Highlands Bankshares Inc /WV/ - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-16761

HIGHLANDS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

West Virginia	55-0650793
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

P.O. Box 929

Petersburg, WV 26847

(Address of Principal Executive Offices, Including Zip Code)

304-257-4111

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [ ]	Accelerated Filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. As of July 31, 2008: 1,336,873 shares of Common Stock, $5 Par Value

HIGHLANDS BANKSHARES, INC.
Quarterly Report on Form 10Q For The Period Ended June 30, 2008

	I N DEX
		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Consolidated Statements of Income Six Months Ended June 30, 2008 and 2007	2

	Unaudited Consolidated Statements of Income Three Months Ended June 30, 2008 and 2007	3

	Unaudited Consolidated Balance Sheet for June 30, 2008 and Audited Consolidated Balance Sheet for December 31, 2007	4

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2008 and 2007	5

	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4.	Controls and Procedures	20

Item 4T.	Controls and Procedures	20

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Submission of Matters to a Vote of Security Holders	21

Item 5.	Other Information	21

Item 6.	Exhibits	22

SIGNATURES		22

Index

Page Two

PART I

FINA N CIAL INFORMATION

Item 1.

Fina n cial Statements

HIGHLANDS BANKSHARES, INC.
C ONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Data)

	Six Months Ended June 30
	2008		2007
	(unaudited)		(unaudited)
Interest Income
Interest and fees on loans	$	12,612	$	12,359
Interest on federal funds sold		223		405
Interest on deposits in other banks		31		70
Interest and dividends on securities		541		650
Total Interest Income		13,407		13,484

Interest Expense
Interest on deposits		4,551		4,806
Interest on borrowed money		235		303
Total Interest Expense		4,786		5,109

Net Interest Income		8,621		8,375

Provision for Loan Losses		398		341

Net Interest Income After Provision for Loan Losses		8,223		8,034

Non-interest Income
Service Charges		819		632
Gains on securities		109		0
Gains on sale of fixed assets		25		0
Other non-interest income		384		333
Total Non-interest Income		1,337		965

Non-interest Expense
Salaries and employee benefits		3,141		2,963
Equipment and occupancy expense		679		691
Data processing expense		416		428
Directors fees		198		183
Legal and professional fees		265		277
Other non-interest expense		962		918
Total Non-interest Expense		5,661		5,460

Income Before Provision For Income Taxes		3,899		3,539

Provision for Income Taxes		1,440		1,295

Net Income	$	2,459	$	2,244

Per Share Data
Net Income	$	1.72	$	1.56
Cash Dividends	$	.54	$	.50
Weighted Average Common Shares Outstanding		1,429,295		1,436,874
The accompanying notes are an integral part of these statements.

Index

Page Three

HIGHLA N DS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Data)

	Three Months Ended June 30
	2008		2007
	(unaudited)		(unaudited)
Interest Income
Interest and fees on loans	$	6,222	$	6,290
Interest on federal funds sold		75		249
Interest on deposits in other banks		14		40
Interest and dividends on securities		259		338
Total Interest Income		6,570		6,917

Interest Expense
Interest on deposits		2,103		2,515
Interest on borrowed money		101		145
Total Interest Expense		2,204		2,660

Net Interest Income		4,366		4,257

Provision for Loan Losses		219		168

Net Interest Income After Provision for Loan Losses		4,147		4,089

Non-interest Income
Service Charges		440		345
Gains on securities		22		0
Gain on sale of fixed assets		25		0
Other non-interest income		193		150
Total Non-interest Income		680		495

Non-interest Expense
Salaries and employee benefits		1,581		1,515
Equipment and occupancy expense		329		336
Data processing expense		208		219
Directors fees		102		86
Legal and professional fees		128		143
Other non-interest expense		527		504
Total Non-interest Expense		2,875		2,803

Income Before Provision For Income Taxes		1,952		1,781

Provision for Income Taxes		731		658

Net Income	$	1,221	$	1,123

Per Share Data
Net Income	$	.86	$	.78
Cash Dividends	$	.27	$	.25
Weighted Average Common Shares Outstanding		1,421,548		1,436,874
The accompanying notes are an integral part of these statements.

Index

Page Four

HIGHLANDS B A NKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)

	June 30, 2008			December 31, 2007
	(unaudited)			(audited)
ASSETS
Cash and due from banks—non-interest bearing	$	8,486		$	7,935
Deposits in other banks—interest bearing		689			1,853
Federal funds sold		5,786			14,246
Securities available for sale, at market value		24,389			26,090
Restricted investments		1,575			1,498
Loans		313,460			310,199
Allowance for loan losses		(3,682	)		(3,577	)
Bank premises and equipment, net of depreciation		8,081			8,104
Interest receivable		2,321			2,273
Investment in life insurance contracts		6,420			6,300
Goodwill		1,534			1,534
Other intangible assets		1,473			1,572
Other Assets		2,677			2,909

Total Assets	$	373,209		$	380,936

LIABILITIES
Non-interest bearing deposits	$	50,626		$	48,605
Savings and interest bearing demand deposits		74,478			73,736
Time deposits		194,073			201,397
Total Deposits		319,177			323,738

Long term debt		10,083			11,819
Accrued expenses and other liabilities		4,738			4,786

Total Liabilities		333,998			340,343

STOCKHOLDERS’ EQUITY
Common stock ($5 par value, 3,000,000 shares authorized, 1,436,874 shares issued)		7,184			7,184
Surplus		1,662			1,662
Retained earnings		33,369			32,032
Other accumulated comprehensive loss		(454	)		(285	)
Treasury stock (at cost, 76,441 shares at June 30, 2008)		(2,550	)		0
Total Stockholders’ Equity		39,211			40,593

Total Liabilities and Stockholders’ Equity	$	373,209		$	380,936


The accompanying notes are an integral part of these statements.

