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 June 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: 1,227,838
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended June 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . 3
Consolidated Statements of Income
for the Three and Six Month Periods Ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the Six Month Periods Ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . .6
Consolidated Statements of Changes in
Stockholders' Equity for the Six
Month Periods Ended June 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>
JUNE 30, DECEMBER 31,
1997 1996
____ ____
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,636 $ 8,008
Federal Funds Sold - 7,948
Investment Securities available for sale
(amortized cost $39,140 June 30,1997;
$31,373 December 31, 1996) 39,262 31,345
Loans, net of allowance for credit losses
$1,321 June 30,1997; $1,072 December 31,
1996 173,830 153,879
Bank premises and equipment 5,994 4,583
Interest receivable 1,461 1,271
Other assets 883 705
_________ _________
Total Assets $ 229,066 $ 207,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 26,959 $ 26,003
Deposits, interest bearing 179,461 163,468
_________ _________
Total Deposits 206,420 189,471
Short-term borrowings 2,287 71
Interest, taxes, and other liabilities 1,872 1,722
Long-term debt 2,739 1,858
_________ _________
Total Liabilities 213,318 193,122
STOCKHOLDERS' EQUITY
Common Stock; $2.50 par value; 10,000,000
shares authorized; 1,228,462 issued and
outstanding at June 30, 1997; 1,221,788
outstanding at December 31, 1996 3,071 3,054
Surplus 5,229 5,187
Undivided profits 7,368 6,394
Unrealized gains (losses) on securities
available for sale, net of deferred taxes 80 (18)
_________ _________
Total Stockholders' Equity 15,748 14,617
_________ _________
Total Liabilities and
Stockholders' Equity $ 229,066 $ 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 SIX MONTH PERIOD
JUNE 30, ENDED JUNE 30,
________________ ________________
1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,945 $ 2,899 $ 7,578 $ 5,634
Interest on securities
available for sale:
Taxable 574 558 1,098 1,048
Exempt from taxable income 7 7 15 15
Interest on federal funds sold 30 49 123 131
_______ _______ _______ _______
Total Interest Income 4,556 3,513 8,814 6,828
INTEREST EXPENSE
Interest on deposits 2,432 1,871 4,731 3,679
Interest on short-term borrowings 51 8 87 17
Interest on federal funds purchased 6 0 6 0
_______ _______ _______ _______
Total Interest Expense 2,489 1,879 4,824 3,696
_______ _______ _______ _______
Net Interest Income 2,067 1,634 3,990 3,132
_______ _______ _______ _______
Provision for loan losses 249 65 390 135
_______ _______ _______ _______
Net Interest Income After
Provision Loan Losses 1,818 1,569 3,600 2,997
_______ _______ _______ _______
NON-INTEREST INCOME
Securities gains (losses), net 11 0 (7) 23
Service charges on deposit accounts 130 116 255 207
Other fee income 14 11 27 22
Other operating income 39 31 79 61
_______ _______ _______ _______
Total Non-interest Income 194 158 354 313
_______ _______ _______ _______
NON-INTEREST EXPENSE
Salaries and employee benefits 697 611 1,358 1,178
Occupancy expense of bank premises 219 221 426 433
Other operating expenses 358 268 686 548
_______ _______ _______ _______
Total Non-interest Expense 1,274 1,100 2,470 2,159
_______ _______ _______ _______
See Acompanying 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 738 627 1,484 1,151
Income tax expense 261 216 510 377
_______ _______ _______ _______
Net Income $ 477 $ 411 $ 974 $ 774
_______ _______ _______ _______
Net Income Per Share (weighted
average basis) $ .39 $ .34 $ .79 $ .64
_______ _______ _______ _______
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>
SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 1997 30, 1996
________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 974 $ 774
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 390 135
Provision for deferred taxes 21 (167)
Deferred compensation expense 32 31
Other compensation expense 42 -
Depreciation 141 115
Securities (gains) losses 7 (23)
Net amortization on securities 83 59
(Increase) decrease in interest receivable (190) (228)
(Increase) decrease in other assets (178) 215
Increase (decrease) in interest, taxes
and other liabilities 45 5
_________ _________
Net Cash Provided by Operating Activities 1,367 916
_________ _________
CASH FLOW FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 3,426 4,569
Proceeds from maturity of securities 3,297 3,319
Purchase of securities (14,580) (12,160)
Net (increase) decrease in Federal funds sold 7,948 5,532
Net (increase) in loans (20,341) (17,555)
Premises and equipment expenditures (1,552) (72)
_________ _________
Net Cash used in Investing Activities (21,802) (16,367)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 12,156 8,258
Net increase in demand, savings, and other deposits 4,793 7,556
Net increase (decrease) in short-term borrowings 2,216 1,240
Net increase in long-term debt 881 -
Proceeds from issuance of common stock 17 5
_________ _________
Net Cash Provided by Financing Activities 20,063 17,059
_________ _________
Net Increase in Cash and Cash equivalents (372) 1,608
Cash and Cash Equivalents at Beginning of Year 8,008 5,618
_________ _________
Cash and Cash Equivalents at End of Quarter $ 7,636 $ 7,226
_________ _________
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 - - 774 -
Proceeds from sale
of stock 5 - - -
Stock Options
Outstanding - 40 - -
Unrealized gains
(losses) - - - (259)
_______ _______ _______ _______
Balance, 06/30/96 $ 3,049 $ 5,160 $ 5,404 $ (241)
_______ _______ _______ _______
Balance, 01/01/97 $ 3,054 $ 5,187 $ 6,394 $ (18)
Net Income - - 974 -
Proceeds from sale
of stock 17 - - -
Stock Options
Outstanding - 42 - -
Unrealized gains
(losses) - - - 98
_______ _______ _______ _______
Balance, 06/30/97 $ 3,071 $ 5,229 $ 7,368 $ 80
_______ _______ _______ _______
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>7
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 that 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 six months ended June 30 follows:
<TABLE>
1997 1996
____ ____
<S> <C> <C>
Balance, January 1 $ 1,072 $ 908
Provision 390 135
Recoveries 7 9
Charge-offs 148 166
_______ _______
Balance, June 30 $ 1,321 $ 886
</TABLE>
Note 3. Regulators of the corporation and its subsidiaries have
implemented risk-based capital guidelines which requires 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
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 June 30, 1997.
