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 March 31, 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: 1,227,838
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended March 31, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . .5
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Months Ended March 31, 1997 and 1996. . . . . . . . . . . . . 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
PART 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
____ ____
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,505 $ 8,008
Federal Funds Sold 1,951 7,948
Investment Securities available for sale
(amortized cost $38,942 March 31,1997;
$31,373 December 31, 1996) 38,986 31,345
Loans, net of allowance for credit losses
$1,125 March 31,1997; $1,072 December 31,
1996 165,761 153,879
Bank premises and equipment 5,797 4,583
Interest receivable 1,360 1,271
Other assets 1,455 705
_________ _________
Total Assets $ 222,815 $ 207,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 28,906 $ 26,003
Deposits, interest bearing 174,057 163,468
_________ _________
Total Deposits 202,963 189,471
Short-term borrowings 89 71
Interest, taxes, and other liabilities 1,833 1,722
Long-term debt 2,738 1,858
_________ _________
Total Liabilities 207,623 193,122
STOCKHOLDERS' EQUITY
Common Stock; $2.50 par value; 10,000,000
shares authorized; 1,227,838 issued and
outstanding at March 31, 1997 3,069 3,054
Surplus 5,203 5,187
Undivided profits 6,891 6,394
Unrealized gains (losses) on securities
available for sale, net of deferred taxes 29 (18)
_________ _________
Total Stockholders' Equity 15,192 14,617
_________ _________
Total Liabilities and
Stockholders' Equity $ 222,815 $ 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>
MARCH 31, MARCH 31,
1997 1996
____ ____
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,633 $ 2,735
Interest on securities available for sale:
Taxable 524 490
Exempt from taxable income 8 8
Interest on federal funds sold 93 82
_________ ________
Total Interest Income 4,258 3,315
INTEREST EXPENSE
Interest on deposits 2,299 1,808
Interest on short-term borrowings 36 9
_________ _________
Total Interest Expense 2,335 1,817
_________ _________
Net Interest Income 1,923 1,498
Provision for loan losses 141 70
_________ _________
Net Interest Income After Provision
Loan Losses 1,782 1,428
_________ ________
NON-INTEREST INCOME
Securities gains (losses), net (18) 23
Service charges on deposit accounts 125 91
Other fee income 13 11
Other operating income 40 30
_________ ________
Total Non-interest Income 160 155
_________ ________
NON-INTEREST EXPENSE
Salaries and employee benefits 661 567
Occupancy expense of bank premises 207 212
Other operating expenses 328 280
_________ _________
Total Non-interest Expense 1,196 1,059
_________ _________
Income Before Applicable Income Taxes 746 524
Income tax expense 249 161
_________ _________
Net Income $ 497 $ 363
_________ _________
Net Income Per Share (weighted average basis) $ .40 $ .30
_________ _________
See Accompanying Notes to Consolidated Financial Statements
<PAGE>4
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 1997 31, 1996
________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 497 $ 363
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 141 70
Provision for deferred taxes 5 72
Deferred compensation expense 10 13
Depreciation 65 55
Securities (gains) losses 18 (23)
Net amortization on securities 27 32
(Increase) decrease in interest receivable (89) (56)
(Increase) decrease in other assets (190) (45)
Increase (decrease) in interest, taxes
and other liabilities 71 51
_________ _________
Net Cash Provided by Operating Activities 555 532
_________ _________
CASH FLOW FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 2,723 4,567
Proceeds from maturity of securities 1,484 1,293
Purchase of securities (11,821) (9,492)
Net (increase) decrease in Federal funds sold 5,997 209
Net (increase) in loans (12,023) (6,211)
Premises and equipment expenditures (1,279) (42)
_________ _________
Net Cash used in Investing Activities (14,919) (9,676)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 8,883 5,030
Net increase in demand, savings, and other deposits 4,049 5,142
Net increase in short-term borrowings 18 (1,000)
Net increase in long-term debt 880 -
Proceeds from sale of stock 31 -
_________ _________
Net Cash Provided by Financing Activities 13,861 9,172
_________ _________
Net Increase in Cash and Cash equivalents (503) 28
Cash and Cash Equivalents at Beginning of Year 8,008 5,618
Cash and Cash Equivalents at End of Quarter $ 7,505 $ 5,646
_________ _________
See Accompanying notes to Consolidated Financial Statements
<PAGE>5
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 - - 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)
_______ _______ _______ _______
Balance, 01/01/97 $ 3,054 $ 5,187 $ 6,394 $ (18)
Net Income - - 497 -
Proceeds from sale
of stock 15 16 - -
Stock Options
Outstanding - - - -
Unrealized gains
(losses) - - - 47
_______ _______ _______ _______
Balance, 03/31/97 $ 3,069 $ 5,203 $ 6,891 $ 29
_______ _______ _______ _______
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>6
Notes to Consolidated Financial Statements
(in thousands)
________________________________________________________________________________
Note 1. - General
The consolidated financial statements conform to generally accepted
accounting principles and to industry practices. The accompanying
consolidated financial statements are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been included. All such
adjustments are of normal and recurring nature. The notes included
herein should be read in conjunction with the notes to consolidated
financial statements included in the Corporation's 1996 Annual Report
to shareholders.