Index

Page Five

HIGHLANDS BANKSHARES, INC
CONSOLIDATED STATEMENTS OF CH A NGES IN STOCKHOLDERS’ EQUITY
(In Thousands of Dollars)

	Common Stock		Surplus		Treasury Stock		Retained arnings			Accumulated Other Comprehensive Income			Total
Balances at December 31, 2006	$	7,184	$	1,662	$	0	$	28,816		$	(586	)	$	37,076

Net Income								2,244						2,244
Change in other comprehensive income											(33	)		(33	)
Total comprehensive income														2,211

Dividends Paid								(718	)					(718	)

Balances at June 30, 2007	$	7,184	$	1,662	$	0	$	30,342		$	(619	)	$	38,569

	Common Stock		Surplus		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at December 31, 2007	$	7,184	$	1,662	$	0		$	32,032		$	(285	)	$	40,593

Net Income									2,459						2,459
Change in other comprehensive income												(169	)		(169	)
Cumulative effect adjustment to retained earnings for change in accounting principle									(347	)					(347	)
Total comprehensive Income															1,943

Treasury stock repurchased						(2,550	)								(2,550	)
Dividends paid									(775	)					(775	)

Balances at June 30, 2008	$	7,184	$	1,662	$	(2,550	)	$	33,369		$	(454	)	$	39,211

Index

Page Six

HIGHLANDS BANKS H ARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
	Six Months Ended June 30,
	2008			2007
	(unaudited)			(unaudited)
Cash Flows From Operating Activities
Net Income	$	2,459		$	2,244
Adjustments to reconcile net income to net
cash provided by operating activities
(Gain) on investment securities		(109	)		0
(Gain) on sale of fixed asset		(25	)		0
Depreciation		340			345
Income from insurance contracts		(120	)		(115	)
Net amortization of securities		41			(51	)
Provision for loan losses		398			341
Amortization of intangibles		99			88
Decrease (increase) in interest receivable		(48	)		(273	)
Decrease (increase) in other assets		232			(154	)
Increase (decrease) in accrued expenses and other liabilities		(395	)		76
Net Cash Provided by Operating Activities		2,872			2,501

Cash Flows From Investing Activities
Increase (decrease) in federal funds sold		8,460			(3,517	)
Proceeds from maturities of securities available for sale		14,138			4,733
Purchase of securities available for sale		(12,537	)		(7,532	)
Decrease (increase) in restricted investments		(77	)		67
Decrease (increase) in interest bearing deposits in other banks		1,164			(422	)
Purchase of property and equipment		(293	)		(303	)
Net Increase in Loans		(3,554	)		(10,450	)
Net Cash Provided by (Used in) Investing Activities		7,301			(17,424	)

Cash Flows From Financing Activities
Net change in deposits		(4,561	)		20,785
Repayment of long term debt		(1,736	)		(2,584	)
Purchase of treasury stock		(2,550	)		0
Dividends paid in cash		(775	)		(718	)
Net Cash Provided (Used in) by Financing Activities		(9,622	)		17,483

Net Increase (decrease) in Cash and Cash Equivalents		551			2,560

Cash and Cash Equivalents, Beginning of Period		7,935			7,111

Cash and Cash Equivalents, End of Period	$	8,486		$	9,671

Supplemental Disclosures
Cash paid for income taxes	$	1,287		$	1,626
Cash paid for interest	$	4,986		$	5,029
The accompanying notes are an integral part of these statements.

Index

Page Seven

NOTES TO CONSOLIDATED F INANCIAL STATEMENTS

NOTE 1

ACCOUNTING PRINCIPLES

These consolidated financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2008 and the results of operations for the three and six month periods ended June 30, 2008 and 2007.

The results of operations for the three and six month periods ended June 30, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year.

The notes included herein should be read in conjunction with the notes to financial statements included in the Company’s 2007 annual report on Form 10-K.

Certain reclassifications have been made to prior period balances to conform to the current year’s presentation format.

NOTE 2

SECURITIES AND RESTRICTED INVESTMENTS

The Company’s securities portfolio serves several purposes. Portions of the portfolio secure certain public and trust deposits while the remaining portions are held as investments or used to assist the Company in liquidity and asset/liability management.

The amortized cost and market value of securities as of June 30, 2008 and December 31, 2007 is shown in the table below (in thousands of dollars). All of the securities on the Company’s balance sheet are classified as available for sale.

	June 30, 2008				December 31, 2007
	Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value
Available For Sale Securities
U.S. Treasuries and Agencies	$	8,750	$	8,788	$	15,040	$	15,245
Mortgage backed securities		11,521		11,487		7,718		7,784
Obligations of states and municipalities		4,087		4,087		3,034		3,039
Marketable equities		28		27		28		22
Total Available For Sale Securities	$	24,386	$	24,389	$	25,820	$	26,090

Restricted investments consist of investments in the Federal Home Loan Bank, the Federal Reserve Bank and West Virginia Bankers’ Title Insurance Company. Investments are carried at face value and the level of investment is dictated by the level of participation with each institution. Amounts are restricted as to transferability. Investments in the Federal Home Loan Bank act as a collateral against the outstanding borrowings from that institution.

