UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No. 0-16761
September 30, 2002
HIGHLANDS BANKSHARES, INC.
West Virginia 55-0650793
- ---------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 929
Petersburg, West Virginia 26847
(304) 257-4111
--------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes ..X. No ....
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at September 30, 2002
- ------------------------------------------ ---------------------------------
Common Stock, par value - $5 1,436,874 shares
1
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Nine Months
Ended September 30, 2002 and 2001 2
Consolidated Statements of Income - Three Months
Ended September 30, 2002 and 2001 3
Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 4
Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Evaluation of Disclosure of Controls and Procedures 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8K 20
SIGNATURES 21
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 22
CERTIFICATION OF EXECUTIVE OFFICER 23
CERTIFICATION OF CHIEF FINANCIAL OFFICER 25
2
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Nine Months Ended
September 30
2002 2001
---------- ----------
Interest Income
Interest and fees on loans $ 12,974 $13,476
Interest on federal funds sold 126 363
Interest on time deposits 85 183
Interest and dividends on investment securities
Taxable 913 1,101
Nontaxable 154 120
------- ------
Total Interest Income 14,252 15,243
------- ------
Interest Expense
Interest on time deposits over $100,000 1,573 1,944
Interest on other deposits 4,161 5,492
Interest on borrowed money 154 162
------- ------
Total Interest Expense 5,888 7,598
------- ------
Net Interest Income 8,364 7,645
Provision for Loan Losses 470 390
------- ------
Net Interest Income After Provision for Loan Losses 7,894 7,255
------- ------
Noninterest Income
Service charges 431 436
Other 461 388
------- ------
Total Noninterest Income 892 824
------- ------
Noninterest Expense
Salaries and employee benefits 3,116 2,874
Equipment and occupancy expense 780 729
Data processing 423 398
Other 1,498 1,315
------- ------
Total Noninterest Expense 5,817 5,316
------- ------
Income Before Income Taxes 2,969 2,763
Provision for Income Taxes 956 942
------- ------
Net Income $ 2,013 $ 1,821
======= ======
Per Share Data
Net Income $ 1.38 $ 1.21 (1)
======= ======
Cash Dividends $ .38 $ .34 (1)
======= ======
Weighted Average Common Shares Outstanding 1,461,792 1,505,694 (1)
========= =========
(1)Restated to reflect the stock split which was distributed to stockholders of
record as of August 1, 2002.
The accompanying notes are an integral part of these statements.
3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Three Months Ended
September 30
2002 2001
---------- ----------
Interest Income
Interest and fees on loans $ 4,418 $ 4,553
Interest on federal funds sold 30 115
Interest on time deposits 20 51
Interest and dividends on investment securities
Taxable 290 366
Nontaxable 51 41
------- ------
Total Interest Income 4,809 5,126
------- ------
Interest Expense
Interest on time deposits over $100,000 452 668
Interest on other deposits 1,298 1,837
Interest on borrowed money 51 57
------- ------
Total Interest Expense 1,801 2,562
------- ------
Net Interest Income 3,008 2,564
Provision for Loan Losses 210 135
------- ------
Net Interest Income After Provision for Loan Losses 2,798 2,429
------- ------
Noninterest Income
Service charges 158 146
Other income 170 135
------- ------
Total Noninterest Income 328 281
------- ------
Noninterest Expense
Salaries and employee benefits 1,050 986
Equipment and Occupancy expense 263 259
Data processing expense 137 136
Other 550 447
------- ------
Total Noninterest Expense 2,000 1,828
------- ------
Income Before Income Taxes 1,126 882
Provision for Income Taxes 375 302
------- ------
Net Income $ 751 $ 580
======= ======
Per Share Data
Net Income $ .52 $ .39 (1)
======= ======
Cash Dividends $ .13 $ .11 (1)
======= ======
Weighted Average Common Shares Outstanding 1,436,874 1,505,694 (1)
========= =========
(1)Restated to reflect the stock split which was distributed to stockholders of
record as of August 1, 2002.
The accompanying notes are an integral part of these statements.
