Item 1.
Business
Item 1A.
Item 1A. Risk Factors
Changes in interest rates could have an adverse effect on our income.
If market interest rates rise, our net interest income can be negatively affected in the short term. The direction and speed of interest rate changes affect our net interest margin and net interest income. In the short term, rising interest rates can negatively affect our net interest income, because our interest-bearing liabilities (generally deposits) reprice sooner than our interest-earning assets (generally loans).
Our failure to maintain adequate capital could have adverse effects on our financial condition.
Highlands Bankshares, Inc. and its bank subsidiary are subject to regulatory capital adequacy guidelines. If the bank fails to meet capital adequacy guidelines, it could have a material effect on our financial condition and could subject us to a variety of enforcement actions, as well as impose, restrictions on our business. In addition, it could lead to a decline in the confidence that our customers have in us and a reduction in the demand for our products and services. If we are not in compliance with governmental regulation, we can be subject to fines, penalties or restrictions of our business.
Our profitability and the value of your investment may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.
Our businesses our subject to stringent regulation by federal and state governmental and regulatory agencies and self-regulatory organizations. In addition, our customers have a number of complex confidentiality and fiduciary requirements. We have established policies, procedures and systems that are designed to comply with these regulatory and operational risk requirements. However, as a financial services institution, we face complexity and costs related to our compliance efforts. We also face the potential for loss resulting from failed or inadequate internal processes and from external events, which could have a material impact on our results of operations. Adverse publicity and damage to our reputation from the failure or perceived failure to comply with legal, regulatory or capital requirements could affect our ability to attract or maintain customers or maintain access to capital markets, or could result in enforcement actions, fines, penalties and lawsuits. If there is a significant economic downturn in our region, our credit risk could be adversely affected and result in loss.
Our business is subject to various lending and other economic risks that could adversely impact our results of operations and financial condition.
We do business in a small geographic area, and a large percentage of our loans are made in our market area. If the region suffers a significant or prolonged period of economic downturn, there is a greater likelihood that more of our customers could become delinquent on their loans or other obligations which could adversely affect our performance. If more competitors come into our market area, our business could suffer.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
Financial services in our market area are highly competitive, with a number of commercial banks, credit unions, insurance companies and stockbrokers seeking to do business with our customers.
Inadequate disaster recovery plans could significantly impact our operations.
If the disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations. Natural or man-made disasters, such as fires, storms, terrorist or military actions could cause damage to our physical facilities, or could cause delays or disruptions to operational functions, including information processing or check settlements. In addition, our vendors could suffer from such events. Should these events affect us or the vendors with whom we do business, our results of operations could be negatively impacted.
An interruption or breach of our information systems may result in a loss of customers.
We rely heavily on communications and information systems to conduct our business. In addition, we rely on third parties to provide key components of our infrastructure, including internet connections and network access. Any disruption in service of these key components could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our operations. Furthermore, any security breach of our information systems or data, whether managed by us or by third parties, could harm our reputation or cause a decrease in the number of customers that choose to do business with us.
Our liquidity is dependent on dividends from the Bank.
The Bank’s ability to pay dividends to the Parent is limited by various statutes and regulations. In the event the Bank was unable to pay dividends to the Parent, dividends on our common stock which we pay to shareholders could be adversely affected. Failure to pay dividends or a reduction in the dividend rate could have a material adverse effect on the market price of our common stock.
Our performance depends on attracting and retaining key employees and skilled personnel to operate our business effectively.
There are a limited number of qualified personnel in the markets we serve, so our success depends in part on the continued services of many of our current management and other key employees. Failure to maintain our key officers and employees and maintain adequate staffing of qualified personnel could adversely impact our operations and ability to compete.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The Company’s and the Bank’s headquarters are located at 340 W. Main Street, Abingdon, Virginia. In addition to the Bank's Main Office location, the Bank owns eleven branch offices: one in the Town of Abingdon, Virginia; one in Washington County, Virginia; two in the City of Bristol, Virginia; one in the Town of Glade Spring, Virginia; one in the Town of Marion, Virginia; one in the City of Bristol, Tennessee; one in the Town of Rogersville, Tennessee; one in the Town of Boone, North Carolina; one in the Town of Banner Elk, North Carolina; and one in the City of Sevierville, Tennessee. The Bank owns the land and buildings of all of these branch offices as well as the main office for the Company and Bank.
The Bank also owns the land and building used for its Financial Services, Collections, Human Resources and Credit Card Operations in Abingdon, Virginia. The Bank owns a vacant piece of land in Bristol, Tennessee that is being held for a potential future branch site. The Bank leases office space in Abingdon, Virginia for operational purposes, leases office space in West Jefferson, North Carolina for a loan production office and leases office space in Sevierville, Tennessee that was previously used as a loan production office. The Bank now subleases this space.
The Company owns the land and buildings used as the Bank’s Operations Center and Technology House in Abingdon, Virginia. The Company owns the land and vacant building on property adjacent to the Company’s Operations Center in Abingdon, Virginia. The Company
owns vacant land adjacent to its Main Branch Office in Abingdon, Virginia. The Company also owns approximately 14 acres of vacant land in Abingdon, Virginia for future possible development of a corporate headquarters.
All of the existing properties are in good operating condition and are adequate for the Company’s present and anticipated future needs.
The Bank owns all its computer and data processing hardware and is a licensee of the software it utilizes.
Item 3.