NOTE 3

INVESTMENT IN INSURANCE CONTRACTS

Investment in insurance contracts consist of single premium insurance contracts which have the dual purposes of providing a rate of return to the Company which approximately equals the Company’s average cost of funds and of providing life insurance and retirement benefits to certain executives.

Index

Page Eight

NOTE 4

LOANS

A summary of loans outstanding as of June 30, 2008 and December 31, 2007 is shown in the table below (in thousands of dollars):

	June 30,		December 31,
	2008		2007
Loan Type
Commercial	$	84,379	$	79,892
Real Estate construction		21,380		15,560
Real Estate mortgage		161,676		169,122
Consumer installment		46,025		45,625
Total Loans	$	313,460	$	310,199

In addition to loans to fund construction and traditional mortgage loans, portions of the portfolio identified as commercial are also secured by real estate. At June 30, 2008, the total balance of loans in the portfolio secured by real estate was $244,312,000.

NOTE 5

ALLOWANCE FOR LOAN LOSSES

A summary of the transactions in the allowance for loan losses for the six month periods ended June 30, 2008 and 2007 is shown below (in thousands of dollars):

	2008			2007
Balance, beginning of period	$	3,577		$	3,482
Provisions charged to operations		398			341
Loan recoveries		81			176
Loan charge-offs		(374	)		(319	)
Balance, end of period	$	3,682		$	3,680

NOTE 6

DEPOSITS

Balances of time deposits over $100,000 and of all other time deposits at June 30, 2008 and December 31, 2007 are shown below (in thousands of dollars):

	June 30,		December 31,
	2008		2007
Time deposits over $100,000	$	62,957	$	65,486
All other time deposits		131,116		135,911
Total Time Deposits	$	194,073	$	201,397

Interest expense for time deposits over $100,000 and for all other time deposits for the six month and three month periods ended June 30, 2008 and 2007 is shown below (in thousands of dollars):

	Six months ended June 30,				Three months ended June 30,
	2008		2007		2008		2007
Time deposits over $100,000	$	1,463	$	1,425	$	683	$	752
All other time deposits		2,769		2,953		1,289		1,539
Total interest paid on time deposits	$	4,232	$	4,378	$	1,972	$	2,291

Index

Page Nine

NOTE 7

EMPLOYEE BENEFITS

The Company's two subsidiary banks each have separate retirement and profit sharing plans which cover substantially all full time employees at each bank.

Capon Valley Bank has a defined contribution pension plan with 401(k) features that is funded with discretionary contributions by the Bank. The bank matches on a limited basis the contributions of the employees. Investment of employee balances is done through the direction of each employee. Employer contributions are vested over a six year period.

The Grant County Bank is a member of the West Virginia Bankers' Association Retirement Plan. Benefits under the plan are based on compensation and years of service with 100% vesting after seven years of service. Prior to 2002, the Plan's assets were in excess of the projected benefit obligations and thus the Bank was not required to make contributions to the Plan in 2003, 2002 or 2001. The bank was required to make contributions in 2004, 2005, 2006 and 2007 and made a contribution to the plan during the first quarter of 2008. The Bank has recognized liabilities of $160,000 at June 30, 2008 as a result of this shortfall. The following table provides the components of the net periodic benefit cost for the plan for the six month periods ended June 30, 2008 and 2007 (in thousands of dollars):

	2008			2007
Service cost	$	82		$	63
Interest cost		129			100
Expected return on plan assets		(156	)		(106	)
Amortization of unrecognized prior service costs		2			5
Recognized net actuarial loss		25			30

Net periodic expense	$	82		$	92

NOTE 8

DEBT INSTRUMENTS

As it becomes necessary, the Company borrows money from the Federal Home Loan Bank of Pittsburgh (FHLB) to meet specific funding needs. The interest rates of the notes payable as of June 30, 2008 range from 3.94% to 5.96%. The weighted average interest rate was 4.61% at June 30, 2008. The debt is secured by the general assets of the Banks.

NOTE 9

EARNINGS PER SHARE

During the first six months of 2007, there were no changes to the outstanding shares of common stock. During the second quarter of 2008, the Company purchased, at varying intervals, 76,441 shares of outstanding common stock. The weighted average shares, upon which earnings per share calculations for the three and six month periods ended June 30, 2008, were calculated based upon the date repurchased and the number of shares repurchased on that date, as a percentage of the total period represented.

NOTE 10

ADJUSTMENT TO RETAINED EARNINGS FOR CHANGE IN ACCOUNTING PRINCIPLE

Index

Page Ten

These EITF pronouncements provided an option for affected companies to record the resulting liability as a cumulative effect adjustment to retained earnings at the beginning of the period in which recorded or to record through retrospective application to prior periods. Highlands Bankshares opted to record the liability as a cumulative effect adjustment to prior period retained earnings and as such recorded a liability and corresponding reduction of prior period retained earnings of $347,000. There is no corresponding deferred tax consequence relating to this liability. The recording of the cumulative effect adjustment to prior period retained earnings is reflected in the June 30, 2008 balance of retained earnings and is shown as an adjustment to retained earnings in the Consolidated Statement of Changes in Stockholders’ Equity.