4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Cash and due from banks - noninterest bearing $ 7,638 $ 6,492
Time deposits in other banks 3,367 6,334
Federal funds sold 8,249 13,284
Securities held to maturity (note 2) 1,370 1,603
Securities available for sale (note 3) 26,360 29,460
Other investments (note 4) 859 792
Loans, net of unearned interest (note 5) 225,080 205,469
Less allowance for loan losses (note 6) (1,781) (1,603)
Bank premises and equipment 6,916 7,056
Interest receivable 1,988 1,818
Investment in insurance contracts (note 7) 5,237 5,100
Other assets 1,284 973
------- -------
Total Assets $286,567 $276,778
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 34,057 $ 29,279
Interest bearing
Money market and checking 19,892 17,936
Money market savings 16,022 11,407
Savings 29,863 26,782
Time deposits over $100,000 43,156 45,182
All other time deposits 108,869 111,456
------- -------
Total Deposits 251,859 242,042
Borrowed money 4,157 4,523
Accrued expenses and other liabilities 1,958 1,903
------- -------
Total Liabilities 257,974 248,468
------- --------
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 3,000,000 shares
authorized, 1,436,874 shares issued
at September 30, 2002 and 546,764 shares
issued at December 31, 2001) (Note 8) 7,184 2,734
Surplus 1,662 1,662
Retained earnings 19,425 24,624
Accumulated other comprehensive income 322 283
Treasury stock (at cost, 44,866 shares in 2001) (993)
------- --------
Total Stockholders' Equity 28,593 28,310
------- -------
Total Liabilities and Stockholders' Equity $286,567 $276,778
======= =======
The accompanying notes are an integral part of these statements.
5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Accumulated
Other
Common Treasury Retained Comprehensive
Stock Surplus Stock Earnings Income Total
Balance, December 31, 2001 $ 2,734 $ 1,662 $ (993) $ 24,624 $ 283 $ 28,310
Comprehensive Income
Net Income 2,013 2,013
Net change in
unrealized
appreciation on
investment
securities available
for sale,
net of taxes 39 39
----- ------ ------ ------ ------ ------
Total Comprehensive
Income 2,052
Treasury stock
repurchased (1,217) (1,217)
Treasury stock retired (340) 2,210 (1,870)
Stock split effected
in the form
of dividend 4,790 (4,790)
Cash dividends paid (552) (552)
----- ------ ------ ------- ------ -------
Balances, September 30,
2002 $ 7,184 $ 1,662 $ $ 19,425 $ 322 $ 28,593
===== ====== ====== ====== ====== ======
Accumulated
Other
Common Treasury Retained Comprehensive
Stock Surplus Stock Earnings Income Total
Balance, December 31, 2000 $ 2,734 $ 1,662 $ (993) $ 22,826 $ 39 $ 26,268
Comprehensive Income
Net Income 1,821 1,821
Net change in
unrealized
appreciation on
investment
securities available
for sale,
net of taxes 312 312
----- ------ ------ ------ ------ ------
Total Comprehensive
Income 2,133
Cash dividends paid (512) (512)
----- ------ ------ ------ ------ ------
Balances, September 30,
2001 $ 2,734 $ 1,662 $ (993) $ 24,135 $ 351 $ 27,889
======== ====== ====== ======= ====== =======
The accompanying notes are an integral part of these statements.
6
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Nine Months Ended
September 30
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Net income $ 2,013 $ 1,821
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 392 383
Net securities amortization 227 70
Provision for loan losses 470 390
Income from insurance investments (137) (145)
Increase in interest receivable (170) (197)
Decrease in other assets (286) (89)
Increase in accrued expenses 55 926
------- ------
Net Cash Provided by Operating Activities 2,564 3,159
------- ------
Cash Flows from Investing Activities:
Net change in time deposits in other banks 2,967 339
Net change in federal funds sold 5,035 (9,140)
Proceeds from maturities of securities
available for sale 6,817 15,289
Proceeds from maturities of securities
held to maturity 232 603
Purchase of securities available for sale (3,876) (18,767)
Purchase of other investments (67) (29)
Net change in loans (19,903) (11,907)
Purchase of property and equipment (305) (711)
-------- ------
Net Cash Consumed by Investing Activities (9,100) (24,323)
-------- -------
Cash Flows from Financing Activities:
Net change in time deposits (4,613) 19,250
Net change in other deposits 14,430 1,718
Dividends paid in cash (552) (512)
Purchase of treasury stock (1,217)
Repayment of borrowed money (366) (450)
Advances of borrowed money 600
------- ------
Net Cash Provided by Financing Activities 7,682 20,606
------- ------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,146 (558)
Cash and Cash Equivalents, Beginning of Period 6,492 7,062
------- ------
Cash and Cash Equivalents, End of Period $ 7,638 $ 6,504
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 956 $ 1,392
Interest 6,078 6,997
The accompanying notes are an integral part of these statements.
