SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d)
Of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1996
Commission File Number: 0-27622
Highlands Bankshares, Inc.
Incorporated in the Commonwealth of Virginia
E.I. Number: 54-1796693
P.O. Box 1128
Abingdon, Virginia 24212
(540) 628-9181
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: 1,217,594
<PAGE>
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended March 31, 1996
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1996 and 1995.........................3
Consolidated Statement of Income
for the Three Months Ended
March 31, 1996 and 1995.........................4
Consolidated Statement of Cash Flows
for the Three Months Ended
March 31, 1996 and 1995.........................5
Consolidated Statement of Changes in
Stockholders' Equity for the Three
Months Ended March 31, 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
2
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands) March 31, March 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,646 $ 3,566
Federal funds sold 5,326 810
Investment securities available for sale
(Amortized cost; $35,880 March 31, 1996; $30,500
March 31, 1995) 35,695 29,627
Loans,net of allowance for credit losses
$884 March 31, 1996; $848 March 31, 1995 119,070 96,795
Bank premises and equipment 4,321 2,722
Interest receivable 1,124 816
Other assets 820 974
Total Assets $172,002 $135,310
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 20,699 $15,475
Deposits, interest bearing 136,800 105,868
Total Deposits 157,499 121,343
Short-term borrowings -- 2,000
Interest, taxes and other liabilities 1,455 881
Total Liabilities 158,954 124,224
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value; 10,000,000
shares authorized; 1,217,594 issued and
outstanding 3,044 3,042
Surplus 5,133 5,120
Undivided profits 4,993 3,499
Unrealized gains (losses) on securities
available for sale, net of deferred taxes (122) (575)
Total Stockholders' Equity 13,048 11,086
Total Liabilities and Stockholders'
Equity $172,002 $135,310
</TABLE>
3
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1996 March 31, 1995
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,735 $ 2,151
Interest on securities available for sale:
Taxable 490 407
Exempt from taxable income 8 6
Interest on federal funds sold 82 11
Total Interest Income 3,315 2,575
INTEREST EXPENSE
Interest on deposits 1,808 1,276
Interest on short-term borrowings 9 22
Total Interest Expense 1,817 1,298
Net Interest Income 1,498 1,277
Provision for loan losses 70 30
Net Interest Income After Provision
Loan Losses 1,428 1,247
NON-INTEREST INCOME
Securities gains (losses), net 23 --
Service charges on deposit accounts 91 76
Other fee income 11 22
Other operating income 30 5
Total Non-Interest Income 156 103
NON-INTEREST EXPENSE
Salaries and employee benefits 567 423
Occupancy expense of bank premises 212 182
Other operating expenses 280 261
Total Non-Interest Expense 1,059 866
Income Before Applicable Income Taxes 524 484
Income tax expense 161 166
Net Income $ 363 $ 318
Net Income Per Share (Weighted Average Basis) $ .30 $ .26
</TABLE>
4
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
(Amounts in thousands) March 31, 1996 March 31, 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 363 $ 318
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 70 30
Provision for deferred taxes 72 (16)
Deferred compensation expense 13 2
Depreciation 55 35
Securities (gains) losses (23) --
Net amortization on securities 32 20
(Increase) decrease in interest receivable (56) (10)
(Increase) decrease in other assets (45) (26)
Increase (decrease) in interest, taxes
and other liabilities 51 16
Net Cash Provided by Operating Activities 460 369
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 4,567 500
Proceeds from maturities of debt
securities 1,293 522
Purchase of securities (9,492) (2,492)
Net (increase) decrease in federal funds
sold 209 (810)
Net increase in loans (6,211) (3,905)
Premises and equipment expenditures (42) (203)
Net Cash Used in Investing Activities (9,676) (6,388)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 5,030 5,847
Net increase in demand, savings and other
deposits 5,142 (1,818)
Maturity of short-term borrowings (1,000) 1,673
Net Cash Provided by Financing Activities 9,172 5,702
Net Increase in Cash and Cash Equivalents 28 (317)
Cash and Cash Equivalents at Beginning of Year 5,618 3,883
Cash and Cash Equivalents at End of Quarter $ 5,646 $ 3,566
</TABLE>
5
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PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) Securities
(Amounts in Undivided Available for
thousands) Common Stock Surplus Profits Sale
<S> <C> <C> <C> <C>
Balance, 01/01/95 $3,038 $5,116 $3,181 $(1,092)
Net income -- -- 318 --
Proceeds from sale
of stock 4 4 -- --
Stock options
outstanding -- -- -- --
Unrealized gains
(losses) -- -- -- 517
Balance, 03/31/95 $3,042 $5,120 $3,499 $ (575)
Balance, 01/01/96 $3,044 $5,120 $4,630 $ 18
Net Income -- -- 363 --
Proceeds from sale
of stock -- -- -- --
Stock options
outstanding -- 13 -- --
Unrealized gains
(losses) -- -- -- (140)
Balance, 03/31/96 $3,044 $5,133 $4,993 $ (122)
</TABLE>
6
<PAGE>
HIGHLANDS BANKSHARES, INC.