Item 3. Legal Proceedings
The Company is not currently involved in any pending legal proceedings, other than routine litigation incidental to the Bank’s banking business. These proceedings are not material to the Company or the Bank.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Information and Dividend
Trades in the Company’s common stock are reported on the Over-The-Counter Bulletin Board (OTCBB) and in the Pinksheets by at least five broker dealers under the symbol HBKA.OB. In addition, the Company 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 Company. The stock transfer agent of the Company 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 summary of sales prices known to the Company for each of the four quarters of 2006 and 2005. The prices below have been adjusted to reflect the Company’s two-for-one stock split effective on September 9, 2005.
The Company historically has paid cash dividends on an annual basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company’s Board of Directors and will depend upon the earnings of the Company and its subsidiaries, principally the Bank, the financial condition of the Company and other factors, including general economic conditions and applicable governmental regulations and policies as discussed in Item 1., “Business - Certain Regulatory Considerations,” above.
The Company is organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders.
The Company is a legal entity separate and distinct from its subsidiaries. Its ability to distribute cash dividends will depend primarily on the ability of the Bank to pay dividends to it, and the Bank is subject to laws and regulations that limit the amount of dividends that it can pay. As a state member bank, the Bank is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Under Virginia law, a bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by it in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the Federal Reserve.
The Federal Reserve and the state of Virginia have the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. Both the state of Virginia and the Federal Reserve have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. Under the Federal Reserve’s regulations, the Bank may not declare or pay any dividend in excess of its net income for the current year plus any retained net income from the prior two calendar years. The Bank may also not declare or pay a dividend without the approval of its board and two-thirds of its shareholders if the dividend would exceed its undivided profits, as reported to the Federal Reserve.
In addition, the Company is subject to certain regulatory requirements to maintain capital at or above regulatory minimums. These regulatory requirements regarding capital affect its dividend policies. The Federal Reserve has indicated that a bank holding company should generally pay dividends only if its net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.
As of March 14, 2007, the Company had approximately 1,417 shareholders of record.
Issuer Repurchases of Equity Securities
The following table sets forth information with respect to repurchases of common stock that the Company made during the three months ended December 31, 2006:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs (1)
Maximum Number of Shares that May Yet Be Purchased Under the Program
(in thousands)
Oct. 1, 2006 - Oct. 31, 2006
31,518
$16.38
31,518
21,738
Nov. 1, 2006 - Nov 30, 2006
3,030
$16.50
3,030
18,708
Dec. 1, 2006 - Dec. 31, 2006
4,895
$16.50
4,895
13,813
Total
39,443
$16.41
39,443
13,813
(1)
On December 14, 2005, the Company’s board of directors approved a stock repurchase program to purchase over 12 months up to 151,000 shares of its outstanding common stock (the “Program”). The Company disclosed the Program in a Current Report on Form 8-K filed on December 20, 2005. The Company has allocated $2.5 million to the Program and anticipates funding for the Program to come from available corporate funds.
Stock Performance Graph
The following graph compares the cumulative total return to the shareholders of the Company, based on transactions known to the Company, for the last five fiscal years with the total return on the Russell 2000 Index and SNL Bank Index, assuming an investment of $100 in shares of Common Stock on December 31, 2001, and the reinvestment of dividends.
Highlands Bankshares, Inc.
Item 6.
Item 6. Selected Financial Data
The Company and Subsidiaries Selected Consolidated Financial Data: (Refer to the Annual Report of Shareholders for the complete set of the Company’s financial statements)
* Data adjusted for 2:1 split effective September 9, 2005.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The purpose of this discussion is to provide information about the financial condition and results of operations of the Company and its wholly-owned subsidiaries and other information included in this report. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements.
Caution About Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially form those set forth in the forward-looking statements.
Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:
•
The ability to successfully manage the Company’s growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;
•
The ability to continue to attract low cost core deposits to fund asset growth;
•
Maintaining capital levels adequate to support the Company’s growth;
•
Maintaining cost controls and asset qualities as the Company opens or acquires new branches;
•
Reliance on the Company’s management team, including its ability to attract and retain key personnel;
•
The successful management of interest rate risk;
•
Changes in general economic and business conditions in the Company’s market area;
•
Changes in interest rates and interest rate policies;
•
Risks inherent in making loans such as repayment risks and fluctuating collateral values;
•
Competition with other banks and financial institutions, and companies outside of the banking industry,
including those companies that have substantially greater access to capital and other resources;
•
Demand, development and acceptance of new products and services;
•
Problems with technology utilized by the Company;
•
Changing trends in customer profiles and behavior; and
•
Changes in banking and other laws and regulations applicable to the Company.
Overview
The Company is a bank holding company located in southwest Virginia. It conducts commercial banking operations primarily through its full service banking subsidiary, Highlands Union Bank (“the Bank”). The Bank has two wholly-owned subsidiaries, Highlands Union Financial Services, Inc. and Highlands Union Insurance Services, Inc. These two subsidiaries offer investment and insurance products. Revenues and net income derived from these two sources are not significant at this time. Management characterizes the Bank as a "community bank".
The Bank offers general retail and commercial banking services to individuals, businesses and local government units. These products and services include accepting deposits in the form of checking accounts, money market deposit accounts, interest-bearing demand deposit accounts, savings accounts and time deposits; making real estate, commercial, revolving, consumer, credit card and agricultural loans; offering letters of credit; providing other consumer financial services, such as automatic funds transfer, collections, night depository, safe deposit, travelers checks and savings bond sales; and providing other miscellaneous services normally offered by commercial banks. The Bank makes loans in all major loan categories, including commercial, commercial and residential real estate, construction and consumer loans.
The Company makes money primarily by earning an interest rate spread between the interest rates it earns on loans and securities and interest rates it pays on deposits and other borrowed money. The Company also earns money through fees, service charges and other non-interest income.