7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally
accepted accounting principles and to general industry practices. In
the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of September 30,
2002, and the results of operations for the three and nine month
periods ended September 30, 2001 and 2002. The notes included herein
should be read in conjunction with the notes to financial statements
included in the 2001 annual report to stockholders of Highlands
Bankshares, Inc.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and fair value of securities held to maturity as
of September 30, 2002 and December 31, 2001, are as follows:
2002 2001
-------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Obligations of states and
political subdivisions $ 1,366 $ 1,476 $1,597 $ 1,633
Mortgage-backed securities 4 4 6 6
------- ------ ------ -------
Total $ 1,370 $ 1,480 $1,603 $ 1,639
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of September 30, 2002 and December 31, 2001, are as follows:
2002 2001
---------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of
US Government
corporations and
agencies $15,526 $15,766 $16,123 $16,432
Obligations of states and
political subdivisions 5,417 5,519 6,319 6,380
Mortgage-backed securities 4,885 5,044 6,527 6,609
Other investments 34 31 42 39
------ ------ ----- ------
Total $25,862 $26,360 $29,011 $29,460
====== ====== ====== ======
8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS
Other investments totaling $ 859,000 include investments in the
Federal Home Loan Bank and other governmental entities whose
transferability is restricted.
NOTE 5 LOANS OUTSTANDING:
A summary of loans outstanding as of September 30, 2002 and
December 31, 2001, is as follows:
2002 2001
---- ----
Commercial $ 14,154 $ 16,072
Real estate - construction 6,092 3,868
- mortgages 148,663 129,361
Consumer installment 56,250 56,366
------- -------
Total 225,001 205,667
Unearned interest (79) (198)
-------- --------
Net loans outstanding $225,080 $205,469
======= =======
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
nine months ended September 30, 2002 and 2001, follows:
2002 2001
---- ----
Balance, beginning of period $ 1,603 $ 1,493
Provisions charged to operating expenses 470 390
Loan recoveries 117 173
Loan charge-offs (409) (504)
-------- -------
Balance, end of period $ 1,781 $ 1,552
======= =======
NOTE 7 INVESTMENT IN INSURANCE CONTRACTS:
Investment in insurance contracts consist of single premium
insurance contracts which have the dual purposes of providing a rate
of return to the Company which approximately equals the Company's
average cost of funds and providing life insurance and retirement
benefits to employees. The carrying value of these investments was
$5,237,000 at September 30, 2002 and $5,100,000 at December 31, 2001.
NOTE 8 CAPITAL STOCK TRANSACTIONS:
In the second quarter of 2002, the Company repurchased stock from
unrelated parties in two separate transactions. Total shares
repurchased were 22,940 at a cost of $1,217,000.
In June 2002, the Company approved a stock split effected in the
form of a dividend which was distributed September 3, 2002 to
shareholders of record as of August 1, 2002. This transaction resulted
in an increase of shares outstanding from 478,958 as of June 30, 2002
to 1,436,874 as of September 30, 2002. Earnings per share and
dividends per share calculations for prior periods have been adjusted
for this stock dividend. The Board of Directors also voted to retire
67,806 shares of treasury stock in the third quarter of 2002.
9
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Year to Date Operations
The Company's year to date net income was $2,013,000, an increase of 10.52%
compared to 2001. Earnings per share were $1.38 for 2002 compared to $1.21 per
share for 2001. The Company's annualized return on average equity was 9.47% in
2002 compared to 8.97% for 2001. Return on average assets was .96% for 2002 and
..93% for 2001, respectively.
The increase in earnings was due primarily to a 9.44% increase in net
interest income. A decrease of 6.50% in interest income was offset by a 22.54%
decrease in interest expense. Net interest income after provision for loan loss
grew 8.80% over 2001. The provision for loan losses of $470,000 represents an
increase of $90,000 over the same period in 2001. This is reflective of a 9.54%
overall increase in loan balances from December 31, 2001 to September 30, 2002
and changes in the levels of employment in the Company's service area.
Noninterest income increased 8.27% due largely to an increase in
insurance activity and an increase in fees earned by Highlands Bankshares Trust
Company. Noninterest expenses increased 9.42%. Costs of salaries and benefits
increased 8.44% due to a 2.8% increase in full time equivalent employees and
customary salary increases.
Quarter Ending September 30 Operations
Overall net income for the quarter ending September 30, 2002 increased
29.46% to $751,000 when compared to 2001 income of $580,000. Earnings per share
for the third quarter of 2002 were $.52 versus $.39 in 2001 (a 36.22% increase).
An increase of 15.17% in net interest income, driven by a 32.34% reduction in
interest expense on time deposits over $100,000, and an increase in noninterest
income of 16.78% was offset in part by an increase in operating expenses of
9.39% The increase in earnings per share was also influenced by the repurchase
of 22,940 shares of treasury stock during 2002.
Net Interest Income
Year to Date Operations
Overall, increases in loan balances coupled with declines in interest
expense offset the decrease in yields on earning assets to contribute to a
taxable equivalent net interest margin increase of 9.59% when compared to the
first nine months of 2001.
