HIGHLANDS BANKSHARES INC /WV/
Dividends and other Payments (continued)  Grant County Bank and Capon Valley Bank are subject to various statutory restrictions on their ability to pay dividends to the Company. Specifically, the approval of the appropriate regulatory authorities is required prior to the payment of dividends by Grant County Bank and Capon Valley Bank in excess of earnings retained in the current year plus retained net profits for the preceding two years. The payment of dividends by the Company, Grant County Bank and Capon Valley Bank may also be limited by other factors, such as requirements to maintain adequate capital above regulatory guidelines. The Federal Reserve Board and the Federal Deposit Insurance Corporation have the authority to prohibit any bank under their jurisdiction from engaging in an unsafe and unsound practice in conducting its business. Depending upon the financial condition of Grant County Bank and Capon Valley Bank, the payment of dividends could be deemed to constitute such an unsafe or unsound practice. The Federal Reserve Board and the FDIC have indicated their view that it generally would be an unsafe and unsound practice to pay dividends except out of current operating earnings. The Federal Reserve Board has stated that, as a matter of prudent banking, a bank or bank holding company should not maintain its existing rate of cash dividends on common stock unless (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate or earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. Moreover, the Federal Reserve Board has indicated that bank holding companies should serve as a source of managerial and financial strength to their subsidiary banks. Accordingly, the Federal Reserve Board has stated that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company's ability to serve as a source of strength.  Governmental Policies  The Federal Reserve Board regulates money and credit and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  Various other legislation, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress. The Company cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.  Available Information  The Company Files annual, quarterly and current reports, proxy statements and other information with the SEC. The Company's SEC filings are filed electronically and are available to the publice via the internet at the SEC's website, www.sec.gov. In addition, any document filed by the Company with the SEC can be read and copies obtained at the SEC's public reference facilities at 450 Fifth Street, NW, Washington, DC 20549. Copies of documents can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of documents can also be obtained free of charge by writing to Highlands Bankshares, Inc., P.O. Box 929, Petersburg, WV 26847.  Executive Officers                                  Position with       Principal Occupation       Name            Age        the Company          (Past Five Years) - ----------------   ---------  -----------------   ----------------------------- Clarence E. Porter   57       President & Chief   CEO of Highlands since 2004;                               Executive Officer;  President of The Grant County                               Treasurer           Bank since 1991  R. Alan Miller       36       Finance Officer     Finance Officer of Highlands                                                   since 2002; Senior Manager of                                                   Finance, Cable & Wireless USA                                                   prior to 2002  Alan L. Brill        51       Secretary;          President of Capon Valley Bank                               President of Capon  since 2001; Executive Vice-                               Valley Bank         President & Chief Operating                                                   Officer of Capon Valley bank                                                   from 1997 to 2001    8
Customers May Default on the Repayment of Loans.  The Bank's customers may default on the repayment of loans, which may negatively impact the Company's earnings due to loss of principal and interest income. Increased operating expenses may result from the allocation of management time and resources to the collection and work-out of the loan. Collection efforts may or may not be successful causing the Company to write off the loan or repossess the collateral securing the loan which may or may not exceed the balance of the loan.  The Company's Controls and Procedures May Fail or Be Circumvented.  Management regularly reviews and updates the Company's internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, no matter how well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's business, results of operations and financial conditions.
None
The Grant County Bank's main office is located on Main Street in Petersburg, West Virginia. The Bank also has branch facilities located in Riverton, Moorefield, Keyser, Harman , Davis and Canaan Valley, West Virginia. The Riverton branch building is leased while all other locations are owned by the Bank.  Capon Valley Bank's main office is located in Wardensville, West Virginia. The Bank also has branch facilities in Moorefield and Baker, West Virginia and in Gore, Virginia. All facilities are owned by the Bank.
