Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended: Commission File
December 31, 1996 Number: 430893107
----------------- ---------
Highlands Bankshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1796693
- -------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
340 West Main Street
Abingdon, Virginia 24210-1128
- ------------------ ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (540)628-9181
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
--------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 par value
-----------------------------
(Title of Class)
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes_X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of December 31, 1996, there were 1,221,788 shares of Common Stock
outstanding.
<PAGE>
Documents Incorporated by Reference
List hereunder the following documents if incorporated by reference and the Part
of Form 10-K into which the documents are incorporated:
(1) Part II incorporates information by reference from the registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1996.
(2) Part III incorporates by reference from the registrant's proxy statement
for its Annual Meeting of Stockholders scheduled for May 14, 1997.
(3) Part IV incorporates by reference from: (i) the registrant's Annual Report
to Stockholders for the fiscal year ended December 31, 1996, and (ii) the
registrant's proxy statement for its Annual Meeting of Stockholders
scheduled for May 14, 1997.
2
<PAGE>
Part I.
Item I. Business
General
Highlands Bankshares Inc. (the "Corporation") was incorporated in
Virginia in 1995 to serve as the holding company for Highlands Union Bank, (the
"Bank"). The stockholders of the Bank approved the Plan of Reorganization at the
Annual Meeting on December 13, 1995, and the reorganization was consummated on
December 29, 1995 with the Bank becoming a wholly-owned subsidiary of the
Corporation. The Bank is a state charted bank with principal offices in
Abingdon, Virginia. The Bank was incorporated in 1985.
At December 31, 1996, the Corporation had total assets of $207,739,000,
deposits of $189,471,000, and net worth of $14,617,000.
The Corporation's principal business activities, which are conducted
through the Bank, are attracting checking and savings deposits from the general
public through its retail banking offices and originating and servicing loans
secured by first mortgage liens on single-family dwellings, including
condominium units. All of the retail banking offices are located in Virginia.
The Corporation also lends funds to retail banking customers by means of home
equity and installment loans, and originates residential constructions loans and
loans secured by commercial property, multi-family dwellings and manufactured
housing units. The Corporation invests in certain U.S. Government and agency
obligations and other investments permitted by applicable laws and regulations.
The operating results of the Corporation are highly dependent on net interest
income, the difference between interest income earned on loans and investments
and the cost of checking and savings deposits and borrowed funds.
The Bank is a member of the Federal Deposit Insurance Corporation
("FDIC"), and it's deposit accounts are insured up to $100,000 as applied by
FDIC guidelines. The Bank is also a member of the Federal Reserve System, as
such, the Bank and the Corporation are subject to the supervision, regulation
and examination of the Federal Reserve. As a Virginia state chartered bank the
Bank is also subject to supervision, regulation and examination by the Virginia
State Corporation Commission.
The Corporation's only direct subsidiary is the Bank and the
Corporation has no material assets or liabilities, except for the stock of the
Bank.
The Corporation operates four full service and one express facility
throughout Washington County and the City of Bristol, Virginia.
The results of operations for the fiscal years ended December 31, 1996,
1995, and 1994 ("fiscal year 1996", "fiscal year 1995" and "fiscal year 1994",
respectively) reflect the Corporation's strategies of expanding its community
banking operations.
See "Management's Discussion and Analysis" of operations and financial
condition, included as part of the Annual Report to Stockholders, for a detailed
discussion of certain aspects of the Corporation's business.
Lending Activities
Residential Mortgage Lending
The Corporation's lending policy is generally to lend up to 80% of the
appraised value of residential property. The Corporation lends up to 95% of the
appraised value with the normal requirement of insurance from private mortgage
insurance companies. This insurance normally covers amounts in excess of 80%
loan to value up to 95%.
The in-house residential mortgages are comprised of primarily one,
three and five year adjustable rate mortgages and a relatively small number of
15 year fixed rate mortgages. Adjustable rate mortgages are indexed to 275 basis
points over the average yield on United States Treasury securities adjusted to a
3
<PAGE>
constant maturity of one, three or five years. An adjustment limitation
(increase or decrease) of 2% per annum or 4% over the life of the loan is
included in the three and five year adjustable rate mortgages.
The corporation's existing loan contracts generally provide for
repayment of residential mortgage loans over periods ranging from 15 to 30
years. However, such loans normally have remained outstanding for much shorter
periods of time as borrowers refinance or prepay their loans through the sale of
their homes.
Most of the Corporation's residential mortgage loans have "due on sale"
clauses which allows the creditor the right to declare a loan immediately due
and payable in the event the borrower sells or otherwise disposes of the real
property. Most of the Corporation's residential mortgage loans are not
assumable.
Mortgage loans exceeding $450,000 but less than $750,000 must be
approved by the loan committee of the Board of Directors. Mortgage loans in
excess of $750,000 must be approved by the Board of Directors.
All of the Corporation's mortgage lending is subject to loan
origination procedures established by the Board of Directors. Most originations
require a property valuation by state licensed appraisers, for a fee, approved
by the Board of Directors. Loan applications are obtained to determine the
borrowers ability to repay. Significant items are verified through the use of
credit reports, financial statements, etc.
It is generally the Corporation's policy to require title insurance on
first mortgage loans in excess of $100,000 (lower where deemed necessary). It is
also generally policy to require an attorney's opinion statement on all first
mortgage deeds of trust. Fire and casualty insurance (extended coverage) is
generally required on all property serving as security for these loans. Hazard
insurance and flood insurance (where required) is generally provided by customer
prior to closing of the loan. The borrower is generally responsible for paying
insurance premiums and real estate taxes.
Federal regulations allow the Corporation to originate loans on real
estate within the State of Virginia, and within limits, to originate and
purchase loans or loan participations secured by real estate located in any part
of the United States. During fiscal year 1996 the Corporation's primary lending
area was Washington County and the City of Bristol, Virginia.
Residential loan originations come from many sources. Some of these
sources include existing customers, walk-in applications, referrals from real
estate brokers and others.
Federal regulation limits loans to one borrower to a maximum of 15% of
unimpaired capital and unimpaired surplus of the Bank.
The Corporation receives fees in addition to interest in connection
with real estate loan originations, loan modifications, late payments, etc.
Income from these activities varies from period to period depending on the
volume and type of loan made. Although not a significant portion of the
Corporation's income, late charges are received when monthly payments are
delinquent but are later paid.
The Corporation also offers secondary market fixed rate mortgages with
terms up to 30 years and up to 95%loan to value. These loans and servicing
rights generally sold immediately into the secondary market and fees received
booked into income. These loans must meet certain criteria generally set by the
secondary market and are not a significant portion of the Bank's residential
mortgage activity.
Residential mortgages made up approximately 35.54% of the loan
portfolio as of December 31, 1996.
Construction and Commercial Real Estate Lending
The Corporation generally makes construction loans for periods up to
one year on residential and commercial real estate property. These loans are for
interim financing and are either paid off or converted to permanent financing
when completed. At December 31, 1996 outstanding construction loans (net of
undisbursed funds) totaled $2,382,000. These loans are generally made at 80% or
less of appraised value at completion. Funds are advanced as the project is
completed after an inspection by a staff inspector or the appraiser as deemed
appropriate. These loans are made based on established corporate underwriting
standards. Most of these construction loans are one to four family dwellings.
The Corporation generally charges a 1% origination fee on these construction
loans in addition to applicable interest.
Loans on commercial properties, multi-family dwellings, and apartment
buildings are typically made at 75% to 80% of the appraised value. These loans
totaled $42,207,000 or 27.13% of total loans held for investment at December 31,
1996.
Commercial and construction loans, by nature, entail additional risk as
compared to residential mortgage lending. They are generally more complex and
involve larger balances than typical residential mortgages. Payments are
typically dependent upon successful operation of a related real estate project
or business as compared to individual earnings on most residential mortgages.
Therefore, the market risk is
4
<PAGE>
somewhat greater. Construction delays, cost overruns or the inability of the
contractor to sell the finished product add an element of risk to such lending.
Consumer lending
The Corporation offers other types of loans in addition to real estate
mortgage and construction loans. Consumer loans of many types are offered by the
Corporation. Some of these loans are loans to purchase automobiles, boats,
recreational vehicles and manufactured housing, as well as other secured and
unsecured consumer loans. The Corporation further makes loans secured by savings
accounts at 2% above the rate of the savings instrument. The terms generally do
not exceed ten years for manufactured housing loans and five years on other
consumer loans. Outstanding consumer loans at December 31, 1996 were
$30,656,000.
Commercial and agriculture non-real estate loans
The Corporation also makes commercial (including agriculture) non-real
estate loans. These loans in general have higher risk associated with them than
real estate loans. They are generally secured by inventory, equipment, accounts
receivable, etc., or unsecured in some cases backed by appropriate financial
condition as per the underwriting standards of the Corporation. Agriculture
loans are generally secured by machinery, equipment, other miscellaneous assets
or unsecured in keeping with the underwriting standards of the Corporation. The
timely pay back is dependent upon the successful operation of the business or
farm. The outstanding balance of non-real estate commercial loans was
$20,370,000 at December 31, 1996 and the outstanding balance of non-real estate
agriculture loans was $1,700,000 at December 31, 1996.
Investments
Investment Securities
The Corporation invests in mortgage-backed securities, agency notes and
bonds, collateralized mortgage obligations (CMO's), municipal bonds, equity
securities and United States Treasury Notes.
A substantial portion of the mortgage-backed security portfolio
consists of securities that are either insured or guaranteed by FHLMC, FNMA or
GNMA. Guaranteed securities are more liquid than individual mortgage loans. At
December 31, 1996 the Corporation's mortgage-backed securities portfolio had a
carrying value of $22,645,000 or 10.90% of total assets compared to $15,530,000
or 9.55% of total assets at December 31, 1995. Amortized costs of
mortgage-backed securities were $22,634,000 at December 31, 1996 and $15,582,000
for the comparable 1995 period. Due to repayments and prepayments of the
underlying loans, the actual maturities of mortgage-backed securities are
expected to be substantially less than the scheduled maturities.
The Corporation also holds investments in CMO's with a market value at
December 31, 1996 of $498,000 and amortized cost of $506,000 compared to a
market value of $503,000 and amortized cost of $506,000 at December 31, 1995.
The Corporation had $998,000 and $2,988,000 invested in United States
Treasury Notes at December 31, 1996 and 1995 respectively. These investments
represented approximately .48% and 1.84% of total assets at those dates.
