SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number: 0-27622
HIGHLANDS BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1796693
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
P.O. Box 1128
Abingdon, Virginia 24212
(Address of Principal Executive Offices) (Zip Code)
(540) 628-9181
(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.
(1) YES__X__ NO_____
(2) YES__X__ NO_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 1,221,198
<PAGE>
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended September 30, 1996
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION REFERENCE
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995...............................................3
Consolidated Statement of Income
for the Nine Months Ended
September 30, 1996 and 1995............................................................4
Consolidated Statement of Cash Flows
for the Nine Months Ended
September 30, 1996 and 1995............................................................5
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended
September 30, 1996 and 1995............................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................7-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................10
Item 2. Changes in Securities..........................................................................10
Item 3. Defaults Upon Senior Securities................................................................10
Item 4. Submission of Matters to a Vote of Security Holders............................................10
Item 5. Other Information..............................................................................10
Item 6. Exhibits and Reports on Form 8-K...............................................................10
SIGNATURES.......................................................................................................11
</TABLE>
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Amounts in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,491 $ 5,618
Federal funds sold 1,159 5,535
Investment securities available for sale
(Amortized cost; $33,936 September 30, 1996;
$32,248 December 31, 1995) 33,644 32,276
Loans, net of allowance for credit losses
$943 September 30, 1996; $908 December 31, 1995 141,395 112,835
Bank premises and equipment 4,347 4,346
Interest receivable 1,345 1,068
Other assets 847 865
--- ---
Total Assets $190,228 $162,543
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 23,146 $ 20,303
Deposits, interest bearing 147,647 127,024
------- -------
Total Deposits 170,793 147,327
------- -------
Short-term borrowings 4,000 1,000
----- -----
Interest, taxes and other liabilities 1,525 1,404
------ -----
Long-term borrowings -0- -0-
Total Liabilities 176,318 149,731
------- -------
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value; 10,000,000
shares authorized; 1,219,468 issued and
outstanding 3,053 3,044
Surplus 5,167 5,120
Undivided profits 5,864 4,630
Unrealized gains (losses) on securities
available for sale, net of deferred taxes (174) 18
----- ---
Total Stockholders' Equity 13,910 12,812
------ ------
Total Liabilities and Stockholders' Equity $190,228 $162,543
-------- --------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
(Amounts in thousands, except per share data)
<S> <C> <C>
Interest Income
Interest and fees on loans $ 8,821 $ 6,954
Interest on securities available for sale:
Taxable 1,568 1,299
Exempt from taxable income 22 18
Interest on federal funds sold 140 137
--- ---
Total Interest Income 10,551 8,408
------ -----
Interest Expense
Interest on deposits 5,615 4,368
Interest on short-term borrowings 57 60
-- --
Total Interest Expense 5,672 4,428
----- -----
Net Interest Income 4,879 3,980
----- -----
Provision for loan losses 190 123
--- ---
Net Interest Income After Provision Loan Losses 4,689 3,857
----- -----
Non-Interest Income
Securities gains (losses), net 23 (1)
Service charges on deposit accounts 327 262
Other fee income 47 85
Other operating income 94 17
-- --
Total Non-Interest Income 491 363
--- ---
Non-Interest Expense
Salaries and employee benefits 1,835 1,344
Occupancy expense of bank premises 649 509
Other operating expenses 847 762
--- ---
Total Non-Interest Expense 3,331 2, 615
----- ------
Income Before Applicable Income Taxes 1,849 1,605
Income tax expense 615 550
--- ---
Net Income 1,234 1,055
----- -----
Net Income Per Share (Weighted Average Basis) $ 1.01 $ .87
------- ------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1995
(Amounts in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,234 $ 1,055
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 190 123
Provision for deferred taxes (160) 497
Deferred compensation expense 53 -0-
Depreciation 175 106
Securities (gains) losses (23) 1
Net amortization on securities 96 62
(Increase) decrease in interest receivable (277) (162)
(Increase) decrease in other assets 178 (29)
Increase (decrease) in interest, taxes
and other liabilities 121 338
--- ---
Net Cash Provided by Operating Activities 1,587 1,991
----- -----
Cash Flows From Investing Activities:
Securities available for sale:
Proceeds from sale of securities 6,273 567