Management is not aware of any material pending or threatened litigation in which Highlands or its subsidiaries may be involved as a defendant. In the normal course of business, the banks periodically must initiate suits against borrowers as a final course of action in collecting past due loans.  In late February of 2006, a third party alleged that an error had been made regarding the safekeeping of a deposit, specifically two certificates of deposit totaling $2,000,000 that had been assigned as collateral for a performance bond had been released to the owners. It was alleged that the error was related to a trust account held by the now discontinued subsidiary of Highlands, Highlands Bankshares Trust Company. This third party indicated that if it experienced a loss relating to this bond, that it may pursue legal action as a potential remedy for this loss. At this time, the potential for legal action or the amount of any potential liability to Highlands Bankshares or its subsidiaries is unknown.
Highlands did not submit any matters to a vote of security holders during the fourth quarter of 2005.    11    PART II
The Company had approximately 1,119 shareholders of record as of December 31, 2005. This amount includes all shareholders, whether titled individually or held by a brokerage firm or custodian in street name. The Company's stock is not traded on any national or regional stock exchange although brokers may occasionally initiate or be a participant in a trade. The Company's stock is listed on the Nasdaq Over The Counter Bulletin Board. Terms of an exchange between individual parties may not be known to the Company. The following outlines the dividends paid and market prices of the Company's stock based on prices disclosed to management. Prices have been provided using a nationally recognized online stock quote system. Such prices may not include retail mark-ups, mark-downs or commissions. Dividends are subject to the restrictions described in Note 10 to the Financial Statements.                                                    Estimated                             Dividends        Market Price Range                              Per Share       High          Low                              ---------       -----        ------    2005 First Quarter                 .20            28.90        24.80 Second Quarter                .20            29.10        26.74 Third Quarter                 .20            30.79        28.11 Fourth Quarter                .22            32.00        30.79      2004 First Quarter                 .15            29.00        27.15 Second Quarter                .15            28.49        26.45 Third Quarter                 .15            26.45        24.50 Fourth Quarter                .18            26.00        24.15  Highlands has not initiated any plans to repurchase its stock nor has it repurchased any stock during the fourth quarter of 2005.    12
Years Ending December 31,                     (In Thousands of Dollars Except for Per Share Amounts)                            2005      2004      2003      2002      2001                            ------  ------   --------   -------    -------  Total Interest Income     19,813    17,729    18,283    18,970    20,207 Total Interest Expense     5,761     4,711     6,338     7,705    10,049                            -------  -------   ------    ------    ------ Net Interest Income       14,052    13,018    11,945    11,265    10,158  Provision for Loan Losses    875       920     1,820       820       600                            -------   ------   ------    ------    ------  Net Interest Income After    Provision for Loan    Losses                 13,177    12,098    10,125    10,445     9,558  Other Income               1,669     1,597     1,367     1,304     1,194 Other Expenses             9,128     8,938     8,247     8,048     7,431                            -------  --------  ------     -----    ------  Income before Income Taxes 5,718     4,757     3,245     3,701     3,321 Income Tax Expense         1,916     1,551     1,012     1,179       979                            -----    -----    -------    -------    -----  Net Income               $ 3,802   $ 3,206  $  2,233  $  2,522  $  2,342                           ======   ======    ======    ======    ======  Total Assets at Year   End                   $337,573  $299,992  $301,168  $296,672  $277,042                         ========  ========  ========   =======  =======  Net Income per Share*    $  2.65   $  2.23   $  1.55   $  1.73   $  1.56 Dividends per Share*     $   .82   $   .63   $   .56   $   .51   $   .45  Return on Average Assets   1.21%      1.07%      .73%      .89%      .89% Return on Average Equity  11.53%     10.36%     7.60%     8.87%     8.57% Dividend Payout Ratio     30.99%     28.23%    36.03%    29.26%    29.15% Year End Equity to    Assets Ratio           10.07%     10.55%     9.81%     9.69%    10.06%  *-- 2002 and 2001 per share figures restated to reflect stock split effected in form of dividend in 2002.