Critical Accounting Policies
General
The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to Consolidated Financial Statements and management’s discussion and analysis are, to a large degree, dependent upon the accounting policies of the Company. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.
Presented below is a discussion of the Accounting Policy that management believes is important to the understanding of the Company’s financial condition and results of operations. This critical accounting policy requires management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial Statements.
Allowance for Loan Losses
The Company monitors and maintains an allowance for loan losses to absorb the estimate of probable losses inherent in the loan portfolio. The allowance for loan losses is based on management’s judgment and analysis of current and historical loss experience, risk characteristics of the loan portfolio, concentrations of credit and asset quality, as well as other internal and external factors, such as general economic conditions. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties, and variability related to the factors used. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.
Performance Summary
The following table shows the Company’s key performance ratios for the years ended December 31, 2006, 2005 and 2004:
Growth
The following table shows the Company’s key growth indicators for the years ended December 31, 2006, 2005 and 2004:
(dollar amounts in thousands)
12/31/06
12/31/05
12/31/04
Securities
$137,984
$135,726
$128,953
Loans, net
$433,034
$407,274
$387,133
Deposits
$500,109
$486,908
$468,657
Assets
$632,649
$599,341
$567,060
Asset Quality
The following table shows the Company’s key asset quality indicators for the years ended December 31, 2006, 2005 and 2004:
(dollar amounts in thousands)
12/31/06
12/31/05
12/31/04
Non-accrual loans
$2,696
$2,920
$3,902
Loans past due over 90 days
1,281
Other real estate owned
1,924
1,047
Allowance for loan losses to total loans
1.04%
1.06%
1.07%
Net charge-off ratio
0.22%
0.24%
0.36%
For further information see the discussion under "Provision and Allowances for Loan Losses".
Results of Operations
Net Interest Income
(dollar amounts in thousands)
2006 versus 2005
Net interest income for 2006 was $18,521 or an increase of $822 over 2005. During 2006 interest income increased $4,823. This was a result of both existing interest earning assets re-pricing at higher rates and new loans made and securities purchased at higher rates. Throughout the first half of 2006, the Federal Reserve Board continued its policy of raising short term rates. Interest-bearing liabilities also re-priced upward, causing an increase in interest expense of $4,001. The net result of these events was a slight decrease in the Company’s net interest margin to 3.50% in 2006 from 3.52% in 2005. To help offset the margin reduction and in anticipation of short term rates falling over the next year or two, the Company continued to increase its portfolio of fixed rate bonds. The Company has also made a concerted effort to lock in longer term funding by increasing its long term funding from the Federal Home Loan Bank. During 2006, the Company increased its funding from the FHLB by $20,000. The continued competition for deposits in the Company’s market areas has not only slowed deposit growth but has also significantly increased the weighted yields paid for such deposits. The current trend is the result of short-term interest rates rising after an unusually long period of low interest rates. The flat and /or slightly inverted yield curve during 2006 has also impacted the Company’s ability to attract longer term deposits. The tax equivalent yield on earning assets for 2006 was 6.73%, increasing 54 basis points during the year. During the same period, the yield on interest bearing liabilities was 3.79%, which was an increase of increase of 68 basis points.
2005 versus 2004
Net interest income for 2005 was $17,699 or an increase of $401 over 2004. During 2005 interest income increased $2,729. This was a result of both existing interest earning assets re-pricing at higher rates and new loans made and securities purchased at higher rates. Throughout 2005 the Federal Reserve Board continued its policy of raising short term rates. Interest-bearing liabilities also re-priced upward, causing an increase in interest expense of $2,328. The net result of these events was a slight decrease in the Company’s net interest margin to 3.52% in 2005 from 3.60% in 2004. To help offset the margin reduction and in anticipation of short term rates falling over the next year or two, the Company continued to increase its portfolio of fixed rate municipal bonds. The Company also continued to increase its portfolio of adjustable rate mortgages to help offset any increase in interest rate risk resulting from these municipal bond purchases. The Company has also made a concerted effort to lock in longer term funding by increasing its long term funding from the Federal Home Loan Bank. The current trend is the result of short-term interest rates rising after an unusually long period of low interest rates. The tax equivalent yield on earning assets for 2005 was 6.19%, increasing 24 basis points during the year. During the same period, the yield on interest bearing liabilities increased by 41 basis points.
Analysis of Net Interest Earnings
The following table shows the major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid, the average yield or rate on the average balance outstanding, net interest income and net yield on average interest-earning assets and average interest spread for the years indicated.
Analysis of Changes in Interest Income and Interest Expense
The Company's primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate).
Increase/(Decrease) Due to Volume and Rate
INTEREST INCOME
Securities
$ 486
$ 735
$ 1,221
$ 306
$ 143
$ 449
Federal funds sold
(56)
(14)
Loans
1,397
2,219
3,616
1,021
1,107
2,128
Total Income Change
$ 1,827
$ 2,996
$ 4,823
$ 1,455
$ 1,274
$ 2,729
INTEREST EXPENSE
Savings and time deposits
$ 642
$ 2,505
$ 3,147
$ 358
$ 1,614
$ 1,972
Other interest-bearing
liabilities
1,053
(199)
Total Expense Change
$ 1,695
$ 2,306
$ 4,001
$ 531
$ 1,797
$ 2,328
Increase (Decrease) in
Net Interest Income
$ 132
$ 690
$ 822
$ 924
$ (523)
$ 401
Non-interest Income
(dollar amounts in thousands)
2006 versus 2005
Non-interest income for 2006 was $4,828. During the fourth quarter of 2005, the Company implemented an overdraft privilege program as an additional service to its customer base. As a result, NSF income increased $399 over 2005. The number of checks processed continues to decline as the number of electronic transactions increases. Merchant and debit card fee income increased by $81 over 2005 due to increases in merchant fees and visa check card interchange fees. The use of debit cards continued to increase significantly over the prior period.