Proceeds from maturities of debt securities 5,988 5,289
Purchase of securities (14,117) (8,177)
Net (increase) decrease in federal funds sold 4,376 (4,058)
Net increase in loans (28,560) (14,169)
Premises and equipment expenditures (196) (1,221)
----- -------
Net Cash Used in Investing Activities (26,236) (21,769)
-------- --------
Cash Flows From Financing Activities:
Net increase in time deposits 14,497 19,590
Net increase in demand, savings and other deposits 8,969 765
Proceeds from issuance of common stock 56 6
Proceeds (Maturity) of short-term borrowings 3,000 673
----- ---
Net Cash Provided by Financing Activities 26,522 21,034
------ ------
Net Increase in Cash and Cash Equivalents 1,873 1,270
Cash and Cash Equivalents at Beginning of Year 5,618 3,883
----- -----
Cash and Cash Equivalents at End of Quarter $ 7,491 $ 5,153
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,672 $ 2,776
Taxes $ 615 $ 351
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Unrealized Gain
(Loss)
Securities
Undivided Available for
Common Stock Surplus Profits Sale
------------ ------- ------- ----
(Amounts in thousands)
<S> <C> <C> <C> <C>
Balance, 01/01/95 $3,038 $5,116 $3,181 $(1,092)
-
Net income - 665 -
Proceeds from sale of stock 5 4 - -
Stock options outstanding - - - -
Unrealized gains (losses) - - - 858
Balance, 06/30/95 $3,043 $5,120 $3,846 $ (234)
------ ------ ------ -------
Balance, 01/01/96 $3,044 $5,120 $4,629 $ 18
Net Income - - 774 -
Proceeds from sale of stock 5 - - -
Stock options outstanding - 40 - -
Unrealized gains (losses) - - - ( 259)
Balance, 06/30/96 $3,049 $5,160 $5,403 $ (241)
------ ------ ------ -------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(In thousands)
Note A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Rule 3-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments were of a normal
recurring nature. Certain reclassifications have been made to the prior
period's financial statements to place them on a comparable basis with
the current period's financial statements. Operating results are
presented for the nine-month period ended September 30, 1996, and are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information refer to the
financial statements and footnotes thereto included as Exhibit 13 to
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.
Note B. REGULATORY CAPITAL REQUIREMENTS
Regulators of the Corporation and its subsidiary have implemented
risk-based capital guidelines that require the maintenance of certain
minimum capital as a percent of assets and certain off-balance sheet
items adjusted for predefined credit risk factors. The regulatory
minimum for Tier and combined Tier 1 and Tier 2 capital ratios were
4.0% and 8.0%, respectively. Tier 1 capital includes tangible common
shareholders' equity reduced by goodwill and certain other intangibles.
Tier 2 capital includes portions of the allowance for loan losses, not
to exceed Tier 1 capital. In addition to the risk-based guidelines, a
minimum leverage ratio (Tier 1 capital as a percentage of average total
consolidated assets) of 4.0% is required. This minimum may be increased
by at least 1.0% or 2.0% for entities with higher levels of risk or
that are experiencing or anticipating significant growth. The following
table contains the capital ratios for the Corporation and its
subsidiary as of September 30, 1996.
<TABLE>
<CAPTION>
Entity Tier 1 Combined Capital Leverage
------ ------ ---------------- --------
<S> <C> <C> <C>
Highlands Bankshares, Inc. 10.61% 11.32% 7.62%
Highlands Union Bank 10.61% 11.32% 7.62%
</TABLE>
<PAGE>
PART I. ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Highlands Bankshares, Inc. (the "Company") was formed December 31, 1995 to
operate as a one-bank holding company. The Company acquired 100% of the common
stock of Highlands Union Bank (the "Bank") through this corporate restructure.
Therefore, all of the comparative material contained within this document is
made between the Company at September 30, 1996 and the Bank at September 30,
1995. The following discussion and analysis is provided to address information
about the Company's financial condition and results of operations that is not
otherwise apparent from the consolidated financial statements incorporated by
reference or included in this report. Reference should be made to those
statements for an understanding of the following discussion and analysis.
Results of Operations
Results of operations for the period ended September 30, 1996 reflected net
income of $1.2 million, an increase of 16.97% over net income reported for the
corresponding period in 1995. Operating results of the Company when measured as
a percentage of average equity reveals a decrease in returns on average equity
from 12.42% for the nine-month period in 1995 to 12.34% for the corresponding
period in 1996. Return on average assets at .93% also reflects a decrease from
1.00% for the same period in 1995. This decrease on return on average assets is
primarily due to the absorption of additional operating costs associated with
the opening of a new branch office in December 1995. Earnings per common share
were $1.01, increasing from $.87 for the same period in 1995.