Effects of Inflation  Inflation primarily affects industries having high levels of property, plant and equipment or inventories. Although the Company is not significantly affected in these areas, inflation does have an impact on the growth of assets. As assets grow rapidly, it becomes necessary to increase equity capital at proportionate levels to maintain the appropriate equity to asset ratios. Traditionally, the Company's earnings and high capital retention levels have enabled the Company to meet these needs.  The Company's reported earnings results have been minimally affected by inflation. The different types of income and expense are affected in various ways. Interest rates are affected by inflation, but the timing and magnitude of the changes may not coincide with changes in the consumer price index. Management actively monitors interest rate sensitivity, as illustrated by the gap analysis shown under the section titled Interest Rate Sensitivity, in order to minimize the effects of inflationary trends on interest rates. Other areas of noninterest expenses may be more directly affected by inflation.
The greatest portion of the Company's net income is derived from net interest income. As such, the greatest component of market risk is interest rate volatility. 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. Early withdrawal of deposits, greater than expected balances of new 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 itself when necessary. 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.  Interest rate market conditions may also affect portfolio composition of both assets and liabilities. Traditionally, the Company's subsidiary banks have primarily offered one year adjustable rate mortgages (ARMs) to its mortgage loan customers. However, the low interest rate environment during 2003, 2004 and 2005 created intense competition, especially from larger banking institutions and finance companies offering long term fixed rate mortgages. As a result, the Company in recent periods has begun to write more mortgage loans with adjustable rates and maturities greater than one year. The increase in new ARM and balloon loans with two, three and five year adjustable rates has caused a shift in the maturity composition of the loan portfolio. This shift to longer term rates is partially responsible for the average rates earned on the loan portfolio to lag behind increases in rates paid on deposits and rates earned on other earning assets. In addition, competition for new loans remains heavy. The result of this competition has also had the effect of causing increases in rates earned on loans to lag behind the increase in those seen on interest bearing liabilities. Should these influences continue into the future, the Company may experience a decrease in its net interest margin.  As a result of the low interest rate environment in past years, depositors seemed reluctant to commit to longer term time deposits and in many instances appeared to hold monies temporarily in interest bearing transaction accounts in anticipation of rising rates in the future. This trend began to reverse in 2005 as time deposit balances have increased as customers began moving deposits from the lower earning transaction accounts and into time deposits. Should interest rates begin to rise sharply in the coming periods, Management believes that additional monies now in interest bearing transaction and savings accounts may further shift to time deposits, and this will cause a rise in the Company's cost of funds. Alternatively, these balances may be transferred by customers to other financial institutions offering higher deposit rates or customers may require the Company to match such rates to retain the deposit.    36   PART II: Item 7A. Quantitative and Qualitative Disclosures About Market                   Risk (continued)  At present, the Company's largest challenge in managing its net interest income is the funding of loan growth. High levels of loan growth would require new funding which has historically been met by increases in deposits. As competition for deposits increases and should the Company need funds to finance loan growth, it may be forced to pay higher rates than other local banking organizations to obtain these deposits. This would result in a reduction in the Company's net interest margin and its net income. During 2004 and 2005, loan growth was funded through reduction in balances of comparatively lower earning assets like securities and federal funds sold and borrowing from the FHLB. The result was that during 2004 deposits balances fell, especially balances of time deposits. Balances of federal funds sold and securities also fell and net interest margin increased as a result of this. During 2005, deposit balances increased slightly, and this, coupled with cash flows from operations, allowed federal funds sold balances to increase. In addition, the purchase of The National Bank of Davis added balances of liquid funds, both in cash balances and balances of federal funds sold and this will allow for loan growth in the coming periods without the immediate need for attracting significant amounts of new deposits.  Although it is expected that deposit rates will continue to rise, management believes that with a significant portion of its loan portfolio repricing within one year that rising rates will not have a significant negative impact on the Company's net interest earnings.  The following table illustrates the Company's sensitivity to interest rate changes as of December 31, 2005 (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 EARNING ASSETS     Loans         $ 33,172   $99,308   $98,933   $17,008   $21,599    $270,020    Fed funds sold  10,808                                              10,808    Securities and      other      investments   12,522     9,741     4,475       840     1,293      28,871    Deposits in      other banks      660       203       100                             963                    ------   -------    ------    ------    ------     -------     Total           57,162   109,252   103,508    17,848    22,892     310,662                    ------   -------   -------    ------    ------     -------  INTEREST BEARING LIABILITIES     Interest bearing      demand      deposits      25,650                                              25,650    Savings      deposits      54,947                                              54,947    Time deposits   18,305    61,091    57,985    18,961               156,342    Borrowed money   1,434       893     2,467       942     9,327      15,063                  --------    ------    ------    ------   -------     --------     Total          100,336    61,984    60,452    19,903     9,327     252,002                   -------    ------    ------    ------   -------     -------  Rate   sensitivity   GAP            $(43,174)  $47,268   $43,056  $ (2,055) $ 13,565    $ 58,660  Cumulative GAP   $(43,174)  $ 4,094   $47,150  $ 45,095  $ 58,660  Ratio of    cumulative    interest    sensitive    assets to    cumulative    interest    sensitive    liabilities     56.97%  102.52%   121.17%   118.58%   123.28%    37