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 Highlands Bankshares, Inc., at March 31, 1996, and Highlands Union
Bank, at March 31, 1995. The following discussion and analysis is provided to
address information about the Company's financial condition and results of
operations which 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 March 31, 1996 reflected net income
of $363 thousand, an increase of 13.79% 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 12.07% for the three-month period in 1995 to 11.14% for the corresponding
period in 1996. This decrease is the result of a $954 thousand average net
unrealized loss on available for sale securities offset to stockholders' equity
as of March 31, 1995 compared to a $12 thousand average net unrealized gains on
available for sale securities for the 1996 period. Return on average assets at
.87% also reflects a decrease from .97% 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 of 1995. Earnings per common share were $.30, increasing from $.26 for
the same period in 1995.
Net interest income for the three months ended March 31, 1996 increased 17.31%,
approximately $221 thousand over the comparable 1995 period. Average
interest-earning assets increased approximately $32.8 million from March 31,
1995 to the current period while average interest-bearing liabilities increased
$33.4 million during the same comparative period. The yield on average
interest-earning assets increased 15 basis points to 8.48% in 1996 as compared
to 8.33% in 1995. The yield on average interest-bearing
7
<PAGE>
liabilities increased 24 basis points to 5.49% in 1996 as compared to 5.25% in
1995. This increase in yield on interest-bearing liabilities is necessary to
maintain depositors in order to continue funding it's large loan demand.
The first quarter provision for possible loan losses totaled $70 thousand, a $40
thousand 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 first
quarter of 1996 were $94 thousand compared with $18 thousand in 1995. Net
charge-offs were .08% of total loans for the quarter ended March 31, 1996 as
compared to .02% for the 1995 quarter end. Loan loss reserves increased 4.25% to
$884 thousand at March 31, 1996. Reserves as of March 31, 1996 represent .74% of
total loans versus .87% for the 1995 period.
8
<PAGE>
FINANCIAL POSITION
Total loans have increased from $97.6 million at March 31, 1995 to $120.0
million at March 31, 1996. The loan to deposit ratio has decreased from 80.47%
at March 31, 1995 to 76.16% at March 31, 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 $220 thousand at March 31, 1996, or .18% of total
loans, compared with $501 thousand, or .51% at March 31, 1995.
Securities totaled $35.7 million (market value) at March 31, 1996 which reflects
an increase of $6.1 million or 20.48% from the March 31, 1995 total of $29.6
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 March 31, 1996, are comprised of U.S. Treasuries, approximately 8.37% of
the total securities portfolio, obligations of the U.S Government, approximately
85.67% of the total securities portfolio, municipal issues, approximately 3.84%
of the securities portfolio, and equity securities, approximately 2.13% 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 $13.5 million at March 31, 1996,
representing an increase of $2.0 million or 17.70% over March 31, 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 ($5.7 million at March 31, 1996), overnight investment in Federal
Funds Sold ($5.3 million at March 31, 1996) and investment securities available
for sale ($35.7 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 available for sale represent a
secondary level of liquidity available for conversion to liquid funds in the
event of extraordinary needs.
9
<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) Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K -- The Registrant filed one report on
Form 8-K during the quarter ended March 31, 1996, on January
24, 1996, which reported the reorganization of Highlands Union
Bank into a one-bank holding company structure.
10
<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: May 15, 1996 /s/ Samuel L. Neese
-------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: May 15, 1996 /s/ James T. Riffe
------------------
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 5,646
<INT-BEARING-DEPOSITS> 136,800
<FED-FUNDS-SOLD> 5,326
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,695
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 119,954
<ALLOWANCE> 884
<TOTAL-ASSETS> 172,002
<DEPOSITS> 157,499
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,455
<LONG-TERM> 0
0
0
<COMMON> 3,044
<OTHER-SE> 10,004
<TOTAL-LIABILITIES-AND-EQUITY> 172,002
<INTEREST-LOAN> 2,735
<INTEREST-INVEST> 580
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,315
<INTEREST-DEPOSIT> 1,808
<INTEREST-EXPENSE> 1,817
<INTEREST-INCOME-NET> 1,498
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 1,059
<INCOME-PRETAX> 524
<INCOME-PRE-EXTRAORDINARY> 363
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
<YIELD-ACTUAL> 8.23
<LOANS-NON> 98
<LOANS-PAST> 122
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 908
<CHARGE-OFFS> 101
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 884
<ALLOWANCE-DOMESTIC> 884
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