Net interest income for the nine months ended September 30, 1996 increased
22.59%, approximately $899,000 over the comparable 1995 period. Average
interest-earning assets increased approximately $24.4 million from September 30,
1995 to the current period, while average interest-bearing liabilities increased
$28.5 million during the same comparative period. The yield on average
interest-earning assets increased 55 basis points to 8.54% in 1996 as compared
to 7.99% in 1995. The yield on average interest-bearing liabilities increased 16
basis points to 5.14% in 1996 as compared to 4.98% in 1995. This increase in
yield on interest-bearing liabilities is necessary to maintain depositors in
order to continue funding its large loan demand.
The third quarter provision for possible loan losses totaled $190,000, a $67,000
increase from the corresponding period in 1995. The Company continually monitors
the loan portfolio for signs of credit weakness or developing collection
problems. Levels for each period are determined after evaluating the loan
portfolio and determining the level necessary to absorb current charge-offs and
maintain the reserve at adequate levels. Net charge-offs in the third quarter of
1996 were $155,000 compared with $138,000 in 1995. Net charge-offs were 0.11% of
total loans for the quarter ended September 30, 1996 as compared to .12% for the
1995 quarter end. Loan loss reserves increased 14.86% to $943,000 at September
30, 1996. Reserves as of September 30, 1996 represent .67% of total loans versus
.76% for the 1995 period.
<PAGE>
Financial Position
Total loans have increased from $107.9 million at September 30, 1995 to $142.3
million at September 30, 1996. The loan to deposit ratio has increased from
78.37% at September 30, 1995 to 83.34% at September 30, 1996. Loan demand
continues at a high pace even within a competitive market area.
Non-performing assets are comprised of loans on non-accrual status and loans
contractually past due 90 days or more and still accruing interest.
Non-performing assets were $624,000 at September 30, 1996, or 0.44% of total
loans, compared with $472,000, or 0.44% at September 30, 1995.
Securities totaled $33.6 million (market value) at September 30, 1996, which
reflects an increase of $3.2 million or 10.31% from the September 30, 1995 total
of $30.5 million. The majority of this increase is in purchases of adjustable
rate securities in order to match the current volatile rate environment.
Securities, as of September 30, 1996, are comprised of U.S. Treasuries,
approximately 7.40% of the total securities portfolio, obligations of the U.S.
Government and debt securities, approximately 86.44% of the total securities
portfolio, municipal issues, approximately 3.64% of the securities portfolio,
and equity securities, approximately 2.52% of the securities portfolio. The
Company's entire security portfolio is classified as available for sale for both
1996 and 1995.
Total stockholders' equity of the Company was $13.9 million at September 30,
1996, representing an increase of $1.6 million or 13.35% over September 30,
1995. The fluctuations of market prices on available for sale securities causes
the significant variations of the stockholders' equity.
The Company maintains a significant level of liquidity in the form of cash and
cash balances ($7.5 million at September 30, 1996), overnight investment in
federal funds sold ($1.2 million at September 30, 1996) and investment
securities available for sale ($33.6 million). Both cash and federal funds sold
are immediately available for satisfaction of deposit withdrawals, customer
credit needs and operations of the Company. Investment securities are available
for conversion to liquid funds in the event of extraordinary needs.
<PAGE>
HIGHLANDS BANKSHARES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
(a) N/A
(b) N/A
Item 3. Defaults Upon Senior Securities
(a) N/A
(b) N/A
Item 4. Submission of Matters to Vote of Security Holders
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) N/A
(b) N/A
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
Highlands Bankshares, Inc.
Date: 11/7/96 /s/ Samuel L. Neese
----------------------------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: 11/7/96 /s/ James T. Riffe
----------------------------------------
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,491
<INT-BEARING-DEPOSITS> 147,647
<FED-FUNDS-SOLD> 1,159
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,644
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 142,338
<ALLOWANCE> 943
<TOTAL-ASSETS> 190,228
<DEPOSITS> 170,793
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 1,525
<LONG-TERM> 0
0
0
<COMMON> 3,053
<OTHER-SE> 10,857
<TOTAL-LIABILITIES-AND-EQUITY> 176,318
<INTEREST-LOAN> 8,821
<INTEREST-INVEST> 1,730
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,551
<INTEREST-DEPOSIT> 5,615
<INTEREST-EXPENSE> 5,672
<INTEREST-INCOME-NET> 4,879
<LOAN-LOSSES> 190
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 3,331
<INCOME-PRETAX> 1,849
<INCOME-PRE-EXTRAORDINARY> 1,234
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,234
<EPS-PRIMARY> 1.01
<EPS-DILUTED> .98
<YIELD-ACTUAL> 6.88
<LOANS-NON> 154
<LOANS-PAST> 470
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 908
<CHARGE-OFFS> 195
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 943
<ALLOWANCE-DOMESTIC> 943
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