NOTE 20     PARENT CORPORATION ONLY FINANCIAL STATEMENTS             (continued)  Statements of Cash Flows (in thousands of dollars)                                               Years Ended December 31,                                            2005        2004       2003                                           -------     -------    -------- Cash Flows From Operating Activities  Net Income                             $  3,802     $  3,206    $ 2,233    Adjustments to net income      Undistributed subsidiary income     (2,602)      (2,506)    (1,541)      Depreciation and amortization            7                       2      Increase (decrease) in payables        (24)         (46)       112      (Increase) decrease in receivables      40          450       (256)      (Increase) decrease in other assets     (5)         (13)        15                                          -------     --------    ------  Net Cash Provided by Operating   Activities                              1,218        1,091        565                                          ------       -------    ------  Cash Flows From Investing Activities  Advances from (payments to) subsidiaries   (197)        (483)       289 Received from subsidiaries                  177          281 Purchase of property and equipment          (21) Special dividend from subsidiary          5,200          ---        ---                                            ------      ------     -----  Net Cash Provided by (used in) Investing    Activities                             5,159         (202)       289                                          ------        ------     ------  Cash Flows From Financing Activities  Purchase of branch operations            (5,200) Dividends paid in cash                   (1,179)        (905)      (804)                                         --------       -------    ------  Net Cash Used in Financing Activities    (6,379)        (905)      (804)                                          -------       -------    ------  Net increase (decrease) in Cash              (2)         (16)        50  Cash, beginning of year                     156          172        122                                         -------        ------    ------  Cash, end of year                        $  154      $   156    $   172                                         =======       =======    =======    61                           REPORT OF INDEPENDENT REGISTERED                              PUBLIC ACCOUNTING FIRM     The Stockholders and Board of Directors Highlands Bankshares, Inc. Petersburg, West Virginia   We have audited the accompanying consolidated balance sheets of Highlands Bankshares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Highlands Bankshares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the three year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.                                              /s/ S. B. Hoover & Company, L.L.P.   February 28, 2006 Harrisonburg, Virginia    62
None
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2005. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of December 31, 2005.  Changes in Internal Controls  During the period reported upon, there was a change in internal control which management deems necessary to report. On October 31, 2005, Highlands purchased all of the outstanding shares of stock in The National Bank of Davis. On November 15, 2005, Highlands merged Davis into The Grant County Bank. As of December 31, 2005, full transition of the legacy Davis systems, including, but not limited to, core processing of transactions, accounting, and certain policies and procedures was not complete. Given the design and assessment of internal controls present at Highlands, this incomplete transition has created a requirement for additional controls to be put in place to reasonably ensure that fraudulent activity of any amount material to these results or in any amount and relating to this incomplete transition is not occurring. Achievement of full transition of legacy Davis systems into Highlands systems currently in place is ongoing and is expected to be completed by the second quarter of 2006. Until such time that full transition has occurred, management of Highlands will continue added internal control measures to reasonably ensure that controls pertaining to financial reporting and safeguarding of assets are effective.  During the period reported upon, and related to the legacy operations of Highlands Bankshares, 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.  Due to the nature of the Company's business as stewards of assets of customers, internal controls are of the utmost importance. The company has established procedures undertaken during the normal course of business in an effort to reasonably ensure that fraudulent activity of either an amount material to these results or in any amount is not occurring. In addition to these controls and review by executive officers, the Company retains the services of a public accounting firm to complete regular internal audits to examine the processes and procedures of the Company and its subsidiary banks to ensure that these processes are both reasonably effective to prevent fraud, both internal and external, and that these processes comply with relevant regulatory guidelines of all relevant banking authorities. The findings of this firm are presented both to Management of the subsidiary banks and to the Audit Committee.