Net securities gains and losses decreased $460 from 2005. The Company sold several more securities during 2005 as opposed to 2006. The majority of sales consisted of tax-exempt municipal bonds and agency preferred stocks (see the “Securities” section for further discussion). Income received during 2006 from the Company’s investment in Virginia Title Company, LLC totaled $130. Earnings related to its investment in Bank Owned Life Insurance totaled $371, or an increase of $30 as compared to 2005. The Company’s net revenue from its financial services division increased $82 over 2005.
2005 versus 2004
Non-interest income for 2005 was $4,850, a 6.08% increase over 2004. During the fourth quarter of 2005, the Company implemented an overdraft privilege program as an additional service to its customer base. The number of checks processed continues to decline as the number of electronic transactions increases. Merchant and debit card fee income increased by $128 over 2004 due to increases in merchant fees and visa check card interchange fees. The use of debit cards continued to increase significantly over the prior period.
Net securities gains and losses increased $159 from 2004. The majority of sales consisted of tax-exempt municipal bonds and agency preferred stocks (see the “Securities” section for further discussion). Income received during 2005 from the Company’s investment in Virginia Title Company, LLC totaled $126. Earnings related to its investment in Bank Owned Life Insurance totaled $340, or a decrease of $14 as compared to 2004.
Management of the Company is continually looking for and researching areas to increase the amount of non-interest income. During 2005, the Company became an equity owner in BI
Investments, which is a full service dealer broker created in conjunction with the Virginia Bankers Association. Bankers’ Investments allows the Company to offer a full range of investment products. Management believes this investment will increase its ability to generate future sales for a wide array of financial services products.
Non-interest Expense
(dollar amounts in thousands)
2006 versus 2005
Non-interest expense is comprised of salaries and employee benefit costs, occupancy expenses, furniture and equipment expenses and other operating expenses. Non-interest expense for 2006 was $15,886, an increase of $888 over 2005. The increase is primarily attributable to the continued growth of the Company that was achieved during 2006. Salaries and employee benefits increased by 2.96% or $261 primarily due to the Company opening a new branch in Sevierville, TN in August of 2006. Furniture and equipment expense increased $131 over 2005. Recent technology enhancements have allowed the bank to leverage its existing personnel base to help minimize overall increases in personnel costs.
2005 versus 2004
Non-interest expense for 2005 was $14,998, essentially the same as 2004. Salaries and employee benefits increased by 1.26% or $110. The Company opened a new branch in Banner Elk, NC. in February 2004 and opened a loan production office in West Jefferson, NC during the fourth quarter of 2004. A full year of expense was incurred during 2005 for these two locations. The Company also opened a loan production office in Sevierville, TN during 2005. Other non-interest expenses remained comparable to 2004.
Income Taxes
(dollar amounts in thousands)
2006 vs. 2005
Income tax expense for 2006 decreased $255 when compared to 2005 primarily due to the increase in tax exempt income and the capital loss treatment pertaining to the sale of approximately $4,597 of agency preferred stocks that occurred in 2005. Tax exempt income continues to be the primary difference between the "expected" and reported tax expense.
2005 vs. 2004
Income tax expense for 2005 increased by $321 when compared to 2004 primarily due to the increase in pretax income and the capital loss treatment pertaining to the sale of approximately $4,597 of agency preferred stocks.
Provision and Allowance for Loan Losses
(dollar amounts in thousands)
2006 vs. 2005
The adequacy of the allowance for loan losses is based on management's judgment and analysis of current and historical loss experience, risk characteristics of the loan portfolio, concentrations of credit and asset quality, as well as other internal and external factors, such as
general economic conditions. The internal credit review department performs pre-credit analyses of large credits and also conducts credit review activities that provide management with an early warning of asset quality deterioration. The internal credit review department also prepares regular analyses of the adequacy of the allowance for loans losses. These analyses include calculations based upon a mathematical formula that considers identified potential losses on specific loans and makes pool allocations for historical losses for various loan types. The Company uses a rolling three year history by loan category in determining pool allocation factors. In addition, an amount is allocated based upon such factors as changing trends in the loan mix, the effects of changes in business conditions and market area, unemployment trends, the effects of any changes in loan policies, and the effects of competition and regulatory factors on the loan portfolio.
The internal credit review department as well as management has determined that the Company's allowance for loan losses is sufficient. Loans past due ninety days or more and still accruing were $704 at December 31, 2006, compared to $1,281 at December 31, 2005. Net charge-offs to total loans decreased from 0.24% in 2005 to 0.22% in 2006. This was in large part due to the changes implemented in 2004 related to credit scoring, underwriting, analysis and review.
2005 vs. 2004
During the first half of 2004, the Company greatly enhanced both its credit review and credit analysis departments. Additional staffing was added and enhanced procedures and systems were also implemented. Loans past due ninety days or more and still accruing were $1,281 at December 31, 2005, compared to $661 at December 31, 2004. Net charge-offs to total loans decreased from 0.36% in 2004 to 0.24% in 2005. This decline in net charge-offs was in large part due to the changes implemented in 2004 related to credit scoring, underwriting, analysis and review.
The following table presents the Company’s loan loss experience for the past five years:
Factors influencing management's judgment in determining the amount of the loan loss provision charged to operating expense include the quality of the loan portfolio as determined by management, the historical loan loss experience, diversification as to type of loans in the portfolio, the amount of secured as compared with unsecured loans and the value of underlying collateral, banking industry standards and averages, and general economic conditions.
