SECURITIES AND EXCHANGE C0MMISSION
WASHINGTON DC 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1997
Commission File Number: 0-27622
Highlands Bankshares, Inc.
Incorporated in the State of Virginia E.I. Number: 54-1796693
P.O. Box 1128
Abingdon Virginia 24212-1128
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.
YES X NO __
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: 1,230,650
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended September 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996.................... 3
Consolidated Statements of Income
for the Three and Nine Month Periods Ended
September 30, 1997 and 1996..................................4
Consolidated Statements of Cash Flows
for the Nine Month Periods Ended
September 30, 1997 and 1996..................................6
Consolidated Statements of Changes in
Stockholders' Equity for the Nine
Month Periods Ended September 30, 1997 and 1996.............7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................................8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................11
Item 2. Changes in Securities............................................11
Item 3. Defaults Upon Senior Securities..................................11
Item 4. Submission of Matters to a Vote of
Security Holders...............................................11
Item 5. Other Information................................................11
Item 6. Exhibits and Reports on Form 8-K.................................11
SIGNATURES................................................................ 12
EXHIBIT 27. Financial Data Schedule.......................................13
PART 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
____ ____
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,131 $ 8,008
Federal funds sold - 7,948
Investment securities available for sale
(amortized cost $41,748 September 30,1997;
$31,373 December 31, 1996) 41,947 31,345
Loans, net of allowance for credit losses
$1,478 September 30,1997; $1,072 December 31,
1996 182,443 153,879
Bank premises and equipment 6,518 4,583
Interest receivable 1,531 1,271
Other assets 969 705
_________ _________
Total Assets $ 241,539 $ 207,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 27,474 $ 26,003
Deposits, interest bearing 188,291 163,468
_________ _________
Total Deposits 215,765 189,471
Short-term borrowings 5,662 71
Interest, taxes, and other liabilities 2,104 1,722
Long-term debt 1,715 1,858
_________ _________
Total Liabilities 225,246 193,122
STOCKHOLDERS' EQUITY
Common Stock; $2.50 par value; 10,000,000
shares authorized; 1,230,650 issued and
outstanding at September 30, 1997; 1,221,788
outstanding at December 31, 1996 3,077 3,054
Surplus 5,249 5,187
Undivided profits 7,836 6,394
Unrealized gains (losses) on securities
available for sale, net of deferred taxes 131 (18)
_________ _________
Total Stockholders' Equity 16,293 14,617
_________ _________
Total Liabilities and
Stockholders' Equity $ 241,539 $ 207,739
_________ _________
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>3
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Amounts in thousands, except per share data)
________________________________________________________________________________
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTH PERIOD
SEPTEMBER 30, ENDED SEPTEMBER 30,
________________ ________________
1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 4,265 $ 3,187 $11,843 $ 8,821
Interest on securities
available for sale:
Taxable 599 520 1,697 1,568
Exempt from taxable income 9 7 24 22
Interest on federal funds sold 12 9 135 140
_______ _______ _______ _______
Total Interest Income 4,885 3,723 13,699 10,551
INTEREST EXPENSE
Interest on deposits 2,584 1,936 7,315 5,615
Interest on short-term borrowings 108 40 201 57
_______ _______ _______ _______
Total Interest Expense 2,692 1,976 7,516 5,672
_______ _______ _______ _______
Net Interest Income 2,193 1,747 6,183 4,879
Provision for loan losses 313 55 703 190
_______ _______ _______ _______
Net Interest Income After
Provision Loan Losses 1,880 1,692 5,480 4,689
_______ _______ _______ _______
NON-INTEREST INCOME
Securities gains (losses), net 0 0 (7) 23
Service charges on deposit accounts 121 120 376 327
Other fee income 27 25 54 47
Other operating income 116 33 195 94
_______ _______ _______ _______
Total Non-interest Income 264 178 618 491
_______ _______ _______ _______
NON-INTEREST EXPENSE
Salaries and employee benefits 773 657 2,131 1,835
Occupancy expense of bank premises 288 216 714 649
Other operating expenses 377 299 1,063 847
_______ _______ _______ _______
Total Non-interest Expense 1,438 1,172 3,908 3,331