The Company's net yield on interest earning assets on a tax equivalent basis
was 4.34% through the third quarter of 2002 compared to 4.25% through the third
quarter of 2001. The volume of all lending has increased substantially,
with Earning Assets rising 3.56% from December 31, 2001 to September 30, 2002
and Average Earning Assests rising 7.74% over 2001 averages. Rates on all types
of loans declined from the same period in 2001 as rates industry wide declined.
Commercial rates decreased from 9.32% in 2001 to 7.07% in 2002 due to the
Federal Reserve Bank ("The Fed") actions in 2001. Rates on real estate loans
declined 99 basis points and rates on consumer loans declined 43 basis points
and are reflected in 2002 income within the year.
10
Through the third quarter of 2002, the Company saw an overall decrease of
115 basis points in yields on investment securities compared to 2001
results. The decrease is reflective of recent reinvestments at lower rates.
Average investments in securities were larger for the nine months ended
September 30, 2002 in comparison to the same period last year as deposit growth
during the early part of 2002 outpaced loan demand which created excess cash to
invest. The Company later funded loan growth through reductions in fed
funds sold. Interest rates earned on fed funds sold declined 256 basis points as
the Fed cut rates 11 times in 2001 by one-quarter to one-half point each time.
Average interest bearing deposits at other banks fell 11.47% over the same
period in 2001. This has occurred as the Company has used maturing certificates
to fund loan growth and deposits of subsidiaries previously held in unrelated
institutions have been deposited with other Company subsidiaries.
Customers appear reluctant to commit to long-term, fixed rates on
certificates when rates are at historical lows and instead are placing their
deposits in accounts that are highly liquid and will allow them to respond
quickly when rates increase. Noninterest bearing deposits grew 16.32% from
December 31, 2001 to September 30, 2002, while interest bearing deposits grew
2.37% over the same time period.
Interest rates paid on transaction and savings accounts declined a combined
90 basis points due to lower rates resulting from the Fed actions. The Company
experienced an 8.13% growth in average interest bearing deposits over the same
time period in 2001. Growth in average balances of money market and savings
accounts was 17.31% while time deposits grew at a more moderate 4.81%. A 149
basis point decrease in rates paid on time deposits between 2001 and 2002
reflects the declining rate environment throughout 2002.
Beginning in 1999, the Company begin borrowing from the FHLB at fixed rates
of interest and has loaned these monies to customers on a fixed rate basis. The
Company anticipates continuing to use this approach as a mechanism to
provide long-term financing to customers and limit market rate risk. In
addition, monies were borrowed on a short-term, variable rate basis to fund the
renovation and expansion at the Capon Valley Bank. In the third quarter of 2002,
this variable rate debt was refinanced on a 10 year fixed rate loan at 3.94%.
Quarter Ending September 30 Operations
In 2002, the Company's net interest income on a tax equivalent basis was
$3,038,000 and the taxable equivalent net interest yield was 4.62%. This was an
increase of 17.34% over the third quarter of 2001. The yield on average earning
assets fell 82 basis points while the rates paid on average balances of interest
bearing liabilities fell 171 basis points compared to last year. Average earning
assets increased 4.49%. Average balances of interest bearing liabilities grew
7.66%. Yields on loans fell 114 basis points and the yield on fed funds was cut
nearly in half, falling from 3.31% in the third quarter of 2001 to 1.66% during
the same period this year. Outpacing the decline in asset yields was a decrease
in average rates paid on interest bearing liabilities from 4.92% in 2001 to
3.21% in 2002. The decrease was primarily the result of a 190 basis point
decline in the cost of time deposits as high rate deposits are maturing and are
being replaced by lower rate deposits. The Company expects future deposit rates
to remain stable or decline based on Fed actions.
A complete yield analysis is shown as Table I on page 17.
Noninterest Income
Year to Date Operations
Noninterest income for 2002 rose 8.27% from the same period in 2001. Service
charge income decreased by 1.16% and other operating income increased by 18.88%.
An increase in service charges due to the overall increase in business activity
was outweighed by a decrease in service charge revenue relating to a single
customer who had historically paid large overdraft and related fees. This
company was sold to new investors who infused funds in the business and
eliminated the fees. The increase in other operating income is due to an
increase in underwriting revenue of HBI Life Insurance Company and an increase
in trust fees earned by Highlands Bankshares Trust Company.
Quarter Ending September 30 Operations
Noninterest income for the quarter ending September 30, 2002 increased
16.78% over 2001 as the result of the increase in other income discussed in the
preceding paragraph.
11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest Expenses
Year to Date Operations
Overall noninterest expense increased 9.42% over the same period in 2001.