Non-performing loans
(dollar amounts in thousands)
The loan portfolio of the Bank is reviewed regularly by senior officers to evaluate loan performance. The frequency of the review is based on a rating of credit worthiness of the borrower utilizing various factors such as net worth, credit history and customer relationship. The evaluations emphasize different factors depending upon the type of loan involved. Commercial and real estate loans are reviewed on the basis of projections of cash flow and estimated net realizable value through an evaluation of collateral and the financial strength of the borrower. Installment loans are evaluated largely on the basis of delinquency data because of the large number of such loans and relatively small size of each individual loan.
Management’s review of commercial and other loans may result in a determination that a loan should be placed on a non-accrual of interest basis. It is the policy of the Bank to discontinue the accrual of interest on any loan on which full repayment of principal and / or interest is doubtful. Subsequent collection of interest is recognized as income on a cash basis upon receipt. Placing a loan on non-accrual status for the purpose of income recognition is not in itself a reliable indication of potential loss of principal. Other factors, such as the value of the collateral securing the loan and the financial condition of the borrower, serve as more reliable indications of potential loss of principal.
The policy of the Bank is that non-performing loans consist of loans accounted for on a non-accrual basis and loans which are contractually past due 90 days or more in regards to interest and/ or principal payments. The following table presents non-performing assets at December 31, 2006, 2005, 2004, 2003 and 2002, respectively.
Allocation of the allowance for loan losses
The following table provides an allocation of the allowance for loan losses at December 31, 2006, 2005, 2004, 2003 and 2002.
1)
Percentages for 2006, 2005 and 2004 are categorized differently from prior years due to the Company’s change in its methodology of the calculation of the Allowance for Loan Loss reserve. More enhanced pooling allocation factors are now being used, in addition to more detailed historical data being utilized. The allowance for loan loss reserve is computed quarterly by the Company’s internal credit review department and is reviewed by the Senior Financial Officers of the Company. Management believes its method, implemented in 2004, pertaining to the allocation of loan loss reserve is both adequate and more properly allocates the reserve among the various categories.
Financial Condition
Balance Sheet
(dollar amounts in thousands)
2006 vs. 2005
Total assets for the Company increased by $33,308 or 5.56% in 2006. Interest earning assets grew by $30,462 or 5.63% for the year. Interest bearing liabilities increased by $22,285 or 4.78% in 2006. Asset growth was primarily attributable to the continued increased market share in both North Carolina and Tennessee.
2005 vs. 2004
Total assets for the Company increased by $32,281 or 5.69% in 2005. Interest earning assets grew by $25,796 or 4.90% for the year. Interest bearing liabilities increased by $21,410 or 4.73% in 2005. Asset growth was primarily attributable to increased market share in both North Carolina and Tennessee as well as net additions to the Company’s securities portfolio.
Loans
(dollar amounts in thousands)
2006 vs. 2005
Loans net of unearned income and deferred fees increased by $25,966 or 6.31% in 2006. The majority of the increase was related to the Company’s continued growth in market share in North Carolina and Tennessee. Loans secured by real estate showed an increase of approximately $26,987, offset by a decline in loans secured by collateral other than real estate of approximately $3,256. The decline in loans secured by collateral other than real estate was primarily due to the Company’s decision to discontinue its dealer finance division in the first quarter of 2005. This decision was made due to the competitive nature of this program and the risks associated with these indirect loans. Management also believes the decline in loans secured by collateral other than real estate was also due to the following:
•
General economic conditions and the lack of employment opportunity in portions of the Company's market area.
•
A decline in consumer requests for new car financing because of special financing incentives offered by automobile companies.
•
Stricter credit scoring / underwriting implemented in 2004.
•
Consumers taking advantage of low mortgage rates to refinance home mortgages to obtain funds that might otherwise have been borrowed through a consumer loan.
Reversal of this trend may occur to some extent as economic conditions change and higher interest rates make mortgage refinancing less appealing. However, management believes that automotive related financing offers and competition from the credit card sector will remain. Since loans to individuals are generally higher yielding, this trend will not have a favorable effect on net interest income in the future but should have a favorable impact on future net charge-offs as the percentage of real estate secured loans to total loans increases.
The Company’s portfolio of commercial, construction and land development loans has also experienced significant growth over the past few years. During 2006, this segment of loans grew $12,313 or 8.78%. This is primarily attributable to the North Carolina and Tennessee markets the Company has entered and the amount of growth occurring in these particular areas.
2005 vs. 2004
Loans net of unearned income and deferred fees increased by $20,319 or 5.19% in 2005. Loans secured by real estate showed an increase of approximately $27,825, offset by a decline in loans secured by collateral other than real estate of $10,562. The majority of the increase in loans during 2005 was the result of the continued growing market share in North Carolina. Again, the decline in non-real estate secured loans was due to the above mentioned reasons.
Loan Portfolio
The table below classifies gross loans by major category and percentage distribution at December 31, 2006 for each of the past five years:
The following table shows the maturity of loans outstanding, inclusive of contractual amortization, at December 31, 2006:
Securities
(dollar amounts in thousands)
2006 vs. 2005
Investment securities available for sale increased $2,258 (market value) from December 31, 2005 to December 31, 2006. Purchases during the year consisted primarily of adjustable rate mortgage backed securities, fixed rate agency notes and fixed rate municipal bonds. As short term interest rates have risen during the year, management has continued its investment strategy to purchase securities that will not
only blend in with the Company’s overall asset liability strategy but also maximize yield. The majority of the monthly pay downs were again contractual amortization and prepayments on variable rate securities as a result of prepayments occurring on the underlying mortgages.