The Corporation had $3,643,000 and $8,140,000 in United States
Government-sponsored Agency Obligations at December 31, 1996 and 1995
respectively. These investments represent approximately 1.67% and 5.01% of total
assets at those dates.
The Corporation holds the following equity investments: Federal Reserve
Bank Stock of $246,000 and $245,000 as of December 31, 1996 and 1995
respectively; Federal Home Loan Bank Stock of $560,000 and $470,000 for the same
dates as above; and Virginia Bankers' Bank Stock of $55,000 and $44,000 for the
same dates as above.
5
<PAGE>
The Corporation also holds investments in municipal bonds of $1,031,000
and $1,407,000 as of December 31, 1996 and 1995 respectively. These investments
represented approximately 0.50% and 0.87% of total assets at those dates.
Investment Activities
Under Federal Reserve regulations, the Bank is required to maintain
certain liquidity ratios and does so by investing in certain obligations and
other securities which qualify as liquid assets under Federal Reserve
regulations. See "Regulation". As a state chartered bank, the Bank's investment
authority is limited by federal law which permits investment in, among other
things, certain certificates of deposit issued by commercial bank, banker's
acceptances, loans to commercial banks for Federal Funds, United States
government and agency obligations of state governments, and corporate bonds.
The Corporation's investment committee, which meets monthly, follows
Federal Reserve guidelines with respect to portfolio investment and accounting.
Such Federal Reserve guidelines state that insured institutions must account for
securities held for investment, sale and/or trading in accordance with generally
accepted accounting principles. The Corporation maintains a written investment
policy to set forth investment portfolio composition and investment strategy.
The investment portfolio composition policy considers, among other factors, the
financial condition of the institution, the types of securities, amounts of
investments in those securities and safety and soundness considerations
pertaining to the institution. The investment strategy considers, among other
factors, interest rate risk, anticipated maturity of each type of investment and
the intent of the institution with respect to each investment.
Sources of Funds
General
Deposit accounts have traditionally been the principal source of the
Corporation's funds for use in lending and for other general business purposes.
In addition to deposits, the Corporation derives funds from loan repayments,
FHLB advances and loan participation sales. Borrowings may be used on a
short-term basis to compensate for seasonal or other reductions in deposits or
inflows at less than projected levels, as well as on a longer term basis to
support expanded lending activities.
Deposit Activities
The Corporation, in its continuing effort to remain a competitive force
in its markets, offers a wide variety of deposit services, with varied
maturities, minimum-balance requirements and market-sensitive interest rates
that are attractive to all types of depositors. The Corporation's deposit
products include checking accounts, passbook savings accounts, money market
deposit accounts, negotiable orders o f withdrawal accounts, individual
retirement accounts and certificates of deposit accounts. The Corporation is
able to offer a broad array of products that are consistent with current Federal
Reserve regulations, and as a major result, the Corporation's deposit portfolio
is, for the most part, sensitive to general market fluctuations.
6
<PAGE>
The following table sets forth the various types of accounts offered by the
Corporation at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Minimum Amount
Interest Balance In % of
Type of Account Rate Term Deposit Thousands Total
- --------------- ---- ---- ------- --------- -----
<S> <C> <C> <C> <C> <C>
Checking Account 0.00% none $ 100.00 $ 26,003 13.72%
Interest Checking 3.48 none 100.00 7,857 4.15
Passbook Accounts 4.01 none 25.00 21,911 11.57
Money Market
Deposit Accounts 3.76 none 500.00 5,522 2.91
Christmas Club Accts 4.02 none 5.00 19 0.01
Individual Retirement
Accounts 6.57 various 500.00 17,019 8.98
Certificates of Deposit
Accounts 5.78 various 500.00 111,140 58.66
------- -----
Totals $189,471 100.00%
-------- ------
</TABLE>
The variety of deposit accounts offered by the Corporation and the
competitive rates paid on these deposit accounts has increased the Corporation's
ability to retain deposits and has allowed it to be more competitive in
obtaining new funds, reducing the threat of disintermediation (the flow of funds
away from deposit institutions into direct investment vehicles such as
government and corporate securities). As customers have become more rate
conscious and willing to move funds to higher yielding accounts, the ability of
the Corporation to attract and maintain deposits and the Corporation's cost of
funds have been, and will continue to be, significantly affected by money market
conditions.
The following table sets forth information relating to the
Corporation's deposits flows during the years indicated.
Years Ended December 31
(In Thousands) 1996 1995 1994
- -------------- ----- ---- ----
Increase (decrease) in deposits before
interest credited $35,813 $25,086 $19,107
Interest credited 6,331 4,927 3,354
------- ------- -------
Net increase in deposits 42,144 30,013 22,461
------- ------- -------
Total deposits at year end $189,471 $147,327 $117,314
------- ------- -------
Borrowings
The Corporation may obtain advances from the FHLB upon the security of
the capital stock it owns in the bank and certain of its home mortgage loans
provided certain standards related to creditworthiness have been met. Such
advances may be made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities and the FHLB
prescribes the acceptable uses to which the advances pursuant to each program
may be used, as well as limitations on the size of such advances. Depending on
the program, such limitations are based either on a fixed percentage of the
Corporation's net worth or on the FHLB's assessment of the Corporation's
creditworthiness. The FHLB is required to review its credit limitations and
standards at least once every six months. FHLB advances have from time been
available to meet seasonal and other withdrawals of savings accounts and to
expand lending.
7
<PAGE>
The Bank also has established credit arrangements with several of it's
correspondent banks. At December 31, 1996 the Bank had approximately $48,942,000
of unused lines of credit, including FHLB unused lines of credit, to fund any
necessary cash requirements.
The following table sets forth certain information as to the
Corporation's advances and other borrowings at the dates indicated. See Notes 8
and 14 to the Consolidated Financial Statements, included as part of the Annual
Report to Stockholders, for information as to rates, maturities, average
balances and maximum amounts outstanding.
December 31
(In Thousands) 1996 1995 1994
- -------------- ---- ---- ----
Advances from FHLB $1,929 $1,000 $-0-
Other borrowings -0- -0- 725
------ ------ ----
Total borrowings $1,929 $1,000 $725
Employees
The Corporation at December 31, 1996, had 103 full time employees. None
of these employees are represented by a collective agent, and the Corporation
believes its employee relations are excellent.
Competition
The Corporation encounters competition for both deposits and loans. For
deposits, competition comes from other commercial banks, savings and loan
associations and/or savings banks, mutual money market funds, credit unions and
various other corporate and financial institutions. Competition also comes from
interest paying obligations issued by various levels of government and from a
variety of securities paying dividends or interest. Competition for loans comes
primarily from other commercial banks, savings and loan associations and/or
savings banks, insurance companies, mortgage companies and other lending
institutions.
Subsidiaries
The Corporation was incorporated in Virginia in 1995 to serve as the
holding company for the Bank. The Bank is a state chartered bank with principal
offices in Abingdon, Virginia. The Bank was incorporated in 1985 under the laws
of the Commonwealth of Virginia.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
System is regulated by the Federal Housing Finance Board ("FHFB"). The FHFB is
composed of five members, including the Secretary of Housing and Urban
Development and four private citizens appointed by the President with the advice
and consent of the Senate for terms of seven years. At least one director must
be chosen from organizations with more than a two-year history of representing
consumer or community interests on banking services, credit needs, housing or
financial consumer protections.
The Bank, as a member of the FHLB of Atlanta, is required to purchase
and maintain stock in its bank in an amount as if 30 percent of the member's
assets were home mortgage loans.
The FHFB is required to adopt regulations establishing standards of
community investment or service for members of the Federal Home Loan Banks as a
condition for continued access to advances. The regulations are to take into
account the record of performance of the institution under the Community
Reinvestment Act of 1977 and its record of lending to first time home buyers.
In addition, new collateral requirements for advances are to be
established which will be designed to insure credit quality and marketability of
the collateral.
8
<PAGE>
Regulation
General
The Corporation and it's subsidiary are subject to the supervision,
regulation and examination of the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the state regulators of the Commonwealth of Virginia
which has jurisdiction over financial institutions and has obtained regulatory
approval for it's various activities to the extent required.
Federal and State Laws and Regulations
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in it's entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Corporation and
it's subsidiary.
Bank Holding Company Regulation
The Corporation is registered as a "bank holding company" with the
Board of Governors of the Federal Reserve System ("Federal Reserve"), and is
subject to supervision by the Federal Reserve under the Bank Holding Corporation
Act ("BHC Act"). The Corporation is required to file with the Federal Reserve
periodic reports and such additional information as the Federal Reserve may
require pursuant to the BHC Act. The Federal Reserve examines the Corporation
and the subsidiary bank.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
of the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of the voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for it's
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Bank Regulation
The Bank, as a state chartered member of the Federal Reserve Systems,
is subject to regulation and examination by the Virginia State Corporation
Commission and the Federal Reserve Board. In addition, the Bank is subject to
the rules and regulations of the Federal Deposit Insurance Corporation, which
currently insures the deposits of each member bank to a maximum of $100,000 per
depositor.
The commercial banking business is affected by the monetary policies
adopted by the Federal Reserve Board. Changes in the discount rate on member
bank borrowings, availability of borrowing at the "discount window", open market
operations, the imposition of any changes in reserve requirements against member
banks' deposits and certain borrowings by banks and their affiliates, and the
limitation of interest rates which member banks may pay on deposits are some of
the instruments of monetary policy available to the Federal Reserve Board. Taken
together, these controls give the Board a significant influence over the growth
and profitability of all banks. Management of the Bank is unable to predict how
the Board's monetary policies (or the fiscal policies or economic controls
imposed by Federal or state governments) will affect the business and earnings
of the Bank or the Corporation, or what those policies or controls will be.
The references in this section to various aspects of supervision and
regulation are brief summaries which do not purport to be complete and which are
qualified in their entirety by reference to applicable laws, rules and
regulations.
9
<PAGE>
Federal Deposit Insurance Corporation Improvement Act
The difficulties encountered nationwide by financial institutions
during 1990 and 1991 prompted federal legislation designed to reform the banking
industry and to promote the viability of the industry and of the deposit
insurance system. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), which became effective on December 19, 1991, bolsters the
deposit insurance fund, tightens bank and thrift regulation and trims the scope
of federal deposit insurance as summarized below.