This increase is related in part to costs of operating Capon Valley Bank's Gore,
Virginia branch (opened June 2001). Marketing expenditures rose as the result of
enlarged marketing campaigns and costs associated with The Grant County Bank's
100th anniversary celebration. Equipment and occupancy expense and data
processing expense rose 7.00% and 6.28% respectively as the volume of operations
increased and both banks continued efforts to upgrade data processing and other
equipment. Costs of salary and benefits increased due to an increase in
full-time equivalent employees and an inflationary increase in wages. The
overall noninterest expense is in line with management estimates through the
third quarter of the year and is consistent with the increase in average earning
assets of 6.47%.
Quarter Ending September 30 Operations
Overall, noninterest expenses increased 9.39% for the quarter ending
September 30, 2002 compared to the quarter ending September 30, 2001. The
reasons for the quarterly increase are the same as for the year-to-date
increases and the percentage increases for the quarters are relatively the same
as the year-to-date increases.
Loan Portfolio
The Company is an active residential mortgage and construction lender and
generally extends commercial loans to small and medium sized businesses within
its primary service area. The Company's commercial lending activity extends
across its primary service areas of Grant, Hardy, Randolph, Mineral, Hampshire,
northern Pendleton counties in West Virginia and Frederick County in Virginia.
Consistent with its focus on providing community-based financial
services, the Company does not attempt to diversify its loan portfolio
geographically by making significant amounts of loans to borrowers outside of
its primary service area.
The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels,
consumer confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based
upon the strength and activity of the local economies of the Company's market
areas. The risk associated with real estate construction loans varies based upon
the supply of and demand for the type of real estate under construction.
Loans outstanding increased $19,610,198 or 9.54% through the first nine
months of 2002 compared to levels at December 31, 2001. The loan to deposit
ratio was 89.37% at September 30, 2002 compared to 84.89% at December 31, 2001.
Loan demand is expected to remain satisfactory in the near future barring any
significant declines in the local or national economies.
12
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Asset Quality and Risk Elements
Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have been changed due to
financial hardship of the borrower.
Real estate acquired through foreclosure was $460,358 at September 30, 2002
and $77,000 at December 31, 2001. All foreclosed property held was in the
Company's primary service area. The Company's practice is to value real estate
acquired through foreclosure at the lower of (i) an independent current
appraisal or market analysis less anticipated costs of disposal, or (ii) the
existing loan balance. The Company is actively marketing all foreclosed real
estate and does not anticipate material write-downs in value before disposition.
An inherent risk in the lending of money is that the borrower will not be
able to repay the loan under the terms of the original agreement. The allowance
for loan losses (see subsequent section) provides for this risk and is reviewed
periodically for adequacy. This review also considers
concentrations of loans in terms of geography, business type or level of risk.
While lending is geographically diversified within the service area, the Company
does have some concentration of loans in the area of agriculture (primarily
poultry farming), timber and related industries. Management recognizes
these concentrations and considers them when structuring its loan portfolio. As
of September 30, 2002, management is not aware of any significant potential
problem loans in which the debtor is currently meeting their obligations as
stated in the loan agreement but which may change in future periods.
Allowance for Loan Losses
General
Management evaluates the loan portfolio in light of national and local
economic changes, changes in the nature and value of the portfolio and industry
standards. The Company's loan classification system, which rates existing loans,
provides the basis for adjusting the allowance for loan losses. Management
reviews these classification totals, past due reports, historical loan loss
experience and individual borrower's financial health to determine the necessary
amount to be provided in the allowance for loan losses. Management evaluates
nonperforming loans relative to their collateral value and their
discounted estimated cash flows and makes the appropriate adjustments to the
allowance when needed.
Critical Accounting Policies
The allowance for loan losses is an estimate of the losses in the current
loan portfolio. The allowance is based on two principles of accounting: (i) SFAS
5, Accounting for Contingencies which requires that losses be accrued when they
are probable of occurring and estimatable and (ii) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that loans be identified
which have characteristics of impairment as individual risks, (e.g. the
collateral, present value of cash flows or observable market values are less
than the loan balance).
Each of Company's banking subsidiaries, Capon Valley Bank and The Grant
County Bank, determines its allowance for loan losses independently. Each bank
pays particular attention to individual loan performance, collateral values,
borrower financial condition and overall national and local economic conditions.
The determination of adequate reserves at each bank is done in a three step
process. The first step is to identify problem loans above a certain threshold
and estimated losses are calculated based on collateral values and projected
cash flows. The second step is to identify loans above a certain threshold which
are problem loans due to the borrowers' payment history or deteriorating
financial condition. Losses in this category are determined based on historical
loss rates adjusted for current economic conditions. The final step is to
calculate a loss for the remainder of the portfolio using historical
loss information for each type of loan classification. The determination
of specific allowances and weights is in some part subjective and actual losses
may be greater or less than the amount of the allowance. However, management
feels that the allowance represents a fair assessment of the losses that exist
in the loan portfolio.