NOTE 11

FAIR VALUE MEASUREMENTS

SFAS No. 157, Fair Value Measurements , defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

Level One: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level Two: I nputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level Three : Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value on the Company’s balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.

Impaired loans

SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan , including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. There were no fair value adjustments made for impaired loans at June 30, 2008.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157. There were no fair value measurements made for the six months ended June 30, 2008.

Index

Page Eleven

Item 2.

Management’s Discussion a n d Analysis of Financial Condition and Results of Operations

Introduction

The following discussion focuses on significant results of the Company’s operations and significant changes in our financial condition or results of operations for the periods indicated in the discussion. This discussion should be read in conjunction with the preceding financial statements and related notes, as well as the Company’s Annual Report on Form 10-K for the period ended December 31, 2007. Current performance does not guarantee, and may not be indicative of, similar performance in the future.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial statements contained within these statements are, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.

Disclosure of the Company’s significant accounting policies is included in Note Two to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the period ended December 31, 2007. Some of the policies are particularly sensitive, requiring significant judgments, estimates and assumptions by management.

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Additional information pertaining to the allowance for loan losses and provision for loan losses is contained on pages 13 and 14 of this report.

The Company has invested in and owns life insurance policies on certain officers. The policies are designed so that the company recovers the interest expenses associated with carrying the policies and the officer will, at the time of retirement, receive any earnings in excess of the amounts earned by the Company. The Company recognizes as an asset the net amount that could be realized under the insurance contract as of the balance sheet date. This amount represents the cash surrender value of the policies less applicable surrender charges. The portion of the benefits which will be received by the executives at the time of their retirement is considered, when taken collectively, to constitute a retirement plan. Therefore the Company accounts for these policies using guidance found in Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post Retirement Benefits Other Than Pensions.” SFAS No. 106 requires that an employers' obligation under a deferred compensation agreement be accrued over the expected service life of the employee through their normal retirement date. Assumptions are used in estimating the present value of amounts due officers after their normal retirement date. These assumptions include the estimated income to be derived from the investments and an estimate of the Company’s cost of funds in these future periods. In addition, the discount rate used in the present value calculation will change in future years based on market conditions.

During 2005, the Company purchased all the outstanding shares of the National Bank of Davis. The net assets of this purchase were recorded at fair value, including goodwill. Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as purchases. In accordance with provisions of SFAS No. 142, " Goodwill and Other Intangible Assets ", goodwill is not amortized over an estimated useful life, but rather will be tested at least annually for impairment. Core deposit and other intangible assets include premiums paid for acquisitions of core deposits (core deposit intangibles) and other identifiable intangible assets. Intangible assets other than goodwill, which are determined to have finite lives, are amortized based upon the estimated economic benefits received .

Index

Page Twelve

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. As of December 1, 2007, the FASB has proposed a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. SFAS 157 had no material impact on the Company’s June 30, 2008 financial statements. Additional disclosure information required by this pronouncement is included as a footnote to the financial statements .

In 2006, the FASB issued EITF 06-04 and 06-10. These EITF pronouncements require that companies which own life insurance policies insuring employees and for which the employees receive a portion of the death benefits of the policies (commonly referred to as “split dollar” policies) and for which these death benefits to the employee continue post retirement record a liability for the present value of the cost of these post retirement death benefits. These EITF pronouncements became effective for Highlands Bankshares on January 1, 2008. These EITF pronouncements provided an option for affected companies to record the resulting liability as a cumulative effect adjustment to retained earnings at the beginning of the period in which recorded or to record through retrospective application to prior periods. Highlands Bankshares opted to record the liability as a cumulative effect adjustment to prior period retained earnings and as such recorded a liability and corresponding reduction of prior period retained earnings of $347,000. There is no corresponding deferred tax consequence relating to this liability.

No other recent accounting pronouncements had a material impact on the Company’s consolidated financial statements.

Forward Looking Statements

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate” or other similar words. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, downturns in the trucking and timber industries, effects of mergers and/or downsizing in the poultry industry in Hardy County, and consumer spending and savings habits. Additionally, actual future results and trends may differ from historical or anticipated results to the extent: (1) any significant downturn in certain industries, particularly the trucking and timber industries are experienced; (2) loan demand decreases from prior periods; (3) the Company may make additional loan loss provisions due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (4) the Company may not continue to experience significant recoveries of previously charged-off loans or loans resulting in foreclosure; and (5) the Company is unable to control costs and expenses as anticipated. The Company does not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

Index

Page Thirteen

Overview of First Half Results

Income for the first six months of 2008 increased 9.58% as compared to the same period in 2007. During this period, the Company recorded recurring one time gains of $134,000, pretax, related to both calls of available for sale securities and to the sale of a parcel of real property held by the Company. Annualized return on average assets was 1.30% compared to 1.23% a year ago and annualized return on average equity for the first half of 2008 was 12.09% compared to 11.96% for the first half of 2007.

Net interest income, on a fully taxable equivalent basis, increased 2.95% over the first half of 2007. Average balances of both earning assets and interest bearing liabilities increased, and, as the continued result of the effects of decreases in the target rate for federal funds sold by the Federal Reserve Board in 2007, average rates earned on assets and average rates paid on interest bearing liabilities both decreased as compared to 2007.