FDICIA requires each federal banking regulatory agency to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate exposure; (v) asset growth; (vi) compensation, fees and
benefits; and (vii) such other operational and managerial standards as the
agency determines to be appropriate. The compensation standards would prohibit
employment contracts, compensation or benefit arrangements, stock option plans,
fee arrangements or other compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material financial loss. In
addition, each federal banking regulatory agency must prescribe by regulation
standards specifying (i) a maximum ration of classified assets to capital; (ii)
minimum earnings sufficient to absorb losses without impairing capital; (iii) to
the extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies; and (iv) such other standards relating to asset quality, earnings and
valuation as the agency determines to be appropriate. If an insured institution
fails to meet any of the standards promulgated by regulation, then such
institution will be required to submit a plan to its federal regulatory agency
specifying the steps it will take to correct the deficiency.
Prompt corrective action measures adopted in FDICIA and which became
effective on December 19, 1992, impose significant new restrictions and
requirements on depository institutions that fail to meet their minimum capital
requirements. Under new Section 38 of the Federal Deposit Insurance Act ("FDI
Act"), the federal banking regulatory agencies have developed a classification
system pursuant to which all depository institutions are placed into one of five
categories based on their capital levels and other supervisory criteria: well
capitalized, adequately capitalized; undercapitalized; significantly
undercapitalized; and critically undercapitalized.
The Bank exceeded all of its regulatory capital requirements and met
the requirements at December 31, 1996 to be classified as "well capitalized".
This classification is determined solely for the purposes of applying the prompt
corrective action regulations and may not constitute an accurate representation
of the Corporation's overall financial condition.
An undercapitalized depository institution is required to submit a
capital restoration plan to its principal federal regulator. The federal banking
agencies may not accept a capital plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital and is guaranteed by the parent
holding company. If a depository institution fails to submit an acceptable plan,
it will be treated as if it were significantly undercapitalized.
Unless its principal federal regulator has accepted its capital plan,
an undercapitalized bank may not increase its average total assets in any
calendar quarter. If an undercapitalized institution's capital plan has been
accepted, asset growth will be permissible only if the growth is consistent with
the plan and the institution's ratio of tangible equity to assets increases
during the quarter at a rate sufficient to enable the institutions to become
adequately capitalized within a reasonable time.
An institution that is undercapitalized may not solicit deposits by
offering rates of interest that are significantly higher than the prevailing
rates on insured deposits in the institution's normal market areas or in the
market area in which the deposits would otherwise be accepted.
An undercapitalized may not branch, acquire an interest in another
business or institution or enter a new line of business unless its capital plan
has been accepted and its principal federal regulator approves the proposed
action.
10
<PAGE>
An insured depository institution may not pay management fees to any
person having control of the institution nor may an institution, except under
certain circumstances and with prior regulatory approval, make any capital
distribution if, after making such payment or distribution, the institution
would be undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to appointment of a
receiver or conservator.
If its principal federal regulator determines that an adequately
capitalized institution is in an unsafe or unsound condition or is engaging in
an unsafe or unsound practice, it may require the institution to submit a
corrective action plan, restrict its asset growth and prohibit branching, new
acquisitions and new lines of business. An institution's principal federal
regulator may deem it to be engaging in an unsafe or unsound practices if it
receives a less than satisfactory rating for asset quality, management, earnings
or liquidity in its most recent examination.
In addition, regulators must draft a new set of non-capital measures of
bank safety, such as loan underwriting standards and minimum earnings levels, to
take effect December 1, 1993. The legislation also requires regulators to
perform annual on-site bank examinations, place limits on real estate lending by
banks and tightens auditing requirements.
Federal And State Taxation
General
The following discussion of federal taxation is a summary of certain
pertinent federal income tax matters as they pertain to the Corporation. With
some exceptions, including particularly the reserve for bad debts discussed
below, the Corporation is subject to federal income tax under the Internal
Revenue Code of 1986 (the "Code") in the same general manner as other
corporations.
Bad Debt Reserves
Commercial banks such as the Bank, which meet certain definitional
tests primarily relating to their assets and the nature of their businesses, are
permitted to establish a reserve for bad debts and to make annual additions to
the reserve. These additions, may within specified formula limits, be deducted
in arriving at the Bank's taxable income. For purposes of computing the
deductible addition to its bad debt reserve, the Bank utilizes the experience
method.
Under the experience method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (1) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years to bear to the sum
of the loans outstanding at the close of those six years or (2) the lower of (a)
the balance in the reserve account at the close of the last taxable year prior
to the most recent adoption of the experience method (the base year is the last
taxable year beginning before 1988), or (b) if the amount of loans outstanding
at the close of the taxable year is less than the amount of loans outstanding at
the close of the base year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans outstanding at the close
of the base year.
The experience and percentage of taxable income methods are not
available after fiscal year 1996; instead, bad debts after fiscal year 1996 will
be deductible at the time they are charged-off.
Minimum Tax
A 20% corporate alternative minimum tax generally will apply to a base
of regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI") and will be payable to the extent such AMTI is in
excess of an exemption amount. The Code provides that an item of tax preference
is the excess of the bad debt deduction over the amount allowable under the
experience method. The other items of tax preference that constitute AMTI
include (a) tax-exempt interest on newly-issued (generally,
11
<PAGE>
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) 75% of adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses).
Other
For federal income tax purposes, the Corporation reports its income and
expenses on the accrual basis method of accounting and uses a year ending
December 31 for filing its income tax returns. The Corporation may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding fifteen taxable years.
The Commonwealth of Virginia imposes an income tax on corporations
domiciled in the state. The Virginia taxable income is based on the federal
taxable income with certain adjustments for interest and dividend income on
obligations of securities of the United States and states other than Virginia.
The tax rate is 6% of taxable income.
See Note 9 to the Consolidated Financial Statements, included as part
of the Annual Report to Stockholders, for additional information regarding the
income taxes of the Company.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(Dollars in Thousands)
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
(taxable-equivalent
basis (1) :
Loans (net of un-
earned discount) (2) $131,449 $12,310 9.36% $102,216 $ 9,590 9.38% $ 78,590 $6,765 8.61%
Securities (3) 34,350 2,082 6.06 30,079 1,793 5.96 29,643 1,584 5.34
Federal funds sold 3,822 204 5.34 3,686 202 5.48 2,099 76 3.62
----- --- ---- ----- --- ---- ----- -- ----
Total interest-earning
assets $169,621 $14,596 8.61% $135,981 $11,585 8.52% $110,332 $8,425 7.64%
-------- ------- ---- -------- ------- ---- -------- ------ ----
LIABILITIES
Interest-bearing
liabilities :
Savings & time dep. $142,331 $ 7,714 5.42% $113,215 $ 6,086 5.38% $ 91,032 $3,967 4.36%
Other interest-bearing 1,803 108 5.99 1,198 75 6.34 390 18 4.62
----- --- ---- ----- -- ---- --- -- ----
liabilities
Total interest-bearing
liabilities $144,134 $ 7,822 5.43% $114,413 $ 6,161 5.38% $ 91,422 $3,985 4.36%
-------- ------- ---- -------- ------- ---- -------- ------ ----
Net interest income $ 6,774 $ 5,424 $4,440
Net margin on int.
earning assets on a
tax equivalent basis 3.99% 3.99% 4.02%
Average interest
spread 3.18% 3.14% 3.28%
</TABLE>
(1) Tax equivalent adjustments (using 34% federal tax rates) have been made in
calculating yields on tax-free loans and investments. Virginia banks are
exempt from state income tax.
(2) For the purposes of these computations, non-accruing loans are included in
the daily average loan amounts outstanding.
(3) The yield on securities classified as available for sale is computed based
on the average balance of the historical amortized cost balance without the
effects of the fair value adjustment required by FAS115
12
<PAGE>
As the largest component of income, net interest income represents the
amount that interest and fees earned on loans and investments exceeds the
interest costs of funds used to support these earning assets. Net interest
income is determined by the relative levels, rates and mix of earning assets and
interest-bearing liabilities. The following table attributes changes in net
interest income either to changes in average volume or to changes in interest
due to both rate and volume has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase Increase Increase Increase
(decrease) due (decrease) due (decrease) due (decrease) due
to change in to change in Net increase to change in to change in Net increase
Increase (Decrease) in volume rate (decrease) volume rate (decrease)
- ---------------------- ------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Securities.................... $ 288 $ 1 $ 289 25 $ 184 $ 209
Federal funds sold............ 7 (5) 2 57 69 126
Loans......................... 2,742 (22) 2,720 2,034 791 2,825
------- ------- --------- ----- --------- ---------
Total Income Change $ 3,037 $ (26) $ 3,011 2,116 $ 1,044 $ 3,160
------- ------- --------- ----- --------- ---------
INTEREST EXPENSE
Savings and time
deposits................... $ 1,566 $ 62 $ 1,628 967 $ 1,152 $ 2,119
Other interest-bearing
liabilities................ 38 (5) 33 37 20 57
------- ------- --------- ----- --------- ---------
Total Expense Change $ 1,604 $ 57 $ 1,661 1,004 $ 1,172 $ 2,176
------- ------- --------- ----- --------- ---------
Increase (Decrease) in
Net Interest Income $ 1,433 $ (83) $ 1,350 1,112 $ (128) $ $984
------- ------- --------- ----- --------- ---------
</TABLE>
Investment Portfolio
The following table presents the maturity distribution, market value,
book value and approximate tax equivalent yield (assuming a 34% federal income
tax rate) of the investment portfolio at December 31, 1996.