13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
Changes in Allowance for Loan Losses
The provision for loan losses and changes in the allowance for loan losses
are shown below (in thousands of dollars).
Quarter Ended Nine Months Ended
Sept 30, Sept 30,
------------------ ----------------
Allowance for loan losses 2002 2001 2002 2001
------------------------- ---- ---- ---- ----
Balance, beginning of period $ 1,723 $ 1,700 $ 1,603 $ 1,493
Net charge-offs (recoveries)
Charge-offs (173) (317) (409) (504)
Recoveries 21 34 117 173
------ ------ ------ ------
Total net charge-offs * (152) (283) (292) (331)
Provision for loan losses 210 135 470 390
------ ------ ------ ------
Balance, End of Period $ 1,781 $ 1,552 $ 1,781 $ 1,552
====== ====== ====== ======
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
* Components of net charge-offs:
Real estate $ (19) $ (40) $ (6) $ (40)
Commercial (74) (166) (92) (174)
Installment (59) (73) (194) (113)
Credit Card (4) (4)
------ ------ ------ ------
Total $ (152) $ (283) $ (292) $ (331)
======= ====== ======= =======
The following is a summary of information pertaining to risk elements and
impaired loans for the periods ended September 30, 2002 and December 31, 2001.
September 30,December 31,
(in thousands) 2002 2001
Non-accural loans $ 649 $ 885
Loans past due 90 days or more
and still accruing interest 2,187 2,295
Restructured loans 0 0
-------- --------
Total $ 2,836 $ 3,180
The allowance for loan losses of $1,781,000 at September 30, 2002, was up
$229,000 from its level at September 30, 2001 and up $178,000 from the level at
December 31, 2001. The increase was due to a greater volume of lending and
declines in the local and national economies as compared to the same period in
2001. Loan balances have grown 9.5% since December 31, 2001 and 12.1% since
September 30, 2001. The allowance was equal to .79% and .78% of total loans at
September 30, 2002 and December 31, 2001, respectively. In the opinion of
management, the allowance, when taken as a whole, fairly reflects estimated loan
losses existing in the Company's portfolio.
14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
The following table shows the allocation of loans in the loan portfolio and
the corresponding amounts of the allowance allocated by loan types as of
September 30, 2002 and December 31, 2001:
September 30, 2002 December 31, 2001
------------------ -----------------
Loan Allowance Percentage Percentage of Allowance Percentage Percentage of
Type Allocation of Allowance Total Loans Allocation of Allowance Total Loans
Commercial $ 628 35% 6% $ 487 30% 5%
Mortgage 560 32% 69% 576 36% 66%
Consumer 593 33% 25% 450 28% 29%
Unallocated 90 6%
----- ---- ----- ----- --- ----
Totals $1,781 100% 100% $1,603 100% 100%
===== ==== ==== ====== ==== ====
Securities
The Company's securities portfolio serves numerous purposes. Portions of
the portfolio may secure certain public and trust deposits. The remaining
portions are held as investments or used to assist the Company in liquidity and
asset/liability management. Total securities at September 30,2002 were
$27,730,000 compared to $31,063,000 at December 31, 2001. Securities as a
percentage of total assets were 9.68% at September 30, 2002 compared to 11.22%
at December 31, 2001. The level of securities relative to total assets has
dropped slightly throughout 2002 as the demand for loans has been partially
funded by investment maturities.
The securities portfolio consists of three components, specifically,
securities held to maturity, securities available for sale and other
investments. Securities are classified as held to maturity when management has
the intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Held to maturity securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts. Securities to
be held for indefinite periods of time are classified as available for sale and
accounted for at market value. Securities available for sale include securities
that may be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity needs
and other similar factors. Other investments include restricted securities whose
ownership is required to participate in certain governmental programs.
The Company's recent purchases of all securities have generally been limited to
securities of high credit quality with short to medium term maturities. Changes
in the market values of securities available for sale are reflected as changes
in stockholders' equity, net of the deferred tax effect. As of September 30,
2002, the fair value of the securities available for sale exceeded their cost by
$498,000 ($322,000 after tax considerations).
15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Deposits
The Company's main source of funds remains deposits received from
individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit.
Total deposits increased 4.06% between December 31, 2001 and September 30,
2002. The cost of funds for the first nine months of 2002 was 3.55% compared to
4.94% for the same period in 2001. The majority of the Company's deposits are
time deposits that are attractive to persons seeking high yields on their
deposits but without the need for liquidity. The Company has seen a decrease in
all time deposits since December 31, 2001 as a result of maturing high-rate
certificates of deposits that were not renewed with the Company's subsidiary
banks.