At December 31, 2006, net unrealized losses in the Company’s securities portfolio classified available for sale totaled $828. The majority of these unrealized losses were related to the Company’s holdings ($6,250 in book value) of Federal Home Loan Mortgage Corporation and Federal National Mortgage Association agency preferred stock. As discussed in Footnote 2 in the Company’s Consolidated Financial Statements, management of the Company does not consider any of these losses to be other than temporary. It is management’s opinion that the unrealized losses are primarily related to interest rate changes. Management also feels that the market values of these particular instruments have also been negatively affected by the accounting related irregularities at both Fannie Mae and Freddie Mac. The Company has both the ability and intent to hold these instruments for a time necessary to recover its cost. Even with the intent and ability to hold these securities, the Board and Management elected to sell during 2005 approximately $4,597 of agency preferred stock realizing a net capital loss of approximately $383. This decision was specifically a risk management decision to reduce the Company’s amount of holdings in this type of investment. Management at that time felt that the amount of holdings in these instruments needed to be reduced as a percentage of the entire securities portfolio. These instruments are stocks and do not have a stated maturity date. The Company continues to hold a “laddered” structure of these investments (a single 1- year floater, two 2- year floaters and a single 5- year floater). It should be noted that the loss in these four instruments has reduced from approximately 24% of book value to approximately 12% of book value since April of 2005 as interest rates have continued to rise. As these instruments’ rates have reset due to their related indexes adjusting upward, their values also have been increasing which supports management’s belief that these losses are temporary and related primarily to the interest rate cycle. 70% of the quarterly dividends paid on these instruments are tax exempt. Therefore, as the coupon rates on these stocks increase, the “tax exempt benefit” increases as well which also supports management’s position that the values of these stocks are related to the interest rate cycle.
Also during 2005, the Company elected to sell a portion of its municipal bond portfolio (approximately $17,353 in book value) and recognized gains totaling approximately $921. Management took the opportunity to sell the municipal bonds and realize the gain and subsequently re-invest the proceeds back into more municipal bonds at similar yields. The average life of the municipals that management purchased was only 2-4 years longer than the municipals that were sold.
2005 vs. 2004
Investment securities available for sale increased $6.89 million (market value) from December 31, 2004 to December 31, 2005. During 2005, the majority of the increase was purchases of adjustable rate mortgage backed securities (approximately $21,232 in book value) and tax exempt municipals bonds (approximately $29,071 in book value).
Investment Portfolio
See Note 2 of Notes to Consolidated Financial Statements for other information relating to the Company’s securities portfolio.
The following table presents the maturity distribution, market value, amortized cost and approximate tax equivalent yield (assuming a 34% federal income tax rate) of the investment portfolio at December 31, 2006.
Deposits
(dollar amounts in thousands)
2006 vs. 2005
Total deposits grew by $13,201 or 2.71% in 2006. Non-interest bearing demand deposits decreased by $366. Total time deposits increased by $28,636. Savings accounts declined $15,774 during the year as customers began placing more funds back into the equity markets or moving their funds to time deposits. The increase in time deposits is primarily a result of rising interest rates and the growth in the Company’s newer markets. The majority of the increase in time deposits was growth in shorter term CD’s due to the current interest rate environment and the inverted yield curve. The Company and banks nationwide are continuing to face the challenge of gathering deposits, especially non-interest bearing deposits. The Company has continued to use its alternative funding sources (primarily FHLB advances) to help facilitate growth. During 2006, the Company increased its borrowings from the FHLB by $20,000. The total amount of FHLB borrowings as of December 31, 2006 was $76,200. See Footnotes 9 and 10 in the Company’s Consolidated Financial Statements for a description of the Bank’s outstanding FHLB advances.
2005 vs. 2004
Total deposits grew by $18,251 or 3.89% in 2005. Non-interest bearing demand deposits increased by $7,141. Total time deposits increased by $20,238. Savings accounts declined during the year as customers began placing more funds back into the equity markets or moving their funds to time deposits. The increase in time deposits is primarily a result of rising interest rates and the growth in the North Carolina and Tennessee markets. The majority of the increase in time deposits was related to the growth in the Bank’s “HUB Choice” 25- month CD which gives the customer a one time option to increase the rate during the term of the certificate. This product has been widely accepted due to the expectation of rising interest rates.
The following table provides a breakdown of deposits at December 31 as indicated:
The average daily amount of deposits and rates paid on such deposits is summarized for the periods indicated in the following table:
The remaining maturities of time deposits greater than or equal to $100,000 at December 31, 2006 are as follows (Amount in thousands):
Maturity
Amount
3 months or less
$ 11,979
Over 3 months through 6 months
24,309
Over 6 months through 12 months
33,902
Over 12 months
31,754
Total
$ 101,944
Effects of Inflation
The Company's consolidated statements of income generally reflect the effects of inflation. Since interest rates, loan demand, and deposit levels are related to inflation, the resulting changes are included in net income. The most significant item which does not reflect the effects of inflation is depreciation expense. Historical dollar values used to determine depreciation expense do not reflect the effects of inflation on the market value of depreciable assets after their acquisition.
Liquidity and Capital Resources
(dollar amounts in thousands)
Liquidity is the measure of the Bank’s ability to generate sufficient funds in order to meet customers’ demands for withdrawal of deposit balances and for the funding of loan requests. The Bank maintains cash reserves, in accordance with Federal Reserve Bank guidelines, and has sufficient flow of funds from investment security payments as well as loan payments to meet current liquidity needs.