(Dollars in Thousands)
<TABLE>
<CAPTION>
One Year Five Years
Within One Through Through After Ten Total Book Market
Year Five Years Ten Years Years Yield Value Value
---- ---------- --------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S.T.N.'s $ 500 $ 498 $ -0- $ -0- 5.08% $ 1,003 $ 998
U.S. Gov Agency 1,246 5,863 1,184 20,162 5.70 28,505 28,455
State & Muni's 65 148 818 -0- 6.99 1,004 1,031
Other -0- -0- -0- 861 6.75 861 861
------ ------ ------ ------- ------- ------- -------
TOTAL $1,811 $6,509 $2,002 $21,023 6.06 $31,373 $31,345
------ ------ ------ ------- ------- ------- -------
</TABLE>
13
<PAGE>
Loan Portfolio
The table below classifies loans, net of unearned income, by major
category and percentage distribution at December 31, 1996 for each of the past
three years:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands)
1996 1995 1994
Description Amount Percentage Amount Percentage Amount Percentage
- ----------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 20,365 13.14% $ 12,699 11.16% $ 8,538 9.11%
Real Estate $101,491 65.50 76,516 67.27 62,903 67.11
Consumer 30,128 19.44 21,785 19.15 20,131 21.47
Other 2,967 1.92 2,743 2.41 2,166 2.31
----- ---- ----- ---- ----- ----
Total $154,951 100.00% $113,743 100.00% $93,738 100.00%
-------- ------ -------- ------ ------- ------
</TABLE>
The following table shows the maturity of loans outstanding as of
December 31, 1996. Also provided are the amounts due after one year classified
according to the sensitivity to changes in interest rates. Loans are classified
based upon the period in which the final payment is due.
December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fixed Floating Fixed Floating Fixed Floating
Rate Rate Rate Rate Rate Rate Total
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 9,355 $ 8,148 $ 2,459 $ 42 $ 361 $ -0- $ 20,365
Real Estate 6,305 36,046 37,160 11,403 10,577 -0- 101,491
Consumer 9,580 -0- 20,081 -0- 467 -0- 30,128
Other -0- 2,967 -0- -0- -0- -0- 2,967
------- ----------- ------- ------- ------- ---- ---------
Total $25,240 $ 47,161 $59,700 $11,445 $11,405 $ -0- $ 154,951
------- ----------- ------- ------- ------- ---- ---------
</TABLE>
Non-performing loans
The loan portfolio of the Bank is reviewed regularly by senior officers
to evaluate loan performance. The frequency of the review is based on a rating
of credit worthiness of the borrower utilizing various factors such as net
worth, credit history, customer relationship, etc. The evaluations emphasize
different factors depending upon the type of loan involved. The commercial and
real estate type loans are reviewed on the basis of estimated net realizable
value through an evaluation of collateral and the financial strength of the
borrower. Installment loans are evaluated largely on the basis of delinquency
data because of the large number of such loans and relatively small size of each
individual loan.
Management review of commercial and other loans may result in a
determination that a loan should be placed on a non-accrual of interest basis.
It is the policy of the Bank to discontinue the accrual of interest on any loan
on which full collectability of principal and / or interest is doubtful.
Subsequent collection of interest is recognized as income on a cash basis upon
receipt. Placing a loan on non-accrual status for the purpose of income
recognition is not in itself a reliable indication of potential loss of
principal. Other factors, such as the value of the collateral securing the loan
and the financial condition of the borrower, serve as more reliable indications
of potential loss of principal.
The policy of the Bank is that non-performing loans consist of loans
accounted for on a non-accrual basis and loans which are contractually past due
90 days or more in regards to interest and/ or principal payments. As of the
three periods ended December 31, 1996, 1995 and 1994, non-accrual loans amounted
to $96,000, $235,000 and $0, respectively.
Summary of Loan Loss Experience
The allowance for loan losses is increased by the provision for loan
losses and reduced by loans charged off net of recoveries. The allowance for
loan losses is established and maintained at a level judged by management to be
adequate to cover any anticipated loan losses to be incurred in the collection
of
14
<PAGE>
outstanding loans. In determining the adequate level of the allowance for loan
losses, management considers the following factors: (a) loan loss experience;
(b) problem loans, including loans judged to exhibit potential charge-off
characteristics, loans on which interest is no longer being accrued, loans which
are past due and loans which have been classified in the most recent regulatory
examination; and (c) anticipated economic conditions and the potential impact
these conditions may have on individual classifications of borrowers.
The following table presents the Corporation's loan loss experience for
the past three years:
Years Ended December 31,
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Allowance for loan losses at
beginning of year $ 908 $ 836 $ 782
Loans charged off:
Commercial 170 19 58
Real Estate -0- 122 -0-
Consumer 85 47 29
Other -0- -0- -0-
-------- -------- -------
Total $ 255 $ 188 $ 87
-------- -------- -------
Recoveries of loans previously charged off:
Commercial $ 32 -0- 11
Real Estate -0- 106 -0-
Consumer 13 11 10
Other -0- -0- -0-
-------- -------- -------
Total $ 45 $ 117 $ 21
-------- -------- -------
Net loans charged off $ 210 $ 71 $ 66
Provision for loan losses 374 143 120
-------- -------- -------
Allowance for loan losses end of year $ 1,072 $ 908 $ 836
-------- -------- -------
Average total loans (net of unearned income) $131,449 $103,069 $79,400
Total loans (net of unearned income)
at year-end $154,951 $113,722 $93,738
Ratio of net charge-offs to average loans 0.160% 0.069% 0.083%
Ratio of provision for loan losses to
average loans 0.285% 0.140% 0.150%
Ratio of provision for loan losses to
pet charge-off 178.100% 201.410% 181.820%
Allowance for loan losses to year-end loans 0.690% 0.880% 0.890%
</TABLE>
15
<PAGE>
Allocation of the allowance for loan losses
The following table provides an allocation of the allowance for loan
losses as of December 31, 1996:
Year Ended December 31, 1996
Percent of Loans on each category
(Dollars in Thousands)
Allowance for Percentage of Percentage of
Loan Loss Total Loan Loss Total Loans
------------- --------------- ------------
Commercial $ 451 42.07% 13.09%
Real Estate 162 15.13 65.29
Consumer 404 37.69 19.71
Other 6 0.58 1.91
Unallocated 41 4.53 0.00
------- ------- -------
Total $ 1,072 100.00% 100.00
------- ------- -------
Deposits
The following table provides a breakdown of deposits at December 31 for
the years indicated is as follows:
December 31,
(Dollars in Thousands)
1996 1995 1994
--------- --------- ---------
Non-interest bearing demand deposits $ 26,002 $ 20,203 $ 16,152
Interest bearing demand deposits 13,379 11,665 11,436
Savings deposits 21,930 17,010 18,220
Time deposits 128,160 98,349 71,506
--------- --------- ---------
Total Deposits $ 189,471 $ 147,327 $ 117,314
--------- --------- ---------
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands)
1996 1995 1994
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 22,569 0.00% $ 17,410 0.00% $ 14,218 0.00%
Interest-bearing demand
deposits 12,566 3.60 11,294 3.64 10,673 3.42
Savings deposits 20,516 4.01 16,950 4.48 20,907 3.63
Time deposits 109,246 5.89 84,898 5.89 59,454 4.80
------- ------ ------
Total $164,897 $130,552 $105,252
-------- -------- --------
</TABLE>
16
<PAGE>
The remaining maturities of time deposits at December 31, 1996 are as
follows (in thousands) :
Maturity
3 months or less.............................$ 28,128
Over 3 through 12 months..................... 61,171
Over 12 months............................... 38,861
------
Total $128,160
--------
Interest Rate Sensitivity Analysis
The following table provides the maturities of investment securities,
loans, and deposits as of December 31, 1996, and measures the interest rate
sensitivity gap for each range of maturity indicated:
<TABLE>
<CAPTION>
December 31 1996
(Dollars in Thousands)
Maturing
Within One After One But After Five
Year Within Five Years Years Total
---- ----------------- ----- -----
<S> <C> <C> <C> <C>
ASSETS
Investment Securities $ 22,726 $ 6,114 $ 2,534 $ 31,374
Loans 90,128 58,109 5,642 153,879
Other Assets 15,822 -0- 6,664 22,486
--------- -------- -------- ---------
Total Assets $ 128,676 $ 64,223 $ 14,840 $ 207,739
--------- -------- -------- ---------
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Demand Deposits Non-interest $ 17,677 $ 8,557 $ -0- $ 26,234
All Interest-bearing Deposits 103,607 57,780 2,098 163,485
Other Liabilities 71 -0- 3,332 4,003
Shareholders' Equity -0- -0- 14,617 14,617
--------- -------- -------- ---------
Total Liabilities and Shareholders'
Equity $ 121,355 $ 66,337 $ 20,047 $ 207,739
--------- -------- -------- ---------
Interest Rate Sensitivity GAP $ 7,321 $ (2,114) $ (5,207) $ -0-
</TABLE>
Return on Equity and Assets
The following table highlights certain ratios for the periods
indicated:
Year Ended December 31,
(Percentage)
1996 1995 1994
---- ---- ----
Net income to:
Average total assets 0.97 1.00 1.00
Average shareholders' equity 13.01 12.45 11.38
Dividend payout ratio (dividends declared per
share divided by net income per share) 0.00 0.00 0.00
Average shareholders' equity to average total
assets ratio 7.46 8.05 8.75
17
<PAGE>
Item 2. Properties
The Corporation's and the Bank's main offices are located at 340 West
Main Street, Abingdon, Virginia. The main office are in a two story brick
structure owned by the Bank. The Bank utilizes the entire structure for it's
banking operations. The Bank maintains a separate drive-thru facility which has
five customer service lanes and is located on the main office property. The main
office opened for operations in 1985. In addition, the Bank also has two branch
locations within Washington County, Virginia. The East Abingdon branch is a one
story brick facility located at 24412 Maringo Road which operates as a full
service facility. This branch was completed and opened for operations in
1993.The West Abingdon Express branch is a one-story brick express facility
which operates with four drive-thru customer service lanes and a walk-up window.
This is a limited service facility. The West Abingdon Express branch was
completed and opened for operations in 1994 and is located at Exit 14 I-81,
Jonesboro Road, Abingdon, Virginia. The Bank also has two full service branch
locations within the City of Bristol, Virginia. The East Bristol office is
located at 999 Old Airport Road, Bristol, Virginia. This is a two-story brick
facility with interior customer loan and deposit areas as well as a four lane
drive-thru facility. This office was completed and opened for operations in
1988. The Commonwealth office is located at 821 Commonwealth Avenue, Bristol,
Virginia. This is a two story block building with interior full service customer
facilities and a four lane drive thru facility. This office was completed and
opened for operations in 1995. All of the Bank's locations have ATM's on
premises. All properties are owned by the Bank and are free of liens.
Item 3. Legal Proceedings
The Corporation is not involved in any pending legal proceedings, other
than non-material legal proceedings undertaken in the ordinary course of
business.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the year ended December 31, 1996.