None  PART III
Information required by this item is set forth under the caption "Compliance with Section 16(a) of the Securities Exchange Act" of our 2006 Proxy Statement, to be filed within 120 days after the end of the Company's fiscal year end, and is incorporated herein by reference
Information required by this item is set forth under the caption "EXECUTIVE COMPENSATION" of our 2006 Proxy Statement, to be filed within 120 days after the end of the Company's fiscal year end, and is incorporated herein by reference.    63
Information required by this item is set forth under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of our 2006 Proxy Statement, to be filed within 120 days after the end of the Company's fiscal year end, and is incorporated herein by reference.
Information required by this item is set forth under the caption "Certain Related Transactions" of our 2006 Proxy Statement, to be filed within 120 days after the end of the Company's fiscal year end, and is incorporated herein by reference.  Most of the directors, limited liability companies of which they may be members, partnerships of which they may be general partners and corporations of which they are officers or directors, maintain normal banking relationships with the Bank. Loans made by the Bank to such persons or other entities were made in the ordinary course of business, were made, at the date of inception, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features. See Note 14 of the consolidated financial statements.  John VanMeter is a partner with the law firm of VanMeter and VanMeter, which has been retained by the Company as legal counsel and it is anticipated that the relationship will continue. Jack H. Walters is a partner with the law firm of Walters, Krauskopf & Baker, which provides legal counsel to the Company and it is anticipated that the relationship will continue.
Information required by this item is set forth under the caption "FEES OF INDEPENDENT PUBLIC ACCOUNTANTS" of our 2006 Proxy Statement, to be filed within 120 days after the end of the Company's fiscal year end, and is incorporated herein by reference.  PART IV
(a)(3)  Exhibits:         Exhibit       Number                           Description          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                          Amendments to the original Articles of Incorporation are                         incorporated by reference; filed as Exhibit 3(i) with                         1997 Form 10-KSB.          3 (ii)          Bylaws of Highlands Bankshares, Inc. are incorporated by                         reference to Appendix D to Highlands Bankshares Inc.'s                         Form S-4 filed October 20, 1986                          Amended Bylaws of Highlands Bankshares, Inc. are                         incorporated by reference to Exhbit 3(ii) to Highlands                         Bankshares Inc.'s Form 10Q filed May 15, 2003          14              Code of Ethics          21              Subsidiaries of the Registrant          31.1            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).          31.2            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).          32.1            Statement of Chief Executive Officer Pursuant to 18                         U.S.C.ss.1350.          32.2            Statement of Chief Financial Officer Pursuant to 18                         U.S.C. ss.1350.         (b) See (a)(3) above        (c) See (a)(1) and (a)(2) above    65                                      Signatures  Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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/ C. E. PORTER                          /s/ R. ALAN MILLER - ---------------------------               --------------------------- C.E. Porter                               R. Alan Miller President and Chief Executive Officer     Chief Financial Officer March 24, 2006                            March 24, 2006   Pursuant to the requirements of the Securities and 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.  Name                    Signature                     Title         Date  Leslie A. Barr          /s/ LESLIE A. BARR            Director   March 22, 2006                         ---------------------   Jack H. Walters         /s/ JACK H. WALTERS           Director   March 22, 2006                         ---------------------   Thomas B. McNeill, Sr.  /s/ THOMAS B. MCNEILL, SR.    