<TABLE>
Combined
Entity Tier 1 Capital Leverage
______ ______ ________ ________
<C> <C> <C> <C>
Highlands Bankshares, Inc. 9.60% 10.41% 6.96%
Highlands Union Bank 9.26% 10.07% 6.78%
</TABLE>
<PAGE>8
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 June 30, 1997 reflected
net income of $974 thousand, an increase of 25.84% over net income reported
for the corresponding period in 1996. Operating results of the Company
when measured as a percentage of average equity reveals an increase in
return on average equity from 11.42% for the six-month period in 1996
to 12.62% for the corresponding period in 1997.
Return on average assets at .87% remain unchanged from the comparable 1996
period. The increase in the return on average equity is the result of
a higher net income for the 1997 second quarter over the corresponding 1996
second quarter.
Net interest income for the six months ended June 30, 1997
increased 27.40%, approximately $858 thousand over the comparable
1996 period. Average interest-earning assets increased approximately
$45.90 million from June 30, 1996 to the current period while
average interest-bearing liabilities increased $40.57 million during the
same comparative period. The yield on average interest-earning assets
decreased 22 basis points to 8.36% in 1997 as compared to 8.54% in
1996. The yield on average interest-bearing liabilities decreased 12 basis
points to 5.37% in 1997 as compared to 5.49% in 1996.
Through the second quarter of 1997, provision for possible loan losses
totaled $390 thousand, a $255 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 second quarter of
1997 were $141 thousand compared with $157 thousand in 1996. Net charge-offs
were .08% of total loans for the quarter ended June 30, 1997 as compared to
.13% for the 1996 quarter end. Loan loss reserves increased 49.10% over
June 30, 1996 to $1,321 thousand at June 30, 1997. Reserves as of June 30,
1997 represent .75% of total loans versus .67% at June 30, 1996.
Financial Position
Total loans have increased from $131.3 million at June 30, 1996 to
$175.2 million at June 30, 1997. The loan to deposit ratio has
increased from 80.47% at June 30, 1996 to 84.85% at June 30, 1997.
Loan demand continues at a high pace even with a competitive market
area.
<PAGE>9
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 $823 thousand at June 30, 1997
or .47% of total loans, compared with $254 thousand at June 30, 1996.
Securities totaled $39.3 million (market value) at June 30, 1997 which
reflects an increase of $3.2 million or 8.86% from the June 30, 1996
total of $36.1 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 June 30, 1997 are comprised
of U.S. Treasuries, approximately 7.63% of the total securities portfolio,
obligations of the U.S. Government Agencies, approximately 87.15% of the total
securities portfolio, municipal issues, approximately 2.46% of the securities
portfolio,and equity securities, approximately 2.76% 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 $15.8 million at June
30, 1997, representing an increase of $2.4 million or 17.79% over
June 30, 1996. The Company maintains a significant level of liquidity
in the form of cash and cash equivalents ($7.6 million at June 30, 1997), and
investment securities available for sale ($39.3 million). Cash is
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>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) The Annual Meeting of Stockholders was held on May 14, 1997.
(b) The following directors were elected to serve a one-year term
to the date of the 1998 Annual Meeting of Stockholders:
Votes Votes
Director's Name Votes For Against Withheld
_______________ _________ _______ ________
James D. Morefield 897,628 0 2,188
James D. Moore, Jr. 897,128 500 2,188
J. Carter Lambert 897,628 0 2,188
Clydes B. Kiser 897,628 0 2,188
William E. Chaffin 897,628 0 2,188
William J. Singleton 897,628 0 2,188
Verne D. Kendrick 897,878 750 2,188
Charles P. Olinger 897,628 0 2,188
H. Ramsey White, Jr. 897,628 0 2,188
(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: August 8, 1997 /S/ Samuel L. Neese
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: August 8, 1997 /S/ James T. Riffe
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<PAGE>12
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HIGHLANDS BANKSHARES INC /VA/ CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> $ 7,636
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,262
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 175,151
<ALLOWANCE> 1,321
<TOTAL-ASSETS> 229,066
<DEPOSITS> 206,420
<SHORT-TERM> 2,287
<LIABILITIES-OTHER> 1,872
<LONG-TERM> 2,739
0
0
<COMMON> 3,071
<OTHER-SE> 12,677
<TOTAL-LIABILITIES-AND-EQUITY> 229,066
<INTEREST-LOAN> 7,578
<INTEREST-INVEST> 1,236
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,814
<INTEREST-DEPOSIT> 4,731
<INTEREST-EXPENSE> 4,824
<INTEREST-INCOME-NET> 3,990
<LOAN-LOSSES> 390
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 2,470
<INCOME-PRETAX> 1,484
<INCOME-PRE-EXTRAORDINARY> 974
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 974
<EPS-PRIMARY> .79
<EPS-DILUTED> .77
<YIELD-ACTUAL> 8.36%
<LOANS-NON> 386
<LOANS-PAST> 437
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,072
<CHARGE-OFFS> 148
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 1,321
<ALLOWANCE-DOMESTIC> 1,321
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