Note 2. - Allowance for Loan Losses
A summary of transactions in the consolidated allowance for loan
losses for the three months ended March 31 follows:
<TABLE>
1997 1996
____ ____
<S> <C> <C>
Balance, January 1 $ 1,072 $ 908
Provision 141 70
Recoveries 2 7
Charge-offs (90) (101)
_______ _______
Balance, March 31 $ 1,125 $ 884
</TABLE>
Note 3. - Income Taxes
Income tax expense for the three months ended March 31 is different
than the amount computed by applying the statutory corporate federal
income tax rate of 34% to income before taxes. The reasons for this
difference are as follows:
<TABLE>
1997 1996
____ ____
<S> <C> <C>
Tax expense at statutory rate $ 254 $ 178
Increase (reduction) in taxes
resulting from:
Tax exempt interest (3) (3)
Other, net (2) (14)
_______ _______
Provision for income taxes $ 249 $ 161
</TABLE>
Note 4. Regulators of the corporation and its subsidiaries have
implemented risk-based capital guidelines 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 shareholder's 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
<PAGE>7
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 it's
subsidiary as of March 31, 1997.
<TABLE>
Combined
Entity Tier 1 Capital Leverage
______ ______ ________ ________
<C> <C> <C> <C>
Highlands Bankshares, Inc. 9.68% 10.40% 7.08%
Highlands Union Bank 9.33% 10.04% 6.68%
</TABLE>
PART 1. ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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, 1997 reflected
net income of $497 thousand, an increase of 36.91% over net income
for the corresponding period in 1996. Operating results of the Company
when measured as a percentage of average equity reveals an increase of
return on average equity from 11.14% for the three-month period in 1996
to 13.38% for the corresponding period in 1997.
Return on average assets at .93% reflects an increase from .87% for the
same period in 1996. These increases in the profitability ratios are the
result of the higher net income for the 1997 first quarter over the
corresponding 1996 first quarter.
Net interest income for the three months ended March 31, 1997
increased 28.37% approximately $425 thousand over the comparable
1996 period. Average, interest-earning assets increased approximately
$12.18 million from March 31, 1996 to the current period while
average interest-bearing liabilities increased $13.62 million during the
same comparative period. The yield on average interest-earning assets
increased 6 basis points to 8.54% in 1997 as compared to 8.48% in
1996. The yield on average interest-bearing liabilities decreased 2 basis
points t 5.47% in 1997 as compared to 5.49% in 1996.
The first quarter provision for possible loan losses totaled $141 thousand,
a $71 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 in the first quarter of 1997 were
$88 thousand compared with $94 thousand in 1996. Net charge-offs were
<PAGE>8
.05% of total loans for the quarter ended March 31, 1997 as compared to
.17% for the 1996 quarter end. Loan loss reserves increased 26.26% to
$1,125 thousand at March 31, 1997 from the comparable 1996 period.
Reserves as of March 31, 1997 represent .67% of total loans versus .74%
for the 1996 period.
Financial Position
Total loans have increased from $120.0 million at March 31, 1996 to
$166.9 million at March 31, 1997. The loan to deposit ratio has
increased from 76.16% at March 31, 1996 to 82.22% at March 31, 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 $756 thousand at March 31, 1997
or .45% if total loans, compared with $220 thousand at March 31, 1996.
Securities totaled approximately $39.0 million (market value) at March
31, 1997 which reflects an increase of $3.3 million or 9.22% from the
March 31, 1996 total of $35.7 million. The majority of this increase is
in purchase of adjustable rate securities in order to match the current
volatile rate environment. Securities, as of March 31, 1997 are comprised
of U.S. Treasuries, approximately 7.66% of the total securities portfolio,
obligations of the U.S. Government, approximately 87.10% of the securities
portfolio, municipal issues, approximately 2.46% of the securities
portfolio,and equity securities, approximately 2.78% of the securities
portfolio.The Company's entire security portfolio is classified as
available for sale for both 1997 and 1996.
Total stockholder's equity of the Company was $15.2 million at March
31, 1997, representing an increase of $2.1 million or 16.42% over March
31, 1996. The Company maintains a significant level of liquidity in the
form of cash and cash equivalents ($7.5 million at March 31, 1997),
overnight investment in Federal Funds Sold ($2.0 million at March 31,
1997), and investment securities available for sale ($39.0 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.
<PAGE>9
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>10
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 13, 1997 /S/ Samuel L. Neese
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: May 13, 1997 /S/ James T. Riffe
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<PAGE>11
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HIGHLANDS BANKSHARES INC /VA/ CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> $ 7,505
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,951
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,986
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 166,886
<ALLOWANCE> 1,125
<TOTAL-ASSETS> 222,815
<DEPOSITS> 202,963
<SHORT-TERM> 89
<LIABILITIES-OTHER> 1,833
<LONG-TERM> 2,738
0
0
<COMMON> 3,069
<OTHER-SE> 12,123
<TOTAL-LIABILITIES-AND-EQUITY> 222,815
<INTEREST-LOAN> 3,633
<INTEREST-INVEST> 625
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,258
<INTEREST-DEPOSIT> 2,299
<INTEREST-EXPENSE> 2,335
<INTEREST-INCOME-NET> 1,923
<LOAN-LOSSES> 141
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 1,196
<INCOME-PRETAX> 746
<INCOME-PRE-EXTRAORDINARY> 497
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 497
<EPS-PRIMARY> .40
<EPS-DILUTED> .38
<YIELD-ACTUAL> 8.54
<LOANS-NON> 333
<LOANS-PAST> 423
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,072
<CHARGE-OFFS> 90
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,125
<ALLOWANCE-DOMESTIC> 1,125
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