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the stock of Highlands
Bankshares, Inc.. At December 31, 1996 the Corporation has approximately 936
stockholders of record. The Corporation acts as it's own registered Stock
Transfer Agent, without charging a transfer fee, ensuring that all applicable
federal guidelines relating to stock transfers are enforced. The Corporation
maintains a list of individuals who are interested in purchasing it's common
stock and connects these people with stockholders' who are interested in selling
their stock. These parties negotiate the per share price independent of the
Corporation. The stock transfer agent of the Corporation attempts to keep a
record of what the stock sales are trading at by asking the parties about the
trade price per share Please refer to the table below entitled Common Stock
Performance for a breakdown of the trades for the four quarters of 1996. It is
the opinion of management that this range accurately reflects the market value
of the Corporations common stock at the present time.
Common Stock Performance-December 31 1996
High Low Quarterly Average
---- --- -----------------
First Quarter No Activity No Activity No Activity
Second Quarter $20.00 $19.00 $19.29
Third Quarter $25.00 $20.00 $19.87
Fourth Quarter $23.00 $20.00 $21.36
18
<PAGE>
The Corporation's and the Bank's Board of Directors determines whether
to declare dividends and the amount of any dividends declared. Such
determinations by the Board take into account the Corporation's financial
condition, results of operations, and other relevant factors. The declaration,
amount and timing of future dividends will be determined by the Board of
Directors after a review of the Corporation's operations and will be dependent
upon, among other factors, the Corporation's income, operating costs, overall
financial condition and capital requirements and upon general business
conditions. The Corporation's only source of funds for cash dividends will be
dividends paid to the Corporation by the Bank, which is subject to regulatory
restrictions. During 1996 the Bank declared and paid cash dividends of $500,000
to the Corporation for operating costs. The Corporation did not declare or pay
any cash dividends during 1996.
At December 31, 1996, there were approximately 936 holders of the
Corporation's common stock (based on the number of record holders as of that
date).
Item 6. Selected Financial Data
The following table sets forth certain selected consolidated financial
data for the past five years.
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Income Statement Amounts:
<S> <C> <C> <C> <C> <C>
Gross interest income $ 14,596 $ 11,585 $ 8,425 $ 6,433 $ 5,581
Gross interest expense 7,822 6,161 3,985 3,064 2,718
Net interest income 6,774 5,424 4,440 3,369 2,863
Provision for possible loan
Losses 374 143 120 150 304
Net interest income after
provision 6,400 5,281 4,320 3,219 2,559
Other operating income 660 488 425 395 402
Other operating expense 4,439 3,541 3,004 2,264 1,873
Income before income taxes
and other items 2,621 2,228 1,741 1,350 1,088
Income taxes 857 779 581 442 382
Income before cumulative
effect of change in
accounting principles 1,764 1,449 1,160 908 706
Cumulative effect of change
in accounting principles -0- -0- -0- -0- -0-
Net income $ 1,764 $ 1,449 $ 1,160 $ 908 706
Per Share Data (1):
Net income per share $ 1.45 $ 1.19 $ 0.96 $ 0.98 $ 0.775
Cash dividends per share -0- -0- -0- -0- -0-
Book value (at year end) 11.97 10.52 8.43 8.33 6.155
Balance Sheet Amounts (at year-
end):
Total assets $207,739 $162,543 $128,749 $105,520 $78,024
Total loans (net of unearned
income) 154,951 113,743 93,738 67,212 49,213
Total deposits 189,719 147,327 117,314 94,853 71,697
Long-term debt 1,858 -0- -0- -0- -0-
Total equity 14,617 12,812 10,243 10,042 5,610
</TABLE>
(1) Adjusted for 1995 two-for-one stock split, 1992 25% stock dividend
and 1990 20% stock dividend.
19
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The information required herein is incorporated by reference from pages
4 to 8 of the Annual Report to Stockholders for the fiscal year ended December
31, 1996.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required herein are
incorporated by reference from pages 9 to 28 of the Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
Item 9. Changes in Accountants and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Part III.
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference to "The
Board of Directors", "Executive Officers Who Are Not Directors", "Security
Ownership of Certain Beneficial Owners" and "Compliance With Filing Requirements
Under the Securities Exchange Act of 1934" contained in the definitive proxy
statement for the Registrant's 1996 Annual Meeting of Stockholders to be
subsequently filed.
Item 11. Executive Compensation
The information required herein is incorporated by reference to
"Remuneration" contained in the definitive proxy statement for the Registrant's
1996 Annual Meeting of Stockholders to be subsequently filed.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference to
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" contained in the definitive proxy statement for the Registrant's 1996
Annual Meeting of Stockholders to be subsequently filed.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference to
"Indebtedness of Management" contained in the definitive proxy statement for the
Registrant's 1996 Annual Meeting of Stockholders to be subsequently filed.
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The following financial statements are incorporated by
reference into Item 8 hereof from Exhibit 13 hereof:
Consolidated Statements of Financial Condition as of December
31, 1996 and 1995
Consolidated Statements of Operations for each of the years in
the three year period ended December 31, 1996
Consolidated Statements of Stockholder's Equity for each of
the years in the three year period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the years in
the three year
20
<PAGE>
period ended December 31, 1996
Notes to Consolidated Financial Statements for December 31,
1996, 1995 and 1994
Independent Auditors' Report
(a) (2) There are no financial statement schedules required to be
filed herewith
3a The following exhibits are filed as part of this report on
Form 10-K, and this list includes the Exhibit Index.
Exhibits
Exhibit No. Document
3(i) Articles of Incorporation, incorporated by reference
to Exhibit 3.1 of the Registrant's Registration Statement
on Form 8-A, filed January 24, 1996.
3(ii) Bylaws, incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form 8-A, filed
January 24, 1996.
13.1 Excerpts from Highlands Bankshares, Inc. 1996 Annual Report*
21 Subsidiaries of the Registrant*
27 Financial Data Schedule* (filed electronically only)
- --------------------
* Filed herewith
(b) No reports on Form 8-K have been filed during the last quarter
of the period covered by this report.
(c) See (a) (3) above for all exhibits filed herewith and the Exhibit
Index.
(d) Separate financial statements are not applicable.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
Date: March 26, 1997 BY: /S/ Samuel L. Neese
---------------------
Samuel L. Neese
Executive Vice President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/S/ James D Morefield 03-26-97
- --------------------------------------------
James D. Morefield Date Chairman of the Board, and Director
/S/ James D. Morre, Jr. 03-26-97
- --------------------------------------------
Dr. James D. Moore, Jr. Date President
/S/ J. Carter Lambert 03-26-97
- --------------------------------------------
J. Carter Lambert Date Vice Chairman
/S/ Samuel L. Neese 03-26-97
- --------------------------------------------
Samuel L. Neese Date Executive Vice President, and Chief Executive
Officer
/S/ James T. Riffe 03-26-97
- --------------------------------------------
James T. Riffe Date Executive Vice President and Cashier
/S/ William E. Chaffin 03-26-97
- --------------------------------------------
William E. Chaffin Date Director
/S/ V. D. Kendrick 03-26-97
- --------------------------------------------
V.D. Kendrick Date Director
/S/ Clydes B. Kiser 03-26-97
- --------------------------------------------
Clydes B. Kiser Date Director
/S/ Charles P. Olinger 03-26-97
- --------------------------------------------
Charles P. Olinger Date Director
/S/ William J. Singleton 03-26-97
- --------------------------------------------
William J. Singleton Date Director
/S/ H. Ramsey White, Jr. 03-26-97
- --------------------------------------------
Dr. H. Ramsey White, Jr. Date Director
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
3(i) Articles of Incorporation, incorporated by reference
to Exhibit 3.1 of the Registrant's Registration Statement
on Form 8-A, filed January 24, 1996.
3(ii) Bylaws, incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form 8-A, filed
January 24, 1996.
13.1 Excerpts from Highlands Bankshares, Inc. 1996 Annual Report*
21 Subsidiaries of the Registrant*
27 Financial Data Schedule* (filed electronically only)
- --------------------
* Filed herewith
Excerpt from Highlands Bankshares, Inc.
1996 Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Results of Operations 1996 1995 1994 1996/1995 1995/1994
(In Thousands except share and per share data) Percentage Change
<S> <C> <C> <C> <C> <C>
Net Interest Income $6,774 $5,424 $4,440 24.89% 22.16%
Net Income (Loss) 1,764 1,449 1,160 21.74 24.91
Financial Condition at Year-End
Assets
Loans 207,739 162,543 128,749 27.81 26.25
Securities 154,951 113,743 93,738 36.23 21.34
Deposits 31,345 32,276 27,389 (2.88) 17.84
Stockholders' Equity 189,719 147,327 117,314 28.77 25.58
Shares Outstanding 14,617 12,812 10,243 14.09 25.08
1,222 1,218 1,216 0.33 0.16
Significant Ratios
Return on average assets 0.97 1.00 1.00 (0.03) 0.00
Return on average equity 13.01 12.45 11.38 4.50 9.40
Average stockholders' equity to
average assets 7.46 8.05 8.75 (7.33) (0.08)
Allowance for loan losses as a
percentage of total loans 0.69 0.80 0.89 (12.50) (10.11)
Non-performing loans to total loans 0.01 0.00 0.00 0.00 0.00
Per Share Data
Based on weighted-average shares outstanding
Net Income $ 1.45 $ 1.19 $ 0.96 21.85 23.96
Stockholders' equity (book value)
per shares outstanding at
year-end 11.97 10.52 8.43 13.88 24.79
</TABLE>
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net interest income for the year-ended December 31, 1996 increased 24.89%,
approximately $1.35 million and over 1995. Average interest earning assets
increased $34.1 million from 1995 to 1996 while average interest-bearing
liabilities increased $29.7 million. The yield on average interest-earning
assets for the year ended December 31, 1996 was 8.61% compared with 8.56% for
the comparable 1995 period. The 1996 yield on loans decreased by 2 basis points
as compared to 1995 period at 9.38%. The yield on average investments remained
constant at 6.01% for December 31, 1996 and 1995. The yield on average
interest-bearing liabilities increased 5 basis points during 1996 to 5.43% as
compared to 5.38% during 1995. Net income for the year-ended December 31, 1996
was $1.76 million, an increase of 21.74% over the 1995 period. Income tax
expense for 1996 increased 10.01% to $857 thousand as compared to $779 thousand
for the 1995 period.