Management of the Bank continuously monitors and plans the Bank’s liquidity position for the future. Liquidity is provided from cash and due from banks, federal funds sold, loan and investment security payments, core deposits, the national certificate of deposit market, lines of credit with correspondent banks and lines of credit with the Federal Home Loan Bank, Management believes that these sources of funds provide sufficient and timely liquidity for the foreseeable future.
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements for information relating to recent accounting pronouncements.
Off-Balance Sheet Arrangements
See Note 16 of Notes to Consolidated Financial Statements for information relating to Off-Balance Sheet Arrangements.
Contractual Obligations
Listed below are the contractual obligations of the Company and its subsidiaries at December 31, 2006 aggregated by type and due date. Optional call date provisions are reflected in the table below.
Total
Less than one year
One to Three Years
Three to Five Years
More Than Five Years
Long-term debt obligations
$ 40,874
$ 0
$ 30,000
$ 10,229
$ 645
Capital lease obligations
-
-
-
-
-
Operating lease obligations
-
-
Other long-term liabilities
reflected on the
Company’s balance sheet
6,300
-
6,300
-
-
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity Analysis
Interest rate risk refers to the exposure of the Company’s earnings and market value of equity (“MVE”) to changes in interest rates. The amount of change in net interest income and MVE resulting from shifts in interest rates is determined by contractual maturity of fixed rate instruments, the repricing date for variable rate instruments, competition and customer reactions.
The Company runs simulation models through a range of positive and negative interest rate movements to determine the effect these shifts in interest rates would have on the market value of the Company’s equity. The market value is determined by applying a discount rate to the Company’s interest-earning assets and interest-bearing liabilities that are not carried at market value, based on current rate levels at the time the model is run and calculating the present value of future cash flows.
There are several common components of interest rate risk that must be effectively managed to maintain minimal impact on the Company’s earnings and capital. Repricing risk comes largely from timing differences in the pricing of interest-earning assets and interest-bearing liabilities. Reinvestment risk refers to the reinvestment of cash flows from interest and principal payments and maturing assets at lower or higher rates. Basis risk arises when different yield curves or pricing indices do not change at precisely the same moment in time or magnitude so that earning assets and interest-bearing liabilities with
the same maturity are not affected equally. Yield curve risk refers to unequal movements in short-term and long-term interest rates.
The Company is not a party to derivative financial instruments with off-balance sheet risks such as futures, forwards, swaps, and options. The Company, however, is a party to financial instruments with off-balance sheet risks such as commitments to extend credit and standby letters of credit and recourse obligations in the normal course of business to meet the financing needs of its customers. See Note 16 of Notes to Consolidated Financial Statements for additional information relating to financial instruments with off-balance sheet risk. Management does not plan any future involvement in high risk derivative products.
The following table provides the maturities or re-pricing of investment securities, loans, and deposits as of December 31, 2006, and measures the interest rate sensitivity gap for each range of maturity indicated. The table presents the carrying amount of assets and liabilities in the periods they are expected to reprice or mature. The amounts below also reflect various prepayment assumptions.
Asset Liability Management
The Company’s primary objectives for asset and liability management are to establish internal controls and procedures that will result in managing interest rate risk, liquidity management, capital planning, asset mix and volume control, and loan and deposit pricing. The Asset and Liability Committee (ALCO) is headed by the CEO and includes management personnel from the different areas of the Bank. The ALCO meets on a monthly basis.
In determining the appropriate level of interest rate risk, the ALCO reviews the changes in projected net interest income subject to various changes in interest rates. To help effectively measure interest rate risk, the ALCO utilizes rate sensitivity and simulation analysis to determine the impact on net interest income as well as the changes in the Economic Value of Equity. Simulation analysis is used to subject or “shock” the current re-pricing and maturing amounts to rising and falling interest rates. Rate change increments of 1% and 2% up and down are used in the monthly simulation analysis. Loan and investment security prepayments are estimated using current market information.
While this planning process is designed to protect the Company over the long-term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not, by their nature, move up or down in tandem in response to changes in the overall rate environment. The Company's profitability in the near term may be temporarily affected either positively by a falling interest rate scenario or negatively by a period of rising rates.
The following table shows the estimated cumulative impact on net interest income (NII) for the next 12 months as of December 31, 2006, subject to the specified interest rate changes. For purposes of this schedule the Company used a parallel rate shock on its interest earning assets and interest bearing liabilities. A parallel rate shock means that a 100 basis point increase in the rate index (prime rate) would result in an immediate 100 basis point increase on interest earning assets and interest bearing liabilities subject to the interest rate reset date. The Company uses a 50 basis point slope for its computation. The slope is the number of basis points per month that an index can increase or decrease until it reaches the target rate.
Rate change increment
% change in NII
$ change in NII
Up 100 basis points
-3.35%
-664,000
Up 200 basis points
-6.55%
-1,300,000
Down 100 basis points
3.28%
651,000
Down 200 basis points
3.66%
726,000
The above schedule assumes that 100% of the Company’s interest bearing checking accounts and 100% of its statement savings accounts would reprice according to the above increments. The above schedule also assumes an approximate growth of 8% over the next 12 months.
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, 2006:
Report of Independent Registered Public Accounting Firm on the Financial Statements per the annual report
Consolidated Balance Sheets as of December 31, 2006, 2005 and 2004;
Consolidated Statements of Income for each of the years in the three year period ended December 31, 2006;
Consolidated Statements of Stockholders’ Equity for each of the years in the three year period ended December 31, 2006;
Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 2006; and
Notes to Consolidated Financial Statements for December 31, 2006
Item 9.