Non-interest income increased largely as a result of increases in income from deposit account service charges, and the one time non recurring gains discussed above.

Non-interest expense increased 3.68% as decreases in data processing expense and legal and professional fees were offset by increases in costs of employee salaries and benefits.

Net Interest Income

Net interest income for the first half of 2008, on a fully taxable equivalent basis, increased 2.95% as compared to the same period in 2007.

Average balances of both earning assets and interest bearing liabilities increased approximately the same amount in 2008 as compared to 2007, with average balances of earning assets growing 3.68% and average balances of interest bearing liabilities increasing 2.85%. The ratio of earning asset to interest bearing liabilities, remained roughly the same for the first half of 2008 as for the same period in 2007.

As a result of the Federal Reserve Board’s (the “Fed”) lowering of the target rate for federal funds sold throughout 2007 and into early 2008, average rates earned on earning assets and paid on interest bearing liabilities both decreased. The decrease in average rates for 2008 as compared to 2007 was approximately equivalent, with the average rate earned on earning assets decreasing 32 basis points and the average rate paid on interest bearing liabilities falling 33 basis points.

The approximately parallel increase in balances of earning assets and interest bearing liabilities, coupled with the approximately parallel decrease in rates earned on earning assets and those paid on interest bearing liabilities resulted in the Company’s net interest margin remaining almost flat from 2007 to 2008, while the overall increase in average balances caused total net interest income, on a fully taxable equivalent basis, to increase.

During 2008, the Company has experienced continued increases in demand for its loan products, the greatest source of the Company’s interest income. However, the increases in loan balances have been less than in recent prior years. From December 31, 2007 to June 30, 2008, balances of gross loans increased 2.10% on an annualized basis. As a result of slowing loan demand, coupled with large balances of liquid funds, in the form of federal funds sold, during the early months of 2008, the Company has been able to reduce its costs of deposits and borrowed funds through reduction in balances of these funding sources. As a result of the management of the balance sheet, should loan balances continue to increase, or remain flat, throughout the remainder of 2008, Management expects that net interest income and net interest margin will continue at current levels.

Index

Page Fourteen

The table below sets forth an analysis of net interest income for the six month periods ended June 30, 2008 and 2007 (Average balances and interest/expense shown in thousands of dollars):

	2008								2007
	Average			Income/					Average			Income/
	Balance			Expense		Rate			Balance			Expense		Rate
Interest Income
Loans 1,2	$	311,756		$	12,612		8.09	%	$	298,548		$	12,359		8.28	%
Federal funds sold		17,603			223		2.53	%		15,851			405		5.11	%
Interest bearing deposits		2,240			31		2.77	%		2,428			70		5.77	%
Taxable investment securities		20,236			484		4.78	%		22,457			594		5.29	%
Nontaxable investment securities 3		2,990			91		6.09	%		2,931			88		6.00	%
Total Earning Assets		354,825			13,441		7.58	%		342,215			13,516		7.90	%

Cash and cash equivalents		7,349								8,033
Allowance for loan losses		(3,595	)							(3,591	)
Insurance contracts		6,352								6,123
Non-earning assets		16,285								15,042
Total Assets	$	381,216							$	367,822

Interest Expense
Interest bearing demand deposits	$	24,116		$	55		0.46	%	$	26,148		$	113		0.86	%
Savings and money markets		50,571			251		0.99	%		46,964			315		1.34	%
Time deposits		198,787			4,245		4.27	%		190,564			4,378		4.59	%
Long term debt		11,183			235		4.20	%		13,091			303		4.63	%
Total Interest Bearing Liabilities		284,657			4,786		3.36	%		276,767			5,109		3.69	%

Demand deposits		50,114								48,410
Other liabilities		5,545								4,798
Stockholders’ equity		40,900								37,847
Total liabilities and stockholders’ equity	$	381,216							$	367,822

Net Interest Income				$	8,655							$	8,407

Net Yield on Earning Assets 3							4.88	%							4.91	%

1 Balances of loans include loans in non accrual status

2 Interest income on loans includes fees

3 Yields are on a fully taxable equivalent basis

Index

Page Fifteen

The table below sets forth an analysis of net interest income for the three month periods ended June 30, 2008 and 2007 (Average balances and interest/expense shown in thousands of dollars):

	2008								2007
	Average			Income/					Average			Income/
	Balance			Expense		Rate			Balance			Expense		Rate
Interest Income
Loans 1,2	$	312,877		$	6,222		7.95	%	$	300,550		$	6,290		8.37	%
Federal funds sold		15,097			75		1.99	%		18,402			249		5.41	%
Interest bearing deposits		2,174			14		2.58	%		2,504			40		6.39	%
Taxable investment securities		19,950			230		4.61	%		23,056			310		5.38	%
Nontaxable investment securities 3		2,971			47		6.33	%		2,924			45		6.16	%
Total Earning Assets		353,069			6,588		7.46	%		347,436			6,934		7.98	%

Cash and cash equivalents		7,187								8,429
Allowance for loan losses		(3,611	)							(3,638	)
Insurance contracts		6,382								6,152
Non-earning assets		16,571								15,103
Total Assets	$	379,598							$	373,482