COMPARISON OF RESULTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net interest income for the year-ended December 31, 1995 increased 22.16%,
approximately $980 thousand over 1994. Average interest earning assets increased
$26.6 million from 1994 to 1995 while average interest-bearing liabilities
increased $22.2 million. The yield on average interest-earning assets for the
year-ended December 31, 1995 was 8.51% compared with 7.68% for the comparable
1994 period. The 1995 yield on loans increased by 69 basis points as compared to
the 1994 period. The yield on average interest-bearing liabilities increased to
6.02% as of December 31, 1995 from 5.34% for the comparable 1994 period. The
yield on average interest-bearing liabilities increased 100.02 basis points
during 1995 to 5.38% as compared to 4.36% during 1994. Net income for the
year-ended December 31, 1995 was $1.45 million, an increase of 24.91% over the
1994 period. Income tax expense for 1995 increased 34.04% to $0.78 million as
compared to $0.58 million for the 1994 period.
[NET INCOME GRAPH]
(In Millions)
$1.16 $1.45 $1.76
1994 1995 1996
<PAGE>
COMPARISON OF FINANCIAL CONDITION
AT DECEMBER 31, 1996 AND 1995
Total assets at December 31, 1996 totaled $207.7 million compared to $162.5
million at December 31, 1995. This 27.81% growth in assets was primarily due to
the large volume of loans originated. Total loans increased 36.23%, or $41.2
million over the comparable 1995 period. The security portfolio decreased 2.88%
to $31.3 million during 1996 as contrasted to the 1995 period. The majority of
the principle payments received were used to fund loans, rather than reinvesting
in lower yielding securities, which resulted in the 2.88% decrease in the
security portfolio. Total deposits increased to $189.7 million or 28.77% from
1995's level of $147.3 million. Stockholder's equity increased 14.09% during
1996. The Financial Accounting Standards Board's (FASB) Statement on Accounting
Standards No. 115 was implemented during 1994. FASB's SAS 115 required that all
securities classified as "Available-for-Sale" be adjusted to market value
through the use of a valuation account, and that any paper gains or losses be
run through the Stockholder's Equity section of the balance sheet. The effect of
implementing SAS 115 caused an increase in Stockholder's Equity at December 31,
1995 of $18 thousand, net of the related deferred tax. As of December 31, 1996
the Corporation's security portfolio had $18 thousand in paper losses, net of
deferred taxes. The Corporation notes that it does have the ability and intent
to carry to maturity approximately $31.3 million of the "Available-for-Sale"
securities.
COMPARISON OF FINANCIAL CONDITION
AT DECEMBER 31, 1995 AND 1994
Total assets at December 31, 1995 totaled $162.5 million compared to $128.8
million at December 31,1994. This 26.24% growth in assets was primarily due to
the large volume of loan demand. Total loans increased 21.34%, or $20.0 million
over the comparable 1994 period. The security portfolio increased 17.84% to
$32.3 million during 1995 as contrasted to the 1994 period. Total deposits
increased to $147.4 million or 25.66% from 1994's level of $117.3 million.
Stockholder's Equity increased 25.09% during 1995. The Financial Accounting
Standards Board's (FASB) Statement on Accounting Standards No. 115 was
implemented during 1994. FASB's SAS 115 required that all securities classified
as "Available-for-Sale" be adjusted to market value through the use of a
valuation account, and that any paper gains or losses be run through the
Stockholder's Equity section of the balance sheet. The effect of implementing
SAS 115 caused a reduction in Stockholder's Equity at December 31, 1994 of $1.09
million, net of the related deferred tax. As of December 31, 1995 the
Corporation's security portfolio had recovered this $1.09 million in paper
losses and had net unrealized holding gains of approximately $18 thousand, net
of deferred taxes. The Corporation notes that it does have the ability and
intent to carry to maturity approximately $32.3 million of the
"Available-for-Sale" securities.
[TOTAL ASSETS GRAPH]
(In Millions)
$128.7 $162.5 $207.7
1994 1995 1996
[TOTAL LOANS GRAPH]
(In Millions)
$93.7 $113.7 $154.9
1994 1995 1996
<PAGE>
COMPARISON OF SIGNIFICANT RATIOS AT
DECEMBER 31, 1996 AND 1995
Return on average assets dropped slightly to 0.97% for the year-ended December
31, 1996 as compared to 1.00% for the comparable 1995 period. The 27.81% growth
in assets and the absorption of the operational costs from the new Bristol
Branch both had significant impact relating to the decrease in this performance
ratio. Return on average equity increased 4.50% from 12.45% at December 31, 1995
to 13.01% at year-end 1996. Average stockholders' equity to average assets
declined to 7.46% at December 31, 1996 from 8.05% at December 31, 1995.
Non-performing loans to total loans increased to 0.01% as of December 31, 1996
as compared to 0.00% for the comparable 1995 period. Allowance for loan losses
as a percentage of total loans decreased 7.33% to 0.69% at December 31, 1996.
The decreases in average stockholders' equity to average assets and allowance
for loan losses as a percentage of total loans reflects the enormous amount of
growth which the Corporation has sustained during 1996.
COMPARISON OF SIGNIFICANT RATIOS AT
DECEMBER 31, 1995 AND 1994
Return on average assets remained constant at 1.00% for the year-ended December
31, 1995 and the comparable 1994 period. Considering the Corporation's 24.91%
growth rate in average assets during 1995 it is a great achievement to maintain
such a steady performance ratio. Return on average equity increased 9.40% from
11.38% at December 31, 1994 to 12.45% at year-end 1995. Average stockholders'
equity to average assets declined to 8.05% at December 31, 1995 from 8.75% at
December 31, 1994. Non-performing loans to total loans remained constant at
0.00% for the two comparable periods. Allowance for loan losses as a percentage
of total loans decreased 10.11% to 0.80% at December 31, 1995. The decreases in
average stockholders' equity to average assets and allowance for loan losses as
a percentage of total loans reflects the enormous amount of growth which the
Corporation has sustained during 1995.
[RETURN ON AVERAGE EQUITY GRAPH]
(In Percent)
11.38 12.45 13.01
1994 1995 1996
<PAGE>
COMPARISON OF PER SHARE DATA FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income per share, on a weighted average basis, increased 21.85% to $1.45 at
December 31, 1996 as compared to $1.19 for the comparable 1995 period. Book
value per share of common stock increased by 13.88% to $11.97 per share as
compared to $10.52 at December 31, 1995. The Corporation had approximately $18
thousand in paper losses as of December 31 1996, net of deferred taxes, due to
FASB;s SAS 115 which had virtually no affect on the book value computation.
COMPARISON OF PER SHARE DATA FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
Net income per share, on a weighted average basis, increased 23.96% to $1.19 at
December 31, 1995 as compared to $0.96 for the comparable 1994 period, as
adjusted for the 1995 2:1 stock split. Book value per share of common stock
increased by 24.79% to $10.52 per share as compared to $8.43 at December 31,
1994. Due to the implementation of FASB's SAS 115, which was explained in the
Comparison of Financial Condition, the Corporation recovered over $1 million,
net of deferred taxes, in paper losses on it's security portfolio which
significantly affected the stock's book value at December 31, 1995.
[EARNINGS PER SHARE GRAPH]
(In Dollars)
$0.96 $1.19 $1.45
1994 1995 1996
<PAGE>
Item 14(a). Financial Statements
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT F1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F2
Consolidated Statements of Income F3
Consolidated Statements of Stockholders' Equity F4
Consolidated Statements of Cash Flows F5
Notes to Consolidated Financial Statements F6 - F18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Highlands Bankshares, Inc. and Subsidiary
Abingdon, Virginia
We have audited the accompanying consolidated balance sheets of Highlands
Bankshares, Inc. and Subsidiary as of December 31, 1996, 1995, and 1994 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Highlands
Bankshares, Inc. and Subsidiary as of December 31, 1996, 1995 and 1994 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Brown, Edwards & Company, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
468 East Main Street
Abingdon, VA 24210
January 31, 1997
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F2
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1996, 1995 and 1994
(In thousands)
ASSETS 1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Cash and due from banks (Note 18) $ 8,008 $ 5,618 $ 3,883
Federal funds sold 7,948 5,535 --
Investment securities available for sale (Note 3) 31,345 32,276 27,389
Loans, net of allowance for credit losses of $1,072,
$908, and $836 thousand for 1996, 1995 and 1994,
respectively (Notes 4 and 5) 153,879 112,835 92,902
Bank premises and equipment (Note 6) 4,583 4,346 2,605
Interest receivable 1,271 1,068 806
Other assets (Note 9) 705 865 1,164
--------- --------- --------
Total Assets $ 207,739 $ 162,543 $ 128,749
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7)
Interest bearing $ 163,468 $ 127,024 $ 101,162
Noninterest bearing 26,003 20,303 16,152
--------- --------- --------
Total Deposits 189,471 147,327 117,314
--------- --------- --------
Short term borrowings (Note 8) 71 1,000 327
Notes Payable (Note 10) 1,858 -- --
Interest, taxes and other liabilities 1,722 1,404 865
--------- --------- --------
3,651 2,404 1,192
--------- --------- --------
Total Liabilities 193,122 149,731 118,506
--------- --------- --------
STOCKHOLDERS' EQUITY
Common stock (Notes 12 and 14) 3,054 3,044 3,038
Surplus 5,187 5,120 5,116
Undivided profits 6,394 4,630 3,181
Unrealized gains (losses) on securities available
for sale (18) 18 (1,092)
--------- --------- --------
Total Stockholders' Equity 14,617 12,812 10,243
--------- --------- --------
Total Liabilities and Stockholders' Equity $ 207,739 $ 162,543 $128,749
========= ========= ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F3
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
INTEREST INCOME 1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Interest and fees on loans $ 12,310 $ 9,590 $ 6,765
Interest on securities available for sale
Taxable 2,009 1,735 1,509
Exempt from taxable income 73 58 70
Interest on Federal funds sold 204 202 76
Interest on deposits with banks -- -- 5
---------- --------- ---------
Total Interest Income 14,596 11,585 8,425
INTEREST EXPENSE
Interest on deposits 7,822 6,161 3,985
---------- --------- ---------
Net interest income 6,774 5,424 4,440
Provision for loan losses (Note 5) 374 143 120
---------- --------- ---------
Net interest income after provision for loan
losses 6,400 5,281 4,320
---------- --------- ---------
NON-INTEREST INCOME
Securities gains (losses), net 23 (1) 15
Service charges on deposit accounts 474 371 291
Insurance commissions 24 25 29
Other service charges, commissons and fees 96 58 65
Other operating income, rents 43 35 25
---------- --------- ---------
Total Non-Interest Income 660 488 425
---------- --------- ---------
NON-INTEREST EXPENSES
Salaries and employee benefits (Note 13) 2,481 1,904 1,555
Compensation related to stock options
granted (Note 14) 53 4 78
Occupancy expense of bank premises 298 212 177
Furniture and equipment expense 564 510 308
Other operating expenses (Note 20) 1,043 911 886
---------- --------- ---------