Director   March 22, 2006                         --------------------------   L. Keith Wolfe          /s/ L. KEITH WOLFE            Director   March 23, 2006                         ---------------------   Kathy G. Kimble         /s/ KATHY G. KIMBLE           Director   March 23, 2006                         ---------------------   Steven C. Judy          /s/ STEVEN C. JUDY            Director   March 23, 2006                         ---------------------   Courtney R. Tusing      /s/ COURTNEY R. TUSING        Director   March 22, 2006                         ----------------------   John G. Vanmeter        /s/ JOHN G. VANMETER          Director   March 22, 2006                         ---------------------  Chairman of the Board   Alan L. Brill           /s/ ALAN L. BRILL             Director   March 22, 2006                         ---------------------        Secretary   C.E. Porter             /s/ C. E. PORTER              Director   March 22, 2006                         --------------------- President, Chief Executive                                                     Officer and                                                     Treasurer     EX-14 2 exhibit14for10k2005.txt EXHIBIT 14    Exhibit 14  Code of Ethics         The philosophy of Highlands Bankshares, Inc. includes promotion of professional and ethical conduct. All employees of Highlands Bankshares and its subsidiaries hold important roles in achieving high standards of professional and ethical conduct within the organization.        All employees of Highlands Bankshares hold roles in corporate governance in that they are empowered to ensure that all stakeholders' interests are appropriately balanced, protected and served. This Code of Professional conduct embodies principles for upholding responsibilities to us, other Highlands Bankshares employees, holders of Highlands Bankshares equity, the public and other applicable Highlands Bankshares stakeholders. As such, all employees and Directors of Highlands Bankshares and its subsidiaries are expected to abide by the tenants set forth below as Highlands Bankshares strives to promote professional and ethical conduct to its fullest ability.        All employees should strive to:  o     Provide stakeholders with information that is accurate, complete,       objective, fair, relevant, timely and understandable.  o     Comply with rules and regulations of federal, state, provincial and local       governments and other appropriate regulatory agencies.  o     Act in good faith, responsibly, with due care, competence and diligence,       without misrepresenting facts or allowing one's independent judgment to be       subordinated.  o     Respect the confidentiality of information acquired in one's work except       when authorized or legally obliged to disclose.  o     Achieve responsible use, control and stewardship over all Highlands       Bankshares' assets and resources that are entrusted to us.  o     Not unduly or fraudulently influence, coerce, manipulate, or mislead any       authorized audit or regulatory examination or interfere with any auditor       or examiner engaged in the performance of an internal audit or independent       examination of any aspect of Highlands Bankshares' operations.  Proactively promote and be an example of ethical behavior as a responsible steward of Highands Bankshares' goodwill amongst its stakeholders.     EX-21 3 exhibit21for10k2005.txt EXHIBIT 21    Exhibit 21  Subsidiaries of the Registrant             (a)    The Grant County Bank (incorporated in West Virginia) doing                   business as The Grant County Bank            (b)    Capon Valley Bank (incorporated in West Virginia) doing                   business as Capon Valley Bank            (c)    HBI Life Insurance Company, Inc. (incorporated in Arizona)                   doing business as HBI Life       EX-31 4 exhibit311for10k2005.txt EXHIBIT 31.1      Exhibit 31.1                      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, C.E. Porter, certify that:  1. I have reviewed this annual report on Form 10-K of Highlands Bankshares, Inc;  2. Based on my knowledge, this 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 report;  3. Based on my knowledge, the financial statements, and other financial    information included in this 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 report;  4. The registrant's other certifying officer(s) and I are responsible for    establishing and maintaining disclosure controls and procedures (as defined    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:           (a) Designed such disclosure controls and procedures, or caused such             disclosure controls and procedures to be designed under our             supervision, 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 report is being prepared;           (b) Evaluated the effectiveness of the registrant's disclosure controls             and procedures and presented in this report our conclusions about             the effectiveness of the disclosure controls and procedures, as of             the end of the period covered by this report based on such             evaluation; and           (c) Disclosed in this report any change in the registrant's internal             control over financial reporting that occurred during the             registrant's most recent fiscal quarter (the registrant's fourth             fiscal quarter in the case of an annual report) that has materially             affected, or is reasonably likely to materially affect, the             registrant's internal control over financial reporting; and  5. The registrant's other certifying officer(s) and I have disclosed, based on    our most recent evaluation of internal control over financial reporting, to    the registrant's auditors and the audit committee of the registrant's board    of directors (or persons performing the equivalent functions):           (a) All significant deficiencies and material weaknesses in the design             or operation of internal control over financial reporting which are             reasonably likely to adversely affect the registrant's ability to             record, process, summarize and report financial information; and           (b) Any fraud, whether or not material, that involves management or             other employees who have a significant role in the registrant's             internal control over financial reporting.  