Interest Expense
Interest bearing demand deposits	$	24,294		$	20		0.33	%	$	25,897		$	56		0.86	%
Savings and money markets		51,266			105		0.82	%		48,179			168		1.39	%
Time deposits		196,249			1,978		4.03	%		195,040			2,291		4.70	%
Long term debt		10,615			101		3.81	%		12,478			145		4.65	%
Total Interest Bearing Liabilities		282,424			2,204		3.12	%		281,594			2,660		3.75	%

Demand deposits		50,225								48,923
Other liabilities		5,965								4,734
Stockholders’ equity		40,984								38,231
Total liabilities and stockholders’ equity	$	379,598							$	373,482

Net Interest Income				$	4,384							$	4,274

Net Yield on Earning Assets 3							4.97	%							4.92	%

1 Balances of loans include loans in non accrual status

2 Interest income on loans includes fees

3 Yields are on a fully taxable equivalent basis

Loan Portfolio

The Company is an active residential mortgage and construction lender and generally extends commercial loans to small and medium sized businesses within its primary service area. The Company's commercial lending activity extends across its primary service areas of Grant, Hardy, Hampshire, Mineral, Randolph, Tucker, and northern Pendleton counties in West Virginia, Frederick County, Virginia and Garrett County, Maryland. Consistent with its focus on providing community-based financial services, the Company does not attempt to diversify its loan portfolio geographically by making significant amounts of loans to borrowers outside of its primary service area.

Index

Page Sixteen

Credit Quality and Allowance for Loan Losses

Non-performing loans decreased 29.78% from December 31, 2007 to June 30, 2008. Non-performing loans represented .75% of gross loans at June 30, 2008 and 1.08% of gross loans at December 31, 2007.

The following table summarizes the Company’s non-performing loans at June 30, 2008 and December 31, 2007 (in thousands of dollars):

	June 30,		December 31,
	2008		2007
Non-accrual loans	$	1,207	$	916
Loans past due 90 days and still accruing interest		1,151		2,244
Restructured loans		0		198
Total non-performing loans	$	2,358	$	3,358

Non-performing loans include non-accrual loans, loans 90 days or more past due and restructured loans. Non accrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans on which the original interest rate or repayment terms have been changed due to financial hardship of the borrower.

Loans are typically placed on non-accrual status once they have reached certain levels of delinquency, depending on loan type, and it is no longer reasonable to expect collection of principal and interest because collateral is insufficient to cover both the principal and interest due. After loans are placed on non-accrual status, they are returned to accrual status if the obligation is brought current by the borrower, or they are charged off if payment is not made and Management believes that collection of the amounts due is doubtful. Charged-off loans are charged against the allowance for loan losses. Any subsequent collection or sale of repossessed collateral is added to the allowance as a recovery.

Because of its large impact on the local economy, Management continuously monitors the economic health of the poultry industry. The Company has direct loans to poultry growers and the industry is a large employer in the Company’s trade area. In recent periods, the Company’s loan portfolio has begun to reflect a concentration in loans collateralized by heavy equipment, particularly in the trucking, timber and coal extraction industries. In part because of rising fuel costs, and because of continued slow economic growth, the trucking sector experienced a recent downturn, and profitability growth within this sector still appears to be sluggish. While close monitoring of this sector is necessary, management expects no significant losses in the foreseeable future.

An inherent risk in the lending of money is that the borrower will not be able to repay the loan under the terms of the original agreement. The allowance for loan losses provides for this risk and is reviewed periodically for adequacy. This review also considers concentrations of loans in terms of geography, business type or level of risk. While lending is geographically diversified within the service area, the Company does have some concentration of loans in the area of agriculture (primarily poultry farming), timber and related industries. Management recognizes these concentrations and considers them when structuring its loan portfolio.

Each of the Company's banking subsidiaries, Capon Valley Bank and The Grant County Bank, determines the adequacy of its allowance for loan losses independently. Although the loan portfolios of the two banks are similar to each other, some differences exist which result in divergent risk patterns and different charge-off rates amongst the functional areas of the banks’ portfolios. Each bank pays particular attention to individual loan performance, collateral values, borrower financial condition and economic conditions. The determination of an adequate allowance at each bank is done in a three step process. The first step is to identify impaired loans. Impaired loans are problem loans above a certain threshold which have estimated losses calculated based on collateral values and projected cash flows. The second step is to identify loans above a certain threshold which are problem loans due to the borrower’s payment history or deteriorating financial condition. Losses in this category are determined based on historical loss rates adjusted for current economic conditions. The final step is to calculate a loss for the remainder of the portfolio using historical loss information for each type of loan classification. The determination of specific allowances and weighting is somewhat subjective and actual losses may be greater or less than the amount of the allowance. However, Management believes that the allowance represents a fair assessment of the losses that exist in the current loan portfolio.

Index

Page Seventeen

The required level of the allowance for loan losses is computed quarterly and the allowance adjusted prior to the issuance of the quarterly financial statements. All loan losses charged to the allowance are approved by the boards of directors of each bank at their regular meetings. The allowance is reviewed for adequacy after considering historical loss rates, current economic conditions (both locally and nationally) and any known credit problems that have not been considered under the above formula.

Management has analyzed the potential risk of loss on the Company's loan portfolio given the loan balances and the value of the underlying collateral and has recognized losses where appropriate. Non-performing loans are closely monitored on an ongoing basis as part of the Company's loan review process.