Total Non-Interest Expenses 4,439 3,541 3,004
---------- --------- ---------
Income Before Taxes on Income 2,621 2,228 1,741
Income Tax Expense (Note 9) 857 779 581
---------- --------- ---------
Net Income $ 1,764 $ 1,449 $ 1,160
========= ========= ========
Net Income Per Share (Note 12) $ 1.45 $ .19 $ 0.96
========= ========= ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (loss)
Securities
Common Stock Undivided Available
Shares Par Value Surplus Profits for sale
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 as
restated $1,206 $3,014 $ ,007 $2,021 --
Net income -- -- -- 1,160 --
Common stock issued for
stock options exercised 10 24 31 -- --
Stock options granted -- -- 78 -- --
(Note 14)
Unrealized gains (losses) -- -- -- -- (1,092)
------ ------ ------ ------ ------
Balance, December 31, 1994 as
restated 1,216 3,038 5,116 3,181 (1,092)
Net income -- -- -- 1,449 --
Common stock issued for
stock options exercised 2 6 -- -- --
Stock options granted -- -- 4 -- --
(Note 14)
Unrealized gains (losses) -- -- -- -- 1,110
------ ------ ------ ------ ------
Balance, December 31, 1995 1,218 3,044 5,120 4,630 18
Net income -- -- -- 1,764 --
Common stock issued for
stock options exercised 4 10 14 -- --
Stock options granted -- -- 53 -- --
(Note 14)
Unrealized gains (losses) -- -- -- -- (36)
------ ------ ------ ------ ------
Balance, December 31, 1996 $1,222 $3,054 $ ,187 $6,394 $ (18)
====== ====== ====== ====== ======
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended
December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,764 $ 1,449 $ 1,160
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 374 143 120
Provision for deferred income taxes (67) 596 (589)
Deferred compensation expense 53 4 78
Depreciation 214 157 124
Securities (gains) losses (23) 1 (15)
Net amortization on securities 125 76 103
Increase in interest receivable (203) (262) (303)
(Increase) decrease in other assets 227 299 (48)
Increase (decrease) in interest, taxes and other
liabilities 318 (58) 240
-------- -------- --------
Net Cash Provided by Operating Activities 2,782 2,405 870
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in time balances with banks -- -- 100
Securities available for sale:
Proceeds from sale of securities 12,779 586 1,349
Proceeds from maturities of debt securities 2,125 3,209 720
Purchase of securities (14,128) (7,648) (6,066)
Net (increase) decrease in federal funds sold (2,413) (5,534) 7,825
Net increase in loans (41,418) (20,077) (26,592)
Premises and equipment expenditures (446) (1,899) (310)
-------- -------- --------
Net Cash Used in Investing Activities (43,501) (31,363) (22,974)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 29,811 22,582 17,136
Net increase in demand, savings and other deposits 12,333 7,432 5,324
Increase (decrease) in federal funds purchased -- (327) 327
Net proceeds from Federal Home Loan Bank
Advances 929 1,000 --
Proceeds from issuance of common stock 36 6 55
-------- -------- --------
Net cash provided by financing activities 43,109 30,693 22,842
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,390 1,735 738
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,618 3,883 3,145
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,008 $ 5,618 $ 3,883
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS
Unrealized gain (loss) in value of securities
available for sale (net of tax effects of
$(19), $572 and $(563) at December 31, 1996,
1995 and 1994, respectively $ (36) $ 1,110 $ (1,092)
==== ===== ======== ======== ========
Investment securities transferred to
available for sale $ - $ - $ 24,733
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 7,595 $ 5,629 $ 3,755
======== ======== ========
Income taxes $ 901 $ 783 $ 579
======== ======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation:
The accounting and reporting policies of Highlands Bankshares,
Inc. and Subsidiary conform to generally accepted accounting
principles and the predominant practices within the banking
industry. The accompanying consolidated financial statements
have been prepared on the accrual basis.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of Highlands Bankshares, Inc. and Subsidiary (the
"Company") and its wholly-owned subsidiary, Highlands Union
Bank (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Nature of Operations:
Highlands Bankshares, Inc. and Subsidiary operates in
Abingdon, Virginia and surrounding Southwest Virginia, under
the laws of the Commonwealth of Virginia. The Company was
organized December 29, 1995. Highlands Union Bank, its
wholly-owned subsidiary, began banking operations on April
27, 1985.
Securities Available for Sale:
Securities classified as available for sale are those debt
securities that the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision
to sell a security classified as available for sale would be
based on various factors, including significant movements in
interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or
decreases in stockholders' equity, net of the related deferred
tax effect. Realized gains or losses, determined on the basis
of the cost of specific securities sold, are included in
earnings.
Reserve for Possible Loan Losses:
The reserve for possible loan losses for financial statement
purposes is based upon management's evaluation of amounts
required to maintain the reserve at an adequate level upon
consideration of losses charged to the reserve, current
economic conditions, changes in the size and character of the
loan portfolio, and other relevant factors which, in
management's judgment, deserve current recognition.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line
method over estimated useful lives. Maintenance and repairs
are charged to current operations while improvements are
capitalized. Disposition gains and losses are reflected in
current operations.
Intangible Assets:
Organizational costs are stated at cost less accumulated
amortization. Amortization is computed on the straight-line
method over 60 months.
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand and amounts due from banks.
Income Taxes:
Under the asset and liability method, deferred income taxes
are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates to the
differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date.
Income on Loans and Loan Fees:
Accrual of interest on commercial loans, mortgages and
consumer single-payment loans is based generally on the daily
amount of principal outstanding. Interest on installment loans
is reported as income over the term of the loan under the
simple interest method and the sum-of-the-months'-digits (Rule
of 78's) method. The Rule of 78's method is not materially
different from the interest method. Beginning with 1996 the
Bank has discontinued the use of the "Rule of 78's". It is the
Bank's policy to discontinue the accrual of interest on loans
based on their delinquency status and evaluation of the
related collateral and the financial strength of the borrower.
The accrual of interest income is normally discontinued when a
loan becomes 90 days past due as to principal or interest.
Management may elect to continue the accrual of interest when
the net realizable value of collateral is sufficient to cover
the principal balance and accrued interest. When interest
accruals are discontinued, interest accrued and not collected
in the current year is reversed and interest accrued and not
collected in prior years is charged to the allowance for
credit losses.
For mortgage loans, the portion of loan origination fees that
exceeds the direct costs of underwriting and closing loans is
deferred. The deferred fees received are amortized to income
over the estimated lives of the mortgage loans using a
straight line method. The deferred fees received in connection
with installment loans are amortized over the life of the
loan. The aforementioned amortization methods are not
materially different from the interest method.
Earnings Per Share:
Earnings per share are calculated based on the weighted
average outstanding shares during the year.
Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported
amounts and disclosures. Actual results could differ from
those estimates.
Reclassification of Financial Statement Presentation:
Certain reclassifications have been made to the 1995 and 1994
financial statements to conform with the 1996 financial
statement presentation. Such reclassifications had no effect
on net income as previously reported.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 2. Business Combination
On December 29, 1995 Highlands Bankshares, Inc. issued
approximately 1.2 million shares of its common stock in
exchange for all the outstanding common stock of Highlands
Union Bank. In addition, outstanding employee stock options to
purchase Highlands Union Bank common stock were converted into
options to purchase shares of Highlands Bankshares, Inc. The
merger has been accounted for as a pooling of interests.
Restatement of prior year financial statements was not deemed
necessary due to immateriality.
Note 3. Investment Securities
Effective January 1, 1994, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Statement No. 115 addresses the classification,
accounting and disclosure of investments in debt and equity
securities. In connection with the adoption of this statement,
securities were classified into two categories: securities
available for sale and investment securities held-to-maturity.
Prior to January 1, 1994, securities available for sale were
recorded at the lower of aggregate cost or market value. Under
Statement No. 115, securities available for sale are recorded
at market value with the unrealized gain or loss, net of
deferred income taxes, reflected as a separate component of
stockholders' equity. The amortized cost and market value of
securities classified as available for sale are as follows:
Securities available for sale:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,003 $ - $ 4 $ 999
U.S. Government agencies and
corporations 3,500 - 38 3,462
State and political subdivisions 1,004 27 - 1,031
Mortgage Backed Securities 25,005 - 13 24,992
Other securities 861 - - 861
-------------------------------------------------------------------
$31,373 $ 27 $ 5 $31,345
===================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 3,008 $ - $ 20 $ 2,988
U.S. Government agencies and
corporations 8,139 68 67 8,140
State and political subdivisions 1,331 77 - 1,408
Mortgage Backed Securities 18,861 152 182 18,831
Other securities 909 - - 909
-------------------------------------------------------------------
$32,248 $ 297 $ 269 $32,276
===================================================================
</TABLE>
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 3. Investment Securities (Continued)
<TABLE>
<CAPTION>
1994
-------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,513 $ - $ 178 $ 4,335
U.S. Government agencies and
corporations 7,987 - 618 7,369
State and political subdivisions 816 8 6 818
Mortgage Backed Securities 14,946 26 873 14,099
Other securities 768 - - 768
-------------------------------------------------------------------
$29,030 $ 34 $1,675 $27,389
===================================================================
</TABLE>
Securities being held to maturity:
Investment securities available for sale with a carrying value
of $1,003, $3,808 and $2,503 thousand at December 31, 1996,
1995 and 1994 respectively, and a market value of $998,
$3,782, and $2,443 thousand at December 31, 1996, 1995 and
1994 were pledged as collateral on public deposits and for
other purposes as required or permitted by law.
