Item 2. Properties
The Corporation's and the Bank's main offices are located at 340 W. Main Street, Abingdon, Virginia. The main office is a two-story brick and stucco structure owned by the Bank. The Bank utilizes the entire structure for its day-to-day operations. Attached to the main office is a four-lane drive thru facility constructed in 1998. The new drive thru replaced an older unit that was detached from the main office's structure. The main office opened for operations in 1985. In addition, the Bank has three other branch locations within Washington County, Virginia.
The East Abingdon branch is a one story brick facility located at 24412 Maringo Road that operates as a full service branch. The branch was completed and opened for operation in 1993.
The West Abingdon location was expanded during 2003 from an "express facility", containing four drive thru lanes and a walk-up window, to a full service branch. The West Abingdon Express branch was completed and opened for operations in 1994 and is located at Exit 14, I-81, Jonesboro Road, Abingdon, Virginia.
During 1998, the Bank constructed and placed in service a two-story brick building located at 506 Maple Avenue, Glade Spring, Virginia. The Glade Spring Office is a full service location with four drive thru lanes.
The Bank also has two full service branch locations within the City of Bristol, Virginia. The East Bristol office is located at 999 Old Airport Road, Bristol, Virginia. This is a two story brick building with interior customer loan and deposit areas as well as a four lane drive thru unit. The office was completed and opened for operations in 1988.
The Commonwealth office is located at 821 Commonwealth Avenue, Bristol, Virginia. This is a two story block building with full service customer service areas and a four lane drive thru facility. The Bank also operates its dealer finance division out of the Commonwealth office. This office was completed and opened for operations in 1995.
The Bank also has a full service branch at 1425 North Main Street, Marion, Virginia. The branch was placed in service in December of 1997. It is a two story brick building and operates as a full service branch. The Marion office has four drive thru lanes and a drive-up ATM. The Bank also owns a vacant
lot, located approximately 1/2 mile from the branch on North Main Street, that originally had a drive-up ATM on location. The ATM was relocated to the Marion branch during 2001. This property is free of all liens.
All of the Bank's branch locations have an on-premises ATM. All branch properties, except for the Boone, North Carolina branch office, are owned by the Bank and are free of liens. In September 1998, the Bank acquired the adjacent building to its Commonwealth office to facilitate future expansion. This is a one story brick structure, located at 801-805 Commonwealth Avenue, Bristol, Virginia and is currently leased. A note payable to the sellers was executed and is secured by a first deed of trust. The note was paid in full in 2003.
Also during 1998, the Bank initiated an off premises ATM program. This program has continued to expand to include 28 offsite ATMs purchased and installed throughout the Bank's market areas. Six machines are placed in Bristol, Virginia; one is installed in Bristol, Tennessee; ten are installed in Washington County, Virginia; two in Russell County, Virginia; six in Smyth County, Virginia, one in Wythe County, Virginia, one in Banner Elk, North Carolina and one in Boone, North Carolina. All machines are free of liens.
During 1999 the Bank purchased a building, across from the Main Office in Abingdon, to provide for expansion of the Bank's operations. The building is a brick and frame structure that is being used to house the Bank's Financial Services Department, the Collections Department, the Bank's credit card, Human Resources department, Customer Call Center, Check Card and ATM Card Operations department, Security and Facilities department as well as the Bank's Check Printing Department. The office space not currently being used by the Bank is being leased to one other business. This property is free of any liens.
On September 23, 2000, the Bank closed on the purchase of a branch office of a bank in Rogersville, Tennessee. This purchase included approximately $3.9 million of deposit accounts, $54,000 of overdraft protection accounts, $7,000 of specified furniture and equipment and approximately $639,000 for the building and real estate. The branch office is a one-story masonry and concrete structure constructed in 1985. The branch is located at 410 Highway 66 South in Rogersville, Tennessee. This building is being used as a Highlands Union Bank full service facility with two drive-thru lanes and a drive-up ATM.
The Bank also purchased a tract of land located off of Highway 11W in Bristol, Tennessee, known as Bristol West Development, for future expansion. The land is approximately 1/2 acre and is currently zoned for commercial use. This property is free of any liens.
During 2000 the Bank began construction of a two-story brick building in Boone, North Carolina that opened as a full service branch of the Bank in January of 2001. The Seller of this property originally financed $250,000 of the purchase price of the land. The balance of this note as of December 31, 2003 was approximately $179,000.
The Corporation acquired a commercial building during 1997 that is located at 266 West Plumb Alley, Abingdon, Virginia. The building is a two story concrete structure that was originally constructed by another bank for use as an operations center. During 1997, the Corporation entered into a leasing arrangement with its subsidiary to lease the first floor to be used for its operations center. This lease was expanded to include the second floor of the building that was renovated during 2001. During 2001, the Corporation renovated the second floor of this building and it currently houses the Bank's electronic data processing operations, bookkeeping operations, proof operations and electronic banking operations. The West Plumb Alley property is free of liens. During 1998, the Corporation purchased the adjacent property to the operations center. The property purchased is a one story brick structure that currently
houses the Corporation's technology department. It is management's intention to utilize the property as growth continues. The property is owned free and clear of all liens.