The following table shows the allocation for loans in the loan portfolio and the corresponding amounts of the allowance allocated by loan type as of June 30, 2008 and December 31, 2007 (in thousands of dollars):

	June 30, 2008					December 31, 2007
			Percent of					Percent of
	Amount		Loans			Amount		Loans
Loan Type
Commercial	$	1,227		27	%	$	1,140		26	%
Mortgage and construction		1,101		59	%		1,200		59	%
Consumer		1,322		14	%		1,172		15	%
Unallocated		32					65
Totals	$	3,682				$	3,577

As certain loans identified as impaired are paid current, collateral values increase or loans are removed from watch lists for other reasons, and as other loans become identified as impaired, and because delinquency levels within each of the portfolios change, the allocation of the allowance among the loan types may change. Management feels that the allowance is a fair representation of the losses present in the portfolio given historical loss trends, economic conditions and any known credit problems as of a given date. Management believes that the allowance is to be taken as a whole, and allocation between loan types is an estimation of potential losses within each type given information known at the time.

The following table summarizes the Company’s net charge-offs by loan type for the six month periods ended June 30, 2008 and 2007 (in thousands of dollars):

	2008			2007
Charge-offs
Commercial	$	(35	)	$	(20	)
Mortgage and construction		(83	)		(38	)
Consumer		(256	)		(261	)
Total Charge-offs		(374	)		(319	)

Recoveries
Commercial		13			49
Mortgage		2			0
Consumer		66			127
Total Recoveries		81			176

Total Net Charge-offs	$	(293	)	$	(143	)

The provision for loan losses taken during the first half of 2008 was $57,000 greater than that taken during the same period in 2007. The ratio of the allowance for loan losses to gross loans increased from 1.15% at December 31, 2007 to 1.17% at June 30, 2008. The ratio of allowance for loan losses to nonperforming loans was 1.56 at June 30, 2008 compared to 1.07 at December 31, 2007.

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Page Eighteen

Non-interest Income

Non-interest income increased 38.55% for the half of 2008 as compared to the same period in 2007.

Income received from customer deposit account service charges increased $187,000, due to continued growth in deposit balances and also to the implementation by The Grant County Bank during the last quarter of 2007 of a courtesy overdraft program, which resulted in an increase in non-sufficient funds fees collected by that bank.

Non interest income was also impacted by $134,000 in non recurring gains. As interest rates continued to fall from 2007 into early 2008, the Company experienced an increase in debt securities with call features in its portfolio being called before the expected maturity dates, which resulted in realized gains of $109,000 recorded during the first half of 2008. In addition, several years previous, the Company purchased a parcel of real property with the intent of establishing a branch on the property. One of the branches purchased during 2005 was adjacent to this parcel held by the Company, therefore, during the second quarter, the Company sold the parcel and recorded a gain on the sale.

Non-interest Expense

Non-interest expense increased 3.68% for the first six months of 2008 as compared to 2007.

Equipment and occupancy and data processing expense declined slightly from 2007 to 2008, as did legal and professional fees. This decrease was offset by a 6.01% increase in the costs of employee salaries and benefits which arose largely as a result of customary employee salary increases and inflationary effects on the cost of employee benefit insurance.

Borrowed Funds

The Company borrows funds from the Federal Home Loan Bank (“FHLB”) to reduce market rate risks, provide liquidity, and to fund capital additions. These borrowings may have fixed or variable interest rates and are amortized over a period of one to twenty years, or may be comprised of single payment borrowings with periodic interest payments and principal amounts due at maturity. In an attempt to manage interest expense and interest rate risk and as competition for deposits have increased, the Company has, during recent periods, used these available debt vehicles to fund loan growth more frequently than was utilized in the past.

Liquidity

Operating liquidity is the ability to meet present and future financial obligations. Short term liquidity is provided primarily through cash balances, deposits with other financial institutions, federal funds sold, non-pledged securities and loans maturing within one year. Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company also maintains lines of credit with correspondent financial institutions, the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Pittsburgh.

Historically, the Company’s primary need for additional levels of operational liquidity has been to fund increases in loan balances. The Company has normally funded increases in loans by increasing deposits and decreases in secondary liquidity sources such as balances of federal funds sold and balances of securities. In recent periods, the Company has substantially maintained or increased levels of these secondary liquidity resources and does not anticipate that an unexpectedly high level of loan demand in coming periods would impact liquidity to the extent that the Company would be required to pay above market rates to obtain deposits.

The parent Company’s operating funds, funds with which to pay shareholder dividends and funds for the exploration of new business ventures have been supplied primarily through dividends paid by the Company’s subsidiary banks Capon Valley Bank (CVB) and The Grant County Bank (GCB). The various regulatory authorities impose restrictions on dividends paid by a state bank. A state bank cannot pay dividends without the consent of the relevant banking authorities in excess of the total net profits of the current year and the combined retained profits of the previous two years. As of July 1, 2008, the subsidiary banks could pay dividends to Highlands Bankshares, Inc. of approximately $5,626,000 without permission of the regulatory authorities.