Item 9. Changes in 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 activities 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 Company’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.
There were not any changes in the Company’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.
Item 9B.
Item 9B. Other Information
None
Part III.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
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” and “Code of Ethics” in the Company’s Proxy Statement for the 2007 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 “Executive Compensation”, (except for the Compensation Committee Report) and “Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the heading “Security Ownership of Management and Certain Beneficial Owners” in the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference.
The following table sets forth information as of December 31, 2006, with respect to compensation plans under which shares of Common Stock are authorized for issuance.
Equity Compensation Plan Information
Plan Category
Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
Number of Securities Remaining Available
for Future Issuance
Under Equity
Compensation Plans (a)
Equity Compensation Plans Approved by Shareholders
353,752
$12.58
--
Equity Compensation Plans Not Approved by Shareholders (b)
_______
$ -
200,000
Total
353,752
$12.58
200,000
(a)
Amounts exclude any securities to be issued upon exercise of outstanding options, warrants and rights.
(b)
On September 13, 2006, the Board of Directors of the Company approved the Highlands Bankshares, Inc. 2006 Equity Compensation Plan (the “Plan”). The Plan authorizes the Personnel and Compensation Committee (the “Committee”) of the Board of Directors to grant options, stock appreciation rights, stock awards and stock units to directors, officers, key employees, consultants and advisors to the Company and its subsidiaries who are designated by the Committee. The Company is authorized to issue under the Plan up to 200,000 shares of its Common Stock. Generally, if an award is forfeited, expires or terminates, the shares allocated to that award under the Plan may be reallocated to new awards under the Plan. Shares surrendered pursuant to the exercise of a stock option or other award or in satisfaction of tax withholding requirements under the Plan may also be reallocated to other awards. The Company is not seeking shareholder approval of the Plan because such approval is not required.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the heading “Transactions with Related Parties” and “The Board of Directors and its Committees” in the Company’s Proxy Statement for the 2007 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” and “Pre-Approved Policies and Procedures” in the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference.
Part IV.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(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 2006 Consolidated Financial Statements.
(3)
Exhibits:
3.1
Articles of Incorporation of Highlands Bankshares, Inc. (as restated in electronic format only as of July 27, 2005), filed as Exhibit 3.1 to the Current Report on Form 8-K, File No. 000-27622, filed with the Commission on August 2, 2005, 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.
10.2
Highlands Bankshares, Inc. 2006 Equity Compensation Plan, filed as Exhibit 3.1 to the Current Report on Form 8-K, File No. 000-27622, filed with the Commission on September 20, 2006, incorporated herein by reference
Statement regarding computation of per share earnings (included as Note 1 of the Notes to Consolidated Financial Statements in the 2006 Annual Report to Shareholders and incorporated herein by reference).
13.1
Annual Report to Shareholders - Financial Statements
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. § 1350.
32.2
Statement of Chief Operations Officer Pursuant to 18 U.S.C. § 1350.
32.3
Statement of Chief Financial Officer of the Corporation Pursuant to 18 U.S.C. § 1350.
32.4
Statement of Chief Financial Officer of the Bank Pursuant to 18 U.S.C. § 1350.
(b)
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.
(c)
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.
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 and on the dates indicated on March 26, 2007.
Signature
Title
Date
/s/ James D. Morefield
James D. Morefield
Chairman of the Board, and Director
March 26, 2007
/s/ Dr. James D. Moore, Jr.
Dr. James D. Moore, Jr.
President
March 26, 2007
/s/ J. Carter Lambert
J. Carter Lambert
Vice Chairman
March 26, 2007
/s/ Samuel L. Neese
Samuel L. Neese
Executive Vice President, and Chief Executive Officer (principal executive officer)
March 26, 2007
/s/ James T. Riffe
James T. Riffe
Executive Vice President and Cashier (principal financial and accounting officer)
March 26, 2007
/s/ William E. Chaffin
William E. Chaffin
Director
March 26, 2007
/s/ E. Craig Kendrick
E. Craig Kendrick
Director
March 26, 2007
/s/ Clydes B. Kiser
Clydes B. Kiser
Direc­tor
March 26, 2007
/s/ Charles P. Olinger
Charles P. Olinger
Direc­tor
March 26, 2007
/s/ William J. Singleton
William J. Singleton
Direc­tor
March 26, 2007
/s/ Dr. H. Ramsey White, Jr.
Dr. H. Ramsey White, Jr.
Direc­tor
March 26, 2007
EXHIBIT INDEX
Exhibit No.
Description
3.1
Articles of Incorporation of Highlands Bankshares, Inc. (as restated in electronic format only as of July 27, 2005), filed as Exhibit 3.1 to the Current Report on Form 8-K, File No. 000-27622, filed with the Commission on August 2, 2005, 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.
10.2
Highlands Bankshares, Inc. 2006 Equity Compensation Plan, filed as Exhibit 3.1 to the Current Report on Form 8-K, File No. 000-27622, filed with the Commission on September 20, 2006, incorporated herein by reference.
Statement regarding computation of per share earnings (included as Note 1 of the Notes to Consolidated Financial Statements in the 2006 Annual Report to Shareholders and incorporated herein by reference).
13.1
Annual Report to Shareholders - Financial Statements
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. § 1350.
32.2
Statement of Chief Operations Officer Pursuant to 18 U.S.C. § 1350.
32.3
Statement of Chief Financial Officer of the Corporation Pursuant to 18 U.S.C. § 1350.
32.4
Statement of Chief Financial Officer of the Bank Pursuant to 18 U.S.C. § 1350.