During 2003 the Bank completed construction and opened a full service branch office located on Highway 394 in Blountville, Tennessee. This Branch is a two story brick building and operates as a full service branch office. There are three drive thru lanes and a drive-up ATM. This property is free of all liens.
During 2003, the Bank purchased a piece of property in Banner Elk, North Carolina and began construction of a full-service one story branch bank. The purchase price of the property was $520,000 of which $250,000 was a note financed by the seller. The branch is expected to open in February 2004.
All of the Corporation's properties are in good operating condition and are adequate for the Corporation's present and anticipated future needs.
Item 3.
Item 3. Legal Proceedings
The Corporation is not involved in any pending legal proceedings, other than non-material legal proceedings undertaken in the ordinary course of business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter ended December 31, 2003.
Part II.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the stock of Highlands Bankshares, Inc. At March 10, 2004, the Corporation had approximately 1,275 shareholders of record. The Corporation acts as its own registered Stock Transfer Agent, without charging a transfer fee, ensuring that all applicable federal guidelines relating to stock transfers are enforced.
The Corporation maintains a list of individuals who are interested in purchasing its common stock and connects these people with shareholders who are interested in selling their stock. These parties negotiate the per share price independent of the Corporation. The stock transfer agent of the Corporation attempts to keep a record of what the stock sales are trading at by asking the parties about the trade price per share. Please refer to the table below entitled Common Stock Performance for a breakdown of the trades for the four quarters of 2003 and 2002. It is the opinion of management that this range accurately reflects the market value of the Corporation's common stock for the periods presented.
Common Stock Performance-December 31, 2003
High Low Quarterly Average ---- --- -----------------
First Quarter $26.00 $26.00 $26.00
Second Quarter $26.00 $26.00 $26.00
Third Quarter $27.00 $26.00 $26.07
Fourth Quarter $28.00 $27.00 $27.99
Common Stock Performance-December 31 2002
High Low Quarterly Average ---- --- -----------------
First Quarter $25.50 $25.00 $25.47
Second Quarter $26.00 $24.00 $25.26
Third Quarter $26.00 $25.50 $25.93
Fourth Quarter $26.00 $26.00 $26.00
The Corporation's Board of Directors determines whether to declare dividends and the amount of any dividends declared. Such determinations by the Board take into account the Corporation's financial condition, results of operations, and other relevant factors. The declaration, amount and timing of future dividends will be determined by the Board of Directors after a review of the Corporation's operations and will be dependent upon, among other factors, the Corporation's income, operating costs, overall financial condition, capital requirements and upon general business conditions. The Corporation declared and paid annual cash dividends of $265,000 or $0.10 per share during 2003 and $238,000 in cash dividends or $0.09 per share during 2002. The Corporation's principal asset is its investment in the Bank, a wholly owned consolidated subsidiary. The primary source of income for the Corporation historically has been dividends from the Bank. Regulatory agencies limit the amount of funds that may be transferred from the Bank to the Corporation in the form of dividends, loans or advances. The Bank paid $1.2 million in dividends to the Corporation in 2003.
Under applicable laws and without prior regulatory approval, the total dividend payments of the Bank in any calendar year are restricted to the net profits of that year, as defined, combined with the retained net profits for the two preceding years. The total dividends that may be declared in 2003 without regulatory approval totals $9.8 million plus year-to-date 2004 net profits as of the declaration date.
Item 6.
Item 6. Selected Financial Data
The following table sets forth certain selected consolidated financial data for the past five years.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required herein is incorporated by reference from the Annual Report to Shareholders for the fiscal year ended December 31, 2003.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required herein is incorporated by reference to pages 24-26 above on Interest Rate Sensitivity Analysis, Asset Liability Analysis and Liquidity.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following financial statements are incorporated by reference from the Annual Report to Shareholders for the fiscal year ended December 31, 2003:
Independent Auditor's Report;
Consolidated Statements of Financial Condition as of December 31, 2003, 2002 and 2001; Consolidated Statements of Operations for each of the years in the three year period ended December 31, 2003; Consolidated Statements of Stockholder's Equity for each of the years in the three year period ended December 31, 2003; Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 2003; and Notes to Consolidated Financial Statements for December 31, 2003, 2002 and 2001.
Item 9.
Item 9. Changes in Accountants and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
On an on-going basis, senior management monitors and reviews the internal controls established for the various operating segments of the Bank. Additionally, the Company has created a Disclosure Review Committee to review not only internal controls but the information used by Company's financial officers to prepare the Corporation's periodic SEC filings and corresponding financial statements. The Committee is comprised of the Senior Management Team of the Bank and meets at least quarterly. Internal audits conducted by the Company's internal audit department are also reviewed by senior officers to assist them in assessing the adequacy of the Company's internal control structure. These audits are also discussed in detail with the Company's Audit Committee.