Index

Page Nineteen

Capital

The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level. As of June 30, 2008, the Company was above the regulatory minimum levels of capital. The table below summarizes the capital ratios for the Company and its subsidiary banks as of June 30, 2008 and December 31, 2007:

	June 30, 2008						December 31, 2007
	Actual			Regulatory			Actual			Regulatory
	Ratio			Minimum			Ratio			Minimum
Total Risk Based Capital Ratio
Highlands Bankshares		14.22	%		8.00	%		14.53	%		8.00	%
Capon Valley Bank		13.20	%		8.00	%		14.78	%		8.00	%
The Grant County Bank		13.76	%		8.00	%		13.23	%		8.00	%

Tier 1 Leverage Ratio
Highlands Bankshares		9.73	%		4.00	%		9.95	%		4.00	%
Capon Valley Bank		9.02	%		4.00	%		10.00	%		4.00	%
The Grant County Bank		9.39	%		4.00	%		9.09	%		4.00	%

Tier 1 Risk Based Capital Ratio
Highlands Bankshares		12.97	%		4.00	%		13.28	%		4.00	%
Capon Valley Bank		11.95	%		4.00	%		13.53	%		4.00	%
The Grant County Bank		12.52	%		4.00	%		12.09	%		4.00	%

In April of 2008, Highlands Bankshares announced that its Board of Directors had authorized the Company’s management to repurchase up to 100,000 shares of the Company’s outstanding common stock. Repurchase of the Company’s common stock outstanding will have the effect of lowering capital. The relative size of the reduction in capital will depend upon the actual number of shares repurchased under the announced repurchase plan. Management and the board of directors feels that the Company and both subsidiary banks current levels of capitalization as compared to regulatory minimums are such that the effects on capital of this repurchase program will not reduce capital to an extent that any type of regulatory action will occur as a result of lowered capital levels.

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 in order to minimize the effects of inflationary trends on interest rates. Other areas of non-interest expenses may be more directly affected by inflation.

Index

Page Twenty

Item 3. Quantitative and Qu a litative Disclosures About Market Risk

There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported in the Company’s Annual Report on Form 10-K for the period ended December 31, 2007.

Item 4. Controls and Proce d ures

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 June 30, 2008. 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 June 30, 2008. 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.

Changes in Internal Controls

During the period reported upon, there were no significant changes in internal controls of Highlands Bankshares, Inc. pertaining to its financial reporting and control of its assets or in other factors that materially affected or are reasonably likely to materially affect such control.

Item 4T. Controls and Pro c edures

Not applicable.

PART II OTHER INFOR M ATION

Item 1. Le g al Proceedings

Management is not aware of any material pending or threatened litigation in which the Company 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 addition, to management’s knowledge, no governmental authorities have initiated or contemplated legal action against the Company.

Item 1A. R isk Factors

There have been no material changes to the Company’s risk factors since these factors were previously disclosed in the Company’s Annual Report on Form 10-K for the period ended December 31, 2007.

Item 2. U n registered Sales of Equity Securities and Use of Proceeds.

(a) None

(b) None

(c) On April 8, 2008 the Company announced a share repurchase plan whereby Management was authorized by the Board of Directors to repurchase up to 100,000 shares of the Company’s Common Stock, $5 par value, through open market transactions. If the maximum authorized repurchase is reached, this represents 6.96% of the Company’s outstanding shares of Common Stock as of the announcement date. The repurchase period will extend through December 31, 2008 unless said number of shares are repurchased prior to this date, or the Board of Directors of the Company elects to extend the repurchase period. The table on the following page summarizes the shares purchased from the announcement date through June 30, 2008.

Index

Page Twenty One

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
April 9, 2008—April 30, 2008		3,100	$	29.07		3,100		96,900
May 1, 2008—May 31, 2008		4,631	$	31.21		4,631		92,269
June 1, 2008—June 30, 2008		68,710	$	33.70		68,710		23,559
Total		76,441	$	33.36		76,441		23,559

Item 3. Defau l ts Upon Senior Securities

None

Item 4. Sub m ission of Matters to a Vote of Security Holders

On May 13, 2008 the Company held its annual meeting of stockholders. The following items were approved by the shareholders by the required majority or plurality.

Election of the Board of Directors as proposed in the Proxy material, without any additions or exceptions

	Votes For	Withhold Authority
Alan L. Brill	1,001,876	10,606
Morris M. Homan, Jr.	1,005,126	7,356
Kathy G. Kimble	983,883	28,599
John G. Van Meter	1,002,429	10,053

Ratification of Smith Elliott Kearns & Company, LLC as Independent Registered Public Accountant for 2008.

Votes For	Votes Against	Abstentions
1,009,779	0	2,703

Item 5. Ot h er Information

None

Index

Page Twenty Two

Item 6. E x hibits

EXHIBIT INDEX
Exhibit Number	Description
3(i)	Articles of Incorporation of Highlands Bankshares, Inc., as restated, are hereby incorporated by reference to Exhibit 3(i) to Highlands Bankshares Inc.’s Form 10-Q filed November 13, 2007.
3(ii)	Amended Bylaws of Highlands Bankshares, Inc. are incorporated by reference to Exhibit 3(ii) to Highlands Bankshares Inc.’s Report on Form 8-K filed January 9, 2008.
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. §1350.
32.2	Statement of Chief Financial Officer Pursuant to 18 U.S.C. §1350.

Signa t ures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HIGHLANDS BANKSHARES, INC.

	/s/ C.E. Porter
	C.E. Porter
	President & Chief Executive Officer

	/s/ R. Alan Miller
	R. Alan Miller
	Principal Financial Officer
August 13, 2008