_______ _______ _______ _______
See accompanying notes to consolidated financial statements
<PAGE>4
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
(unaudited)
(Amounts in thousands, except per share data)
________________________________________________________________________________
</TABLE>
Income Before Applicable
Income Taxes 706 698 2,190 1,849
Income tax expense 238 238 748 615
_______ _______ _______ _______
Net Income $ 468 $ 460 $ 1,442 $ 1,234
_______ _______ _______ _______
Net Income Per Share (weighted
average basis) $ .38 $ .38 $ 1.17 $ 1.01
_______ _______ _______ _______
See accompanying notes to consolidated financial statements
<PAGE>5
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 1997 30, 1996
________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,442 $ 1,234
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 703 190
Provision for deferred taxes (49) (160)
Deferred compensation expense 32 53
Depreciation 235 175
Securities (gains) losses 7 (23)
Net amortization on securities 163 96
(Increase) decrease in interest receivable (260) (277)
(Increase) decrease in other assets (264) 178
Increase (decrease) in interest, taxes
and other liabilities 382 121
_________ _________
Net Cash Provided by Operating Activities 2,391 1,587
_________ _________
CASH FLOW FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 3,426 6,273
Proceeds from maturity of securities 5,866 5,988
Purchase of securities (19,898) (14,117)
Net (increase) decrease in Federal funds sold 7,948 4,376
Net (increase) in loans (29,267) (28,560)
Premises and equipment expenditures (2,170) (196)
_________ _________
Net Cash used in Investing Activities (34,095) (26,236)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 20,648 14,497
Net increase in demand, savings, and other deposits 5,646 8,969
Net increase (decrease) in short-term borrowings 5,448 3,000
Proceeds from issuance of common stock 85 56
_________ _________
Net Cash Provided by Financing Activities 31,827 26,522
_________ _________
Net Increase in Cash and Cash equivalents 123 1,873
Cash and Cash Equivalents at Beginning of Year 8,008 5,618
_________ _________
Cash and Cash Equivalents at End of Quarter $ 8,131 $ 7,491
_________ _________
Supplemental disclosures of cash flow information:
Interest paid $ 7,516 $ 5,672
_________ _________
Taxes paid $ 748 615
_________ _________
See accompanying notes to consolidated financial statements
<PAGE>6
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Securities
Common Undivided Available
Stock Surplus Profits For Sale
_______ _______ _______ ________
<S> <C> <C> <C> <C>
Balance, 01/01/96 $ 3,044 $ 5,120 $ 4,630 $ 18
Net income - - 1,234 -
Proceeds from sale
of stock 9 - - -
Stock options
outstanding - 47 - -
Unrealized gains
(losses) - - - (192)
_______ _______ _______ _______
Balance, 09/30/96 $ 3,053 $ 5,167 $ 5,864 $ (174)
_______ _______ _______ _______
Balance, 01/01/97 $ 3,054 $ 5,187 $ 6,394 $ (18)
Net income - - 1,442 -
Proceeds from sale
of stock 23 - - -
Stock options
outstanding - 62 - -
Unrealized gains
(losses) - - - 149
_______ _______ _______ _______
Balance, 09/30/97 $ 3,077 $ 5,249 $ 7,836 $ 131
_______ _______ _______ _______
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>7
Notes to Consolidated Financial Statements
(in thousands)
________________________________________________________________________________
Note 1. - General
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 amde to the prior periods financial statements
to place them on a comparable basis with the current periods financial
statements. Operating results are presented for the nine-month period
ended September 30, 1997, and are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. 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, 1996.
Note 2. - Regulatory Capital Requirements
Regulators of the coporation and its subsidiary have implemented risk-based
capital guidlines which 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, 1997.
<TABLE>
Combined
Entity Tier 1 Capital Leverage
______ ______ _______ ________
<C> <C> <C> <C>
Highlands Bankshares, Inc. 9.30% 10.15% 6.79%
Highlands Union Bank 8.96% 9.81% 6.62%
</TABLE>
<PAGE>8
Note 3. - Allowance for Loan Losses
A summary of transactions in the consolidated allowance for loan
losses for the nine months ended September 30 follows:
<TABLE>
1997 1996
____ ____
<S> <C> <C>
Balance, January 1 $ 1,072 $ 908
Provision 703 190
Recoveries 14 40
Charge-offs (311) (195)
_______ _______
Balance, September 30 $ 1,478 $ 943
</TABLE>
PART 1. 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. The Company aquired 100% of the common
stock of Highlands Union Bank, the "Bank," through this corporate restructure.