Date:  March  24, 2006                                            /s/ C. E. PORTER                                           ---------------------------                                           C.E. Porter, Chief Executive Officer      EX-31 5 exhibit312for10k2005.txt EXHIBIT 31.2    Exhibit 31.2                      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 annual report on Form 10-K of Highlands Bankshares, Inc;  2. Based on my knowledge, this 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 report;  3. Based on my knowledge, the financial statements, and other financial    information included in this 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 report;  4. The registrant's other certifying officer(s) and I are responsible for    establishing and maintaining disclosure controls and procedures (as defined    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:           (a) Designed such disclosure controls and procedures, or caused such             disclosure controls and procedures to be designed under our             supervision, 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 report is being prepared;           (b) Evaluated the effectiveness of the registrant's disclosure controls             and procedures and presented in this report our conclusions about             the effectiveness of the disclosure controls and procedures, as of             the end of the period covered by this report based on such             evaluation; and           (c) Disclosed in this report any change in the registrant's internal             control over financial reporting that occurred during the             registrant's most recent fiscal quarter (the registrant's fourth             fiscal quarter in the case of an annual report) that has materially             affected, or is reasonably likely to materially affect, the             registrant's internal control over financial reporting; and  5. The registrant's other certifying officer(s) and I have disclosed, based on    our most recent evaluation of internal control over financial reporting, to    the registrant's auditors and the audit committee of the registrant's board    of directors (or persons performing the equivalent functions):           (a) All significant deficiencies and material weaknesses in the design             or operation of internal control over financial reporting which are             reasonably likely to adversely affect the registrant's ability to             record, process, summarize and report financial information; and           (b) Any fraud, whether or not material, that involves management or             other employees who have a significant role in the registrant's             internal control over financial reporting.  Date:  March  24, 2006                                          /s/ R. ALAN MILLER                                          ------------------------------                                          R. Alan Miller, Chief Financial Officer     EX-32 6 exhibit321for10k2005.txt EXHIBIT 32.1    Exhibit 32.1  Statement of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350         In connection with the Annual Report of Highlands Bankshares, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as the chief executive officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2003, that:        1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.                                              /s/ C. E. PORTER                                          -------------------------                                          C. E. Porter                                          Chief Executive Officer      Date:  March  24, 2006          EX-32 7 exhibit322for10k2005.txt EXHIBIT 32.2    Exhibit 32.2  Statement of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350         In connection with the Annual Report of Highlands Bankshares, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as the chief financial officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2003, that:        1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.                                               /s/ R. ALAN MILLER                                          -------------------------                                          R. Alan Miller                                          Chief Financial Officer   Date:  March  24, 2006      -----END PRIVACY-ENHANCED MESSAGE-----