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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 September 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.


2,663,600 shares of common stock, par value $1.25 per share,

outstanding as of  November 12, 2004.




Highlands Bankshares, Inc.


FORM 10-Q

For the Quarter Ended September 30, 2004


INDEX


PART I. FINANCIAL INFORMATION

PAGE


     Item 1.  Financial Statements


          Consolidated Balance Sheets

               September 30, 2004 (Unaudited) and December 31, 2003 (Note 1)

3

 

          Consolidated Statements of Income (Unaudited)

               for the Three Months and Nine Months Ended

               September 30, 2004 and 2003

4

.

          Consolidated Statements of Cash Flows (Unaudited)

               for the Nine Months Ended

               September 30, 2004 and 2003

5


          Consolidated Statements of Changes in

                Stockholders’ Equity (Unaudited) for the Three Months and

                Nine Months Ended September 30, 2004 and 2003

6-7


Notes to Consolidated Financial Statements (Unaudited)

8-12


    Item 2. Management’s Discussion and Analysis of

                  Financial Condition and Results of Operations

13-16


     Item 3. Quantitative and Qualitative Disclosures About Market Risk

17


     Item 4.  Controls and Procedures

18

 

PART II.  OTHER INFORMATION


     Item 1.  Legal Proceedings

19


     Item 2.  Unregistered Sales of Equity Securities and

                   Use of Proceeds

19


     Item 3.  Defaults Upon Senior Securities

19


     Item 4.  Submission of Matters to a Vote of Security Holders

19


     Item 5.  Other Information

19


     Item 6.  Exhibits

20


SIGNATURES

21

2

PART I. FINANCIAL INFORMATION

 ITEM 1.  FINANCIAL STATEMENTS


Consolidated Balance Sheets

(Amounts in thousands)

 


ASSETS

 

(Unaudited)

September 30, 2004

 

(Note 1)

December 31,

2003

      
 

Cash and due from banks

 

$  19,703

 

 $        14,473

 

Federal funds sold

 

     589

 

             389

      
 

   Total Cash and Cash Equivalents

 

   20,292

 

        14,862

      
 

Investment securities available for sale  (amortized cost $130,827 as of September 30, 2004, $122,336 as of  December 31, 2003)

 

130,154

 

122,064

 

Other investments, at cost

 

3,524

 

2,900

 

Loans, net of allowance for loan losses of $4,370 at September  30, 2004, $4,274 at December 31, 2003

 

388,483

 

373,534

 

Premises and equipment, net

 

16,253

 

15,465

 

Interest receivable

 

2,805

 

2,749

 

Other assets

 

      13,249

 

        11,842

      
 

    Total Assets

 

$  574,760

 

$    543,416

      
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    
      
 

LIABILITIES

    
      
 

Deposits:

    
 

  Non-interest bearing

 

$   71,401

 

$      59,057

 

  Interest bearing

 

   394,368

 

     390,952

      
 

    Total Deposits

 

   465,769

 

     450,009

      
 

Federal funds purchased

 

8,185

 

-0-

 

Interest, taxes and other liabilities

 

2,102

 

2,244

 

Other short-term borrowings

 

28,549

 

33,000

 

Long-term debt

 

25,346

 

16,429

 

Capital securities

 

       6,300

 

         6,300

      
 

    Total Other Liabilities

 

     70,482

 

       57,973

      
 

    Total Liabilities

 

   536,251

 

     507,982

      
 

STOCKHOLDERS’ EQUITY

    
      
 

Common stock (2,664 and 2,659 shares issued and outstanding, respectively)

 

3,330

 

3,324

 

Additional paid-in capital

 

6,398

 

6,305

 

Retained earnings

 

29,225

 

25,984

 

Accumulated other comprehensive income

 

        (444)

 

          (179)

      
 

  Total Stockholders’ Equity

 

38,509

 

       35,434

      
 

    Total Liabilities and Stockholders’ Equity

 

$  574,760

 

$   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
September 30,
2004

Three Months Ended
September 30,
2003

Nine Months
Ended
September 30,
2004

Nine Months

Ended

 September 30, 2003

 

INTEREST INCOME

    
 

Loans receivable and fees on loans

$    6,096

$    6,260

$  18,297

$  18,686

 

Securities available for sale:

    
 

  Taxable

547

497

1,605

1,813

 

  Exempt from taxable income

645

577

1,905

1,488

 

Other investment income

34

25

74

81

 

Federal funds sold

           4

           12

           8

           63

      
 

    Total Interest Income

     7,326

      7,371

  21,889

    22,131

      
 

INTEREST EXPENSE

    
 

Deposits

2,304

2,564

6,852

7,896

 

Federal funds purchased

30

-

63

-

 

Other borrowed funds

         699

         625

      2,016

      1,909

      
 

    Total Interest Expense

      3,033

      3,189

      8,931

      9,805

      
 

    Net Interest Income

      4,293

      4,182

      12,958

      12,326

      
 

Provision for Possible Loan Losses

         373

         447

         1,062

         1,427

      
 

    Net Interest Income after Provision for Loan Losses

      3,920

      3,735

      11,896

      10,899

      
 

