 

   389

     

   Total Cash and Cash Equivalents

 

   12,857

 

   14,862

     

Investment securities available for sale (amortized
 cost $127,223 as of June 30, 2004, $122,336 as of
 December 31, 2003)

 

123,855

 

122,064

Other investments, at cost

 

3,169

 

2,900

Loans, net of allowance for loan losses of $4,318 at
 June 30, 2004, $4,274 at December 31, 2003

 

378,955

 

373,534

Premises and equipment, net

 

16,150

 

15,465

Interest receivable

 

2,707

 

2,749

Other assets

 

      13,440

 

   11,842

     

    Total Assets

 

$  551,133

 

$  543,416

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

    
     

LIABILITIES

    
     

Deposits:

    

  Non-interest bearing

 

$   66,726

 

$   59,057

  Interest bearing

 

   389,135

 

  390,952

     

    Total Deposits

 

   455,861

 

  450,009

     

Federal funds purchased

 

9,395

 

-0-

Interest, taxes and other liabilities

 

2,147

 

2,244

Other short-term borrowings

 

20,547

 

33,000

Long-term debt

 

21,359

 

16,429

Capital securities

 

       6,300

 

  6,300

     

    Total Other Liabilities

 

     59,748

 

  57,973

     

    Total Liabilities

 

   515,609

 

  507,982

     

STOCKHOLDERS’ EQUITY

    
     

Common stock (2,662 and 2,659 shares issued and
 outstanding, respectively)

 

3,327

 

3,324

Additional paid-in capital

 

6,355

 

6,305

Retained earnings

 

28,064

 

25,984

Accumulated other comprehensive income

 

   (2,222)

 

    (179)

     

  Total Stockholders’ Equity

 

35,524

 

  35,434

     

    Total Liabilities and Stockholders’ Equity

 

$  551,133

 

$   543,416


See accompanying Notes to Consolidated Financial Statements



3

Consolidated Statements of Income

(Amounts in thousands, except for per share data)

(Unaudited)

 

Three Months
Ended June 30,
2004

Three Months
Ended June 30,
2003

Six Months
Ended June 30,
2004

Six Months

Ended June 30,
2003

INTEREST INCOME

    

Loans receivable and fees on loans

$    6,032

$    6,190

$  12,202

$  12,426

Securities available for sale:

    

  Taxable

545

598

1,058

1,316

  Exempt from taxable income

624

519

1,260

911

Other investment income

20

30

40

56

Federal funds sold

           2

           20

           4

           51

     

    Total Interest Income

     7,223

      7,357

  14,564

    14,760

     

INTEREST EXPENSE

    

Deposits

2,242

2,644

4,548

5,332

Federal funds purchased

22

-

33

-

Other borrowed funds

         662

         635

      1,317

      1,284

     

    Total Interest Expense

      2,926

      3,279

      5,898

      6,616

     

    Net Interest Income

      4,297

      4,078

      8,666

      8,144

     

Provision for Possible Loan Losses

         341

         510

         689

         980

     

    Net Interest Income after Provision for

       Loan Losses

      3,956

      3,568

      7,977

      7,164

     

NON-INTEREST INCOME

    

Securities gains (losses), net

150

280

203

382

Service charges on deposit accounts

690

677

1,309

1,284

Other service charges, commissions and fees

197

201

372

383

Other operating income

         152

           159

         336

          304

    

    

    Total Non-Interest Income

      1,189

         1,317

      2,220

       2,353

     

NON-INTEREST EXPENSE

    

Salaries and employee benefits

2,166

1,883

4,266

3,753

Occupancy expense of bank premises

187

147

376

292

Furniture and equipment expense

350

425

759

836

Other operating expense

         944

         909

      1,833

      1,692

     

    Total Non-Interest Expense

      3,647

      3,364

      7,234

      6,573

     

    Income Before Income Taxes

1,498

1,521

2,963

2,944

     

Income Tax Expense

         289

         338

         564

         676

     

    Net Income

$    1,209

$    1,183

$    2,399

$    2,268

     