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 nine-month period ended September 30, 1997
reflected net income of $3.9 million, an increase of 16.86% over net income
reported for the corresponding period in 1996. Operating results of the
Company when measured as a percentage of average equity reveals a decrease in
returns on average equity from 12.34% for the nine-month period in 1996
to 12.27% for the corresponding period in 1997.
Return on average assets at .85% also reflects a decrease from .93% for the
same period in 1996. Earnings per common share were $1.17, increasing from
$1.01 for the same period in 1996.
Net interest income for the nine months ended September 30, 1997
increased 26.73%, approximately $1.3 million over the comparable
1996 period. Average interest-earning assets increased approximately
$57.8 million from September 30, 1996 to the current period while
average interest-bearing liabilities increased $43.4 million during the
same comparative period. The yield on average interest-earning assets
decreased 33 basis points to 8.21% in 1997 as compared to 8.54% in
1996. The yield on average interest-bearing liabilities increased 12 basis
points to 5.26% in 1997 as compared to 5.14% in 1996. This increase in
yield on interest-bearing liabilities is necessary to maintain depositors
in order to continue funding its large loan demand.
<PAGE>9
The provision for possible loan losses for the nine-month period ended
September 30, 1997 totaled $703 thousand, a $513 thousand increase from the
corresponding period in 1996. The Company continually monitors the loan
portfolio for signs of credit weaknesses 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 for the nine-month period
ended September 30, 1997 were $297 thousand compared with $155 thousand in
1996. Net charge-offs were .16% of total loans for the nine-months ended
September 30, 1997 as compared to .10% for 1996.
Loan loss reserves increased 37.87% from December 31, 1996 to $1.48 million
at September 30, 1997. Reserves as of September 30, 1997 represent .80% of
total loans versus .66% at September 30, 1996.
Financial Position
Total loans have increased from $142.3 million at September 30, 1996 to
$183.9 million at September 30, 1997. The loan to deposit ratio has
increased from 83.34% at September 30, 1996 to 85.24% at September 30, 1997.
Loan demand continues at a high pace even with 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 $942 thousand at September 30, 1997
or .51% of total loans, compared with $624 thousand, or .44% at September
30, 1996.
Securities totaled $41.9 million (market value) at September 30, 1997 which
reflects an increase of $8.3 million or 24.68% from the September 30, 1996
total of $33.6 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 September 30, 1997 are comprised
of U.S. Treasuries, approximately 5.97% of the total securities portfolio,
obligations of the U.S. Government and debt securities, approximately 89.18%
of the total securities portfolio, municipal issues, approximately 2.25% of
the securities portfolio, and equity securities, approximately 2.60% of the
securities portfolio. The Company's entire security portfolio is classified
as available for sale for both 1997 and 1996.
Total stockholders' equity of the Company was $16.3 million at September
30, 1997, representing an increase of $2.4 million or 17.13% over
September 30, 1996. The fluctuations of market prices on available for
sale securities causes some variations in the stockholders' equity.
The Company maintains a significant level of liquidity in the form of cash
and cash balances ($8.1 million at September 30, 1997), and investment
securities available for sale ($41.9 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>10
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>11
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: November 13, 1997 /S/ Samuel L. Neese
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 1997 /S/ James T. Riffe
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<PAGE>12
<TABLE> <S> <C>
<ARTICLE> 9
</ARTICLE>
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HIGHLANDS BANKSHARES INC /VA/ CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 8,131
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,947
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 183,921
<ALLOWANCE> 1,478
<TOTAL-ASSETS> 241,539
<DEPOSITS> 215,765
<SHORT-TERM> 5,662
<LIABILITIES-OTHER> 2,104
<LONG-TERM> 1,715
0
0
<COMMON> 3,077
<OTHER-SE> 13,216
<TOTAL-LIABILITIES-AND-EQUITY> 241,539
<INTEREST-LOAN> 11,843
<INTEREST-INVEST> 1,856
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,699
<INTEREST-DEPOSIT> 7,315
<INTEREST-EXPENSE> 7,516
<INTEREST-INCOME-NET> 6,183
<LOAN-LOSSES> 703
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 3,908
<INCOME-PRETAX> 2,190
<INCOME-PRE-EXTRAORDINARY> 1,442
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,442
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 3.70
<LOANS-NON> 325
<LOANS-PAST> 617
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,072
<CHARGE-OFFS> 311
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 1,478
<ALLOWANCE-DOMESTIC> 1,478
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