NON-INTEREST INCOME

    
 

Securities gains (losses), net

163

3

367

385

 

Service charges on deposit accounts

678

664

1,987

1,948

 

Other service charges, commissions and fees

268

212

641

595

 

Other operating income

         167

           165

         502

          469

 

    

    
 

    Total Non-Interest Income

      1,276

         1,044

      3,497

       3,397

      
 

NON-INTEREST EXPENSE

    
 

Salaries and employee benefits

2,211

1,937

6,477

5,690

 

Occupancy expense of bank premises

202

154

578

446

 

Furniture and equipment expense

376

385

1,134

1,221

 

Other operating expense

         991

         913

      2,824

      2,605

      
 

    Total Non-Interest Expense

      3,780

      3,389

      11,013

      9,962

      
 

    Income Before Income Taxes

1,416

1,390

4,380

4,334

      
 

Income Tax Expense

         255

         274

         819

         950

      
 

    Net Income

$    1,161

$    1,116

$    3,561

$    3,384

      
 

Basic Earnings Per Common Share – Weighted Average

$      0.44

$      0.42

$     1.34

$     1.28

      
 

Earnings Per Common Share – Assuming Dilution

$      0.41

$      0.40

$     1.25

$      1.20


See accompanying Notes to Consolidated Financial Statements


4

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)


 

Nine Months

Ended

Nine Months Ended

 

September 30,

2004

September 30, 2003

CASH FLOWS FROM OPERATING  ACTIVITIES:

  

Net income

$3,561

$3,384

Adjustments to reconcile net income to net cash provided by operating

  

  activities

  

Provision for loan losses

1,062

1,427

Depreciation and amortization

758

707

Net realized gains on available-for-sale securities

(367)

  (385)

Net amortization on securities

424

195

Amortization of capital issue costs

10

9

Increase in interest receivable

(56)

(189)

Increase in other assets

(1,351)

(768)

Increase (decrease) in interest, taxes and other liabilities

   (142)

      39

   

Net cash provided by operating activities

      3,899

   4,419

   

CASH FLOWS FROM INVESTING ACTIVITIES:

  

Securities available for sale:

  

Proceeds from sale of debt and equity securities

11,143

5,805

Proceeds from maturities of debt and equity securities

15,899

20,087

Purchase of debt and equity securities

(35,589)

(35,817)

Purchase of other investments

(624)

(186)

Net increase in loans

(16,011)

(30,128)

Premises and equipment expenditures

   (1,476)

 (2,294)

   

Net cash used in investing activities

  (26,658)

( 42,533)

   

CASH FLOWS FROM FINANCING ACTIVITIES:

  

Net increase in time deposits

  7,315

14,626

Net increase in demand, savings and time deposits

8,444

31,180

Net increase (decrease) in short-term borrowings

3,734

(2,094)

Net increase in long-term debt

8,917

2,234

Cash dividends paid

 (320)

(265)

Repurchase of capital securities

-

(1,200)

Proceeds from exercise of common stock options

76

103

Proceeds from issuance of common stock through Dividend Reinvestment and

  

   Stock Purchase Plan

    22

         16

   

Net cash provided by financing activities

 28,188

  44,600

   

Net increase in cash and cash equivalents

5,430

6,486





   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

  14,862

  18,501

   

CASH AND CASH EQUIVALENTS AT END OF QUARTER

$20,292

$24,987

   

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

  

Cash paid during the year for:

  

Interest

$8,950

$9,864

Income taxes

$882

$1,050


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, June 30, 2003

2,654

$3,317

$6,226

$23,732

$1,404

$34,679

       

Comprehensive income:

      

Net income

-

-

-

1,116

-

1,116

Change in unrealized gain (loss) on securities available for sale, net of deferred income tax benefit of $887

-

-

-

-

(1,721)

(1,721)

Less: reclassification adjustment

-

-

-

-

  (2)

     (2)

       

    Total comprehensive income

-

-

-

-

-

$(607)

       

Common stock issued for stock options exercised, net

2

3

32

-

-

35

Common stock issued for dividend reinvestment and optional cash purchase plan

-

-

-

-

-

-

Cash dividend

          -

        -

     -

      -

     -

       -

       

Balance, September 30, 2003

  2,656

$3,320

$6,258

$24,848

$(319)

$34,107

       
       

Balance, June 30, 2004

2,662

$3,327

$6,355

$28,064

$(2,222)

$35,524

       

Comprehensive income:

      

Net income

-

-

-

1,161

-

1,161

Change in unrealized gain (loss) on securities available for sale, net of deferred income tax expense of  $972

-

-

-

 

1,886

1,886

Less: reclassification adjustment, net of deferred tax expense of $54

-

-

-

 

  (108)

  (108)

       

    Total comprehensive income

-

-

-

-

-

2,939

       

Common stock issued for stock options exercised, net

1

2

22

-

-

24

Common stock issued for dividend reinvestment and optional cash purchase plan

1

1

21

-

-

   22

Cash dividend

-

-

-

-

-

-

       

Balance, September 30, 2004

2,664

$3,330

$6,398

$29,225

$(444)

$38,509


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

-

-

-

3,384

-

3,384