Basic Earnings Per Common Share – Weighted Average

$      0.45

$      0.45

$      0.90

$      0.86

Earnings Per Common Share – Assuming Dilution

$      0.43

$      0.43

$      0.85

$      0.82


See accompanying Notes to Consolidated Financial Statements


4


Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)

  

Six Months Ended
June 30, 2004

 

Six Months Ended
June 30, 2003

 

CASH FLOWS FROM OPERATING  ACTIVITIES:

   
 

Net income

$       2,399

 

$       2,268

 

Adjustments to reconcile net income to net cash provided by operating

   
 

  activities

   
 

Provision for loan losses

689

 

980

 

Depreciation and amortization

482

 

482

 

Net realized gains losses on available-for-sale securities

(205)

 

  (382)

 

Net amortization on securities

273

 

105

 

Amortization of capital issue costs

6

 

6

 

(Increase) decrease in interest receivable

42

 

(128)

 

(Increase) in other assets

(546)

 

(1,081)

 

Increase (decrease) in interest, taxes and other liabilities

            (97)

 

              20

     
 

Net cash provided by (used in) operating activities

          3,043

 

         2,270

     
 

CASH FLOWS FROM INVESTING ACTIVITIES:

   
 

Securities available for sale:

   
 

Proceeds from sale of debt and equity securities

8,357

 

4,759

 

Proceeds from maturities of debt and equity securities

10,936

 

12,874

 

Purchase of debt and equity securities

(24,270)

 

(29,085)

 

Purchase of other investments

(269)

 

(186)

 

Net increase in loans

(6,110)

 

(22,691)

 

Premises and equipment expenditures

        (1,136)

 

        (719)

     
 

Net cash used in investing activities

      (12,492)

 

   (35,048)

     
 

CASH FLOWS FROM FINANCING ACTIVITIES:

   
 

Net increase (decrease) in time deposits

  (5,276)

 

9,203

 

Net increase in demand, savings and time deposits

11,114

 

21,266

 

Net (decrease) in short-term borrowings

(3,058)

 

(86)

 

Net increase (decrease) in long-term debt

4,930

 

(11)

 

Cash dividends paid

(319)

 

(265)

 

Repurchase of capital securities

-

 

(1,200)

 

Proceeds from exercise of common stock options

53

 

68

 

Proceeds from issuance of common stock through Dividend

   
 

   Reinvestment and Stock Purchase Plan

                  -

 

                16

     
 

Net cash provided by financing activities

          7,444

 

      28,991

     
 

Net increase in cash and cash equivalents

(2,005)

 

(3,787)

     
 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

        14,862

 

      18,501

     
 

CASH AND CASH EQUIVALENTS AT END OF QUARTER

$      12,857

 

$    14,714

     
 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW

   INFORMATION

   
 

Cash paid during the year for:

   
 

Interest

$          5,988

 

$         6,741

 

Income taxes

$             569

 

$            650

     


See accompanying Notes to Consolidated Financial Statements



5

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, 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)

       

    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

       
       

Balance, March 31, 2004

2,662

$    3,327

$   6,355

$   26,855

$  796

$    37,333

       

Comprehensive income:

      

Net income

-

-

-

1,209

-

1,209

Change in unrealized gain (loss) on
  securities available for sale, net of
  deferred income tax benefit of  $1,504

-

-

-

 

(2,919)

(2,919)

Less: reclassification adjustment
  net of deferred tax expense of $50

-

-

-

 

        (99)

          (99)

    Total comprehensive income

-

-

-

-

-

(1,809)

       

Common stock issued for stock
  options exercised, net

-

-

-

-

-

-

Common stock issued for
  dividend reinvestment and
  optional cash purchase plan

-

-

-

-

-

--

Cash dividend

-

-

-

-

-

-

       

Balance, June 30, 2004

2,662

$    3,327

$    6,355

$   28,064

$   (2,222)

$    35,524


See accompanying Notes to Consolidated Financial Statements


(continued)


6


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, 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
&nbs