We have carried out an evaluation, under the supervision and the participation of our management, including our Executive Vice President and Chief Executive Officer, our Executive Vice President and Chief Operations Officer, our Chief Financial Officer and our Vice President of Accounting, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Act") as of the end of the fiscal year covered by this report. Based upon that evaluation, our CEO, COO, CFO and VP Accounting concluded that our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO, COO, CFO and VP Accounting, as appropriate to allow timely decisions regarding required disclosure.
Management asserts that there have not been any changes in the Corporation's internal controls over financial reporting during the fourth fiscal quarter of the fiscal year covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part III.
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the headings "The Nominees," "Executive Officers Who Are Not Directors," "Section 16(a) Beneficial
Ownership Reporting Compliance," "The Board of Directors and its Committees -- Audit Committee" (with respect to the designation of an audit committee financial expert) and "Code of Ethics" in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the headings "Director Compensation," "Executive Officer Compensation," "Stock Options" and "Option Exercises and Holdings" in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the headings "Security Ownership of Management and Certain Beneficial Owners" and "Equity Compensation Plans" in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the heading "Certain Transactions" in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the headings "Services and Fees during 2003" and "Pre-Approved Services" in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders is incorporated herein by reference.
Part IV.
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The response to this portion of Item 15 is submitted as a separate section of this report.
(2) All applicable financial statement schedules required by Regulation S-X are included in the Notes to the 2003 Consolidated Financial Statements.
(3) Exhibits:
3.1 Articles of Incorporation of Highlands Bankshares, Inc. (restated in electronic format), filed as Exhibit 4.1 to the Registration Statement on Form S-3, Registration No. 333-83618, filed with the Commission on March 1, 2002, incorporated herein by reference.
3.2 Bylaws of Highlands Bankshares, Inc. attached as Exhibit 3.2 to the Registration Statement on Form 8-A, File No. 000-27622, filed with the Commission on January 24, 1996, incorporated herein by reference.
10.1 Highlands Union Bank 1995 Stock Option Plan, attached as Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No. 000-27622, incorporated herein by reference.
11 Statement regarding computation of per share earnings (included as Note 1 of the Notes to Consolidated Financial Statements in the 2003 Annual Report to Shareholders and incorporated herein by reference).
13.1 Annual Report to Shareholders.
21 Subsidiaries of the Corporation.
23.1 Consent of Brown, Edwards & Company, L.L.P.
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Operations Officer.
31.3 Section 302 Certification of Chief Financial Officer of the Corporation.
31.4 Section 302 Certification of Chief Financial Officer of the Bank.
32.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C. ss.1350.
32.2 Statement of Chief Operations Officer Pursuant to 18 U.S.C.ss.1350.
32.3 Statement of Chief Financial Officer of the Corporation Pursuant to 18 U.S.C.ss.1350.
32.4 Statement of Chief Financial Officer of the Bank Pursuant to 18 U.S.C.ss.1350.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report.
(c) Exhibits.
The response to this portion of Item 15 as listed in Item 15(a)(3) above is submitted as a separate section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 15 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 26, 2004 BY: /s/ Samuel. Neese ------------------------------------- Samuel L. Neese Executive Vice President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 26, 2004.
EXHIBIT INDEX
Exhibit No. Description - ----------- -----------
3.1 Articles of Incorporation of Highlands Bankshares, Inc. (restated in electronic format), filed as Exhibit 4.1 to the Registration Statement on Form S-3, Registration No. 333-83618, filed with the Commission on March 1, 2002, incorporated herein by reference.
3.2 Bylaws of Highlands Bankshares, Inc. attached as Exhibit 3.2 to the Registration Statement on Form 8-A, File No. 000-27622, filed with the Commission on January 24, 1996, incorporated herein by reference.
10.1 Highlands Union Bank 1995 Stock Option Plan, attached as Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No. 000-27622, incorporated herein by reference.
11 Statement regarding computation of per share earnings (included as Note 1 of the Notes to Consolidated Financial Statements in the 2003 Annual Report to Shareholders and incorporated herein by reference).
13.1 Annual Report to Shareholders.
21 Subsidiaries of the Corporation.
23.1 Consent of Brown, Edwards & Company, L.L.P.
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Operations Officer.
31.3 Section 302 Certification of Chief Financial Officer of the Corporation.
31.4 Section 302 Certification of Chief Financial Officer of the Bank.
32.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C. ss.1350.
32.2 Statement of Chief Operations Officer Pursuant to 18 U.S.C.ss.1350.
32.3 Statement of Chief Financial Officer of the Corporation Pursuant to 18 U.S.C.ss.1350.
32.4 Statement of Chief Financial Officer of the Bank Pursuant to 18 U.S.C.ss.1350.