Capital
The Company seeks to maintain a strong capital base to expand facilities,
promote public confidence, support current operations and grow at a
manageable level. As of September 30, 2002, the Company's total risk based
capital ratio was 13.91% which is far above the regulatory minimum of 8.0%. The
leverage ratio of total capital to total assets was 9.98% at September 30, 2002,
which is comparable to the Company's peer group.
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liquidity exposure. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions and the Federal Reserve Bank of
Richmond. Both subsidiary banks have lines of credit with the Federal Home Loan
Bank of Pittsburgh although utilization has been insignificant. In the past,
growth in deposits has been sufficient to fund the net increase in loans and
investment securities
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on the
balance sheet. Managing this risk involves regular monitoring of the
interest sensitive assets relative to interest sensitive liabilities over
specific time intervals.
16
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Interest Rate Sensitivity (Continued)
At September 30, 2002 the Company had a negative gap position through the
first three months, shifting to a positive gap by the end of one year. With the
largest amount of interest sensitive assets and liabilities repricing within one
year, the Company believes it is in an excellent position to respond quickly to
rapid market rate changes. Early withdrawal of deposits, prepayments of loans
and loan delinquencies are some of the factors that could affect actual versus
expected cash flows. In addition, changes in rates on interest sensitive assets
and liabilities may not be equal, which could result in a change in net interest
margin. While the Company does not match each of its interest sensitive
assets against specific interest sensitive liabilities, it does review its
positions regularly and takes actions to reposition it when necessary.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including Highlands
Bankshares, Inc., and the address is (http://www.sec.gov).
17
Table I
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
--------------------------- -----------------------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Interest Income
Loans 1, 4
Commercial $ 13,543 $ 716 7.07% $ 11,030 $ 771 9.32%
Consumer 53,715 4,509 11.22% 56,575 4,944 11.65%
Real estate 147,813 7,749 7.01% 129,368 7,761 8.00%
------- ------ ------ --------- ----- -------
Total 215,071 12,974 8.07% 196,973 13,476 9.12%
Federal funds sold 10,109 126 1.67% 11,443 363 4.23%
Interest bearing
deposits 5,055 85 2.25% 5,710 183 4.27%
Investments
Taxable 3 24,932 913 4.90% 24,375 1,101 6.02%
Tax exempt 2,3 5,473 244 5.97% 3,421 190 7.41%
----- ----- ---- ----- ----- -----
Total Earning
Assets 260,640 14,343 7.36% 241,922 15,313 8.44%
------- ------ ------- ------- ------ ------
Interest Expense
Money markets 33,288 302 1.21% 28,410 432 2.03%
Savings 29,260 297 1.36% 24,908 439 2.35%
Time deposits 154,587 5,134 4.44% 147,495 6,565 5.93%
Other borrowed
money 4,317 154 4.77% 4,096 162 5.27%
----- ----- ---- ----- ----- -----
Total Interest
Bearing
Liabilities 221,452 5,888 3.55% 204,909 7,598 4.94%
------- -------- ------- -------- ----- -------
Net Interest
Income $ 8,455 $ 7,715
===== =====
Net Yield on
Interest Earning
Assets 4.34% 4.25%
==== =====
1 Interest income on loans includes loan fees.
2 On a taxable equivalent basis based on a tax rate of 37%.
3 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
4 Average balances include non-accrual loans.
17 (Continued)
Table I (Continued)
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
--------------------------------- ---------------------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Interest Income
Loans 1, 4
Commercial $ 14,062 $ 256 7.28% $ 10,453 $ 237 9.07%
Consumer 55,549 1,361 9.80% 49,176 1,418 11.53%
Real estate 153,227 2,801 7.31% 141,268 2,898 8.21%
------- ------- ------ ------- ----- -------
Total 222,838 4,418 7.93% 200,897 4,553 9.07%
Federal funds sold 7,257 30 1.66% 13,883 115 3.31%
Interest bearing
deposits 3,636 20 2.20% 5,470 51 3.73%
Investments
Taxable 3 23,803 290 4.87% 27,535 366 5.32%
Tax exempt 2,3 5,225 81 6.20% 3,683 65 7.06%
----- ----- ---- ----- ----- -----
Total Earning
Assets 262,760 4,839 7.37% 251,468 5,150 8.19%
------- ------- ------ ------ ----- ------
Interest Expense
Money markets 35,640 98 1.10% 27,038 122 1.80%
Savings 30,113 91 1.21% 25,728 132 2.05%
Time deposits 154,188 1,561 4.05% 151,257 2,251 5.95%
Other borrowed
money 4,195 51 4.87% 4,170 57 5.47%
----- ----- ---- ----- ----- -----
Total Interest Bearing
Liabilities 224,136 1,801 3.21% 208,193 2,562 4.92%
------- ------- -------- ------ ----- ------
Net Interest Income $ 3,038 $ 2,588
===== =====
Net Yield on Interest
Earning
Assets 4.62% 4.12%
==== =====
1 Interest income on loans includes loan fees.
2 On a taxable equivalent basis based on a tax rate of 37%.
3 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
4 Average balances include non-accrual loans.
18
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
SEPTEMBER 30, 2002
(In Thousands of Dollars)
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or no
Days Days Years Years Maturity Total
EARNINGS ASSETS
Loans $36,468 $107,852 $61,478 $ 8,434 $10,848 $225,080
Fed funds sold 8,249 8,249
Securities 9,244 7,410 6,293 1,331 4,311 28,589
Time deposits in other
banks 3,167 200 3,367
------ ------ ------ ------ ----- ------
Total 57,128 115,462 67,771 9,765 15,159 265,285
------ ------- ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Transaction accounts 19,892 19,892
Money market savings 16,022 16,022
Savings accounts 29,863 29,863
Time deposits more
than $100,000 4,027 23,597 8,401 7,131 43,156
Time deposits less
than $100,000 22,959 53,423 23,815 8,672 108,869
Other borrowed money 127 394 970 750 1,916 4,157
------ ------ ------ ------ ----- ------
Total 92,890 77,414 33,186 16,553 1,916 221,959
------ ------ ------ ------ ----- -------
Rate sensitivity GAP (35,762) 38,048 34,585 (6,788) 13,243
Cumulative GAP (35,762) 2,286 36,871 30,083 43,326
Ratio of cumulative
interest sensitive
assets to
cumulative interest
sensitive
liabilities (61.50%) 101.34% 118.12% 113.67% 119.52%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
19
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as Highlands Bankshares, Inc. that file periodic reports under the
Securities Exchange Act of 1934 (the "Act") are now required to include in those
reports certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws.
Under rules adopted by the Securities and Exchange Commission effective August
29, 2002, these disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports it files or submits under the Act,
is communicated to the issuer's management, including its principal
executive officer or officers and principal financial officer or officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
We have established our disclosure controls and procedures to ensure that
material information related to Highlands Bankshares, Inc. is made known to our
principal executive officers and principal finance officer on a regular basis,
in particular during the periods in which our quarterly and annual reports are
being prepared. These disclosure controls and procedures consist principally of
communications between and among the President and the Finance Officer, and the
other executive officers of Highlands Bankshares, Inc. and its subsidiaries to
identify any new transactions, events, trends, contingencies or other matters
that may be material to the Company's operations. As required, we will evaluate
the effectiveness of these disclosure controls and procedures on a quarterly
basis, and most recently did so as of October 31, 2002, a date within 90 days
prior to the filing of this quarterly report. Based on this evaluation, the
management of Highlands Bankshares, Inc., including the Finance Officer,
concluded that such disclosure controls and procedures were operating
effectively as designed as of the date of such evaluation.
Changes in Internal Controls
During the period reported upon, there were no significant changes in the
internal controls of Highlands Bankshares, Inc. pertaining to its financial
reporting and control of its assets or in other factors that could significantly
affect these controls.
20
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a)Exhibits
3 (i) Articles of Incorporation of
Highlands Bankshares, Inc. are
incorporated by reference to
Appendix C to Highlands
Bankshares, Inc.'s Form S-4
filed October 20, 1986.
3 (ii)Bylaws of Highlands Bankshares,
Inc. are incorporated by
reference to Appendix D to
Highland Bankshares, Inc.'s Form
S-4 filed October 20, 1986.
(b)Reports on Form 8-K filed during the
three months ended September 30, 2002.
None
21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
/s/ LESLIE A. BARR
---------------------------------------
Leslie A. Barr
President
/s/ R. ALAN MILLER
---------------------------------------
R. Alan Miller
Finance Officer
Date: November 12, 2002
Certification of the CEO and CFO under Section 906 of the Sarbanes-Oxley
Act of 2002 is attached as correspondence.
22
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Leslie A. Barr, 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: November 13, 2002
/s/ LESLIE A. BARR
----------------------------------
Leslie A. Barr
President
23
CERTIFICATION
OF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Clarence E. Porter, 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: November 12, 2002
/s/ CLARENCE E. PORTER
----------------------------------
Clarence E. Porter
Treasurer
24
CERTIFICATION
OF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Alan L. Brill, 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: November 13, 2002
/s/ ALAN L. BRILL
----------------------------------
Alan L. Brill
Secretary
25
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, R. Alan Miller, 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: November 13, 2002
/s/ R. ALAN MILLER
----------------------------------
R. Alan Miller
Finance Officer