The amortized cost and estimated fair value of securities
available for sale at December 31, 1996 by contractual
maturity are shown below. Expected maturities may differ from
contractual maturities, because borrowers may have the right
to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Approx-
imate
Amortized Market
Cost Value
------------ -----------
<S> <C> <C>
Due in one year or less $ 567 $ 565
Due after one year through five years 4,151 4,109
Due after five years through ten years 789 818
Due after ten years - -
------------ -----------
5,507 5,492
------------ -----------
Mortgage-backed securities 25,005 24,992
Other securities 861 861
------------ -----------
25,866 25,853
------------ -----------
$ 31,373 $ 31,345
============ ===========
</TABLE>
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 3. Investment Securities (Continued)
Gross realized gains and losses for the years ended December
31, 1996, 1995 and 1994 on investment securities available
for sale are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Realized gains $ 50 $ 3 $ 25
Realized losses $( 27) $( 4) $( 10)
</TABLE>
Note 4. Loans
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Commercial $ 20,370 $ 12,699 $ 8,538
Real estate 101,570 76,590 62,955
Installment 30,656 23,342 21,890
Other 2,967 2,743 2,166
---------- --------- ----------
155,563 115,374 95,549
---------- --------- ----------
Deduct:
Unearned discount 455 1,377 1,550
Allowance for credit losses 1,072 908 836
Unearned net loan fees 157 254 261
---------- ---------- ----------
1,684 2,539 2,647
---------- ---------- ----------
$ 153,879 $ 112,835 $ 92,902
========= ========== ==========
</TABLE>
In May 1993, the Financial Accounting Standards Board issued
Statement No. 114, "Accounting by Creditors for the
Impairment of a Loan" which is effective for fiscal years
beginning after December 15, 1994. In October 1994, certain
provisions of Statement No. 114 were amended by Statement
No. 118. Statements 114 and 118 address the methods to be
used by a creditor to measure the impairment of a loan and
the proper recognition of a change in the value of an
impaired loan. The Company has no loans that are considered
impaired in conformity with SFAS 114.
Nonaccruing loans totaling $99, $235, and $0 thousand at
December 31, 1996, 1995 and 1994 are included in the above
loans. Interest income lost on these nonaccruing loans was
approximately $6, $12, and $0 for December 31, 1996, 1995
and 1994, respectively.
Loans have been pledged as part of the floating blanket lien
to secure Federal Home Loan Bank advances. (Note 8)
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 5. Allowance for Credit Losses
Activity in the allowance for credit losses is as follows for
the periods ended December 31, 1996, 1995, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $ 908 $ 836 $ 782
Provisions charged to
operations 374 143 120
Loans charged to reserve ( 255) ( 188) ( 87)
Recoveries 45 117 21
-------- -------- --------
Balance, ending $ 1,072 $ 908 $ 836
======== ======== ========
</TABLE>
Note 6. Premises and Equipment
Premises and equipment, stated at cost, are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Land $ 1,451 $ 1,301 $ 765
Bank premises 2,909 2,876 1,785
Equipment 1,316 1,053 783
-------- -------- --------
5,676 5,230 3,333
Less accumulated
depreciation 1,093 884 728
-------- -------- --------
$ 4,583 $ 4,346 $ 2,605
======== ======== ========
</TABLE>
The depreciation expense is $214, $157, and $124 thousand for
1996, 1995, and 1994, respectively.
Note 7. Deposits
The composition of deposits is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Demand $ 39,381 $ 31,968 $ 27,587
Savings 21,930 17,010 18,257
Time deposits, $100,000 or
more 31,007 26,297 18,836
Other time deposits 97,153 72,052 52,634
--------- --------- ---------
$ 189,471 $ 147,327 $ 117,314
========= ========= =========
</TABLE>
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 7. Deposits (Continued)
The remaining maturities of time deposits at December 31, 1996
are as follows:
Three months or less $ 28,128
Three through twelve months 61,171
Over twelve months 38,861
-----------
$ 128,160
============
Note 8. Short Term Borrowings
Borrowed funds consist of Federal Home Loan Bank advances
which are secured by a floating blanket lien on assets of the
Bank, including loans. Short-term borrowings for December 31,
1996, 1995 and 1994 were $71, $1,000 and $327 thousand,
respectively.
Note 9. Income Taxes
The components of the net deferred tax asset at December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan
loss $ 323 $ 245 $ 254
Deferred compensation
accruals 90 78 77
Gain (loss) on securities
available for sale 9 - 563
--------- -------- --------
422 323 894
--------- -------- --------
Deferred tax liability:
Depreciation
differences ( 128) ( 106) ( 90)
Gain (loss) on securities
available for sale - ( 9) -
--------- -------- --------
( 128) ( 115) ( 90)
--------- -------- --------
Net deferred tax asset $ 294 $ 208 $ 804
========= ======== ========
</TABLE>
The net deferred tax asset is included in the balance sheet
under the caption "Other Assets".
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 9. Income Taxes (Continued)
The components of income tax expense (benefit) related to
continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Federal:
Current 924 $ 755 $ 607
Deferred ( 67) 24 ( 26)
-------- ------- --------
Total $ 857 $ 779 $ 581
======== ======= ========
</TABLE>
The Bank's income tax expense differs from the statutory
federal rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to
earnings before income taxes $ 891 $ 758 $ 592
Tax exempt interest ( 15) ( 20) ( 24)
Other, net ( 19) 41 13
-------- ------- -------
$ 857 $ 779 $ 581
======== ======= =======
</TABLE>
Note 10. Notes Payable
During the year, the Bank had the following notes payable
agreements:
<TABLE>
<CAPTION>
Current Long-Term Total
------- --------- -----
<S> <C> <C> <C>
Note payable Federal Home Loan Bank dated June 6, 1996 for
$1,000,000 with an annual interest rate of 5.6325%, due June
8, 1998. The note requires annual interest payments. The loan
is secured by a floating blanket lien on
assets of the Bank, including loans. - 1,000,000 1,000,000
Note payable Federal Home Loan Bank dated June 6, 1996 for
$1,000,000 with an annual interest rate of 7.02%, due June 6,
2003. The note requires annual installments of $71,429 plus
interest. The loan is secured by a floating blanket lien on
assets of the Bank,
including loans. 71,429 857,571 929,000
------------ ----------- ----------
Totals $ 71,429 $1,857,571 $1,929,000
============ ========== ==========
</TABLE>
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 10. Notes Payable (Continued)
Principal maturities of notes payable at December 31, 1996 are
as follows:
1997 $ 71,429
1998 1,071,429
1999 71,429
2000 71,429
2001 71,429
Thereafter 571,855
-----------
$ 1,929,000
===========
Note 11. Operating Leases
The following is a schedule by years of future minimum rental
payments required under operating leases that have initial or
remaining noncancelable terms in excess of one year as
follows:
Year ending December 31:
1997 $ 303
1998 198
1999 111
2000 -
2001 -
-------
Total minimum payments required $ 612
=======
Total operating lease expense was $359, $261 and $158 for
December 31, 1996, 1995 and 1994 respectively.
Note 12. Common Stock, Stock Split, and Net Income Per Share
On April 13, 1995, the Board authorized a 2 for 1 stock split
to be distributed to all shareholders of record as of April
12, 1995. As a result, authorized shares increased from
5,000,000 to 10,000,000 and par value decreased from $5.00 to
$2.50 per share. All references in the financial statements to
number of shares, per share amounts and market prices of the
Bank's common stock have been retroactively restated to
reflect the increased number of common shares outstanding.
At December 31, 1996, 1995 and 1994, the Bank had 1,222, 1,218
and 1,216 thousand shares of common stock issued and
outstanding, respectively. Net income per share is computed
using the weighted average outstanding shares of 1,220, 1,214
and 1,208 thousand for the periods ended December 31, 1996,
1995 and 1994, respectively. The stock options (Note 14) have
an antidilutive effect on earnings per share.
Note 13. Profit Sharing Plan
Effective January 1, 1986, the Bank adopted a profit sharing
plan covering substantially all employees with over one year
of service. The plan provides for contributions in such
amounts as the Board of Directors may annually determine, but
not in excess of the amount permitted under the Internal
Revenue Code as a deductible expense. The Bank accrued to the
plan $120, $92 and $88 thousand for the years ended December
31, 1996, 1995 and 1994, respectively, which represents
approximately 6%, 7% and 8% of qualifying salaries and wages
of the Bank.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 14. Stock Option Plan
In 1995, Highlands Bankshares, Inc. adopted a non-qualified
stock incentive option plan, which is identical to and
replaced the plan adoped by Highlands Union Bank in 1986, for
key employees, officers, and directors and reserved 150,000
shares of common stock for issuance thereunder. Options
granted under the plan expire ten years from date of grant.
Shares under options which subsequently expire, or are
canceled are available for subsequent grant. Option prices are
determined by the Board of Directors, but shall not be less
than the greater of the par value of such stock or 100% of the
book value of such stock as shown by the Bank's last published
statement prior to granting of the option. Proceeds received
upon exercise of options are credited to common stock, to the
extent of par value of the related shares, and the balance is
credited to surplus. During 1996, 1995 and 1994 12,900, 700
and 9,600 shares were granted at $15.000, $9.333 and $8.330
per share at grant date, respectively.
Options outstanding at option price for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- -------------------- ----------------------
Dollars Number of Dollars Number of Dollars Number of
(Thousands) Shares (Thousands) Shares (Thousands) Shares
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding January 1 $ 226 65,082 $ 225 66,742 $ 179 66,678
Granted 53 12,900 4 700 78 9,600
Exercised ( 13) ( 4,194) ( 3) ( 2,360) ( 32) ( 9,536)
--------- -------- -------- -------- -------- --------
Options outstanding December 31 $ 266 73,788 $ 226 65,082 $ 225 66,742
========= ======== ======== ======== ======== ========
</TABLE>
At the time options are granted, the difference in market
value and the option price is recorded as an expense and the
related accrual is included in surplus. For 1996, 1995 and
1994 $53, $4 and $78 thousand was recorded as compensation as
a result of options granted. As of December 31, 1996, 1995 and
1994 $266, $226 and $225 thousand remained as accrued stock
options outstanding included in surplus.
Note 15. Commitments, Contingencies and Concentrations of Credit
The Bank is party to various financial instruments with
off-balance sheet risk arising in the normal course of
business to meet the financing needs of their customers. Those
financial instruments include commitments to extend credit and
standby letters of credit. These commitments include standby
letters of credit of approximately $2,026, $218, and $341
thousand and unused portions of credit lines of $10,335,
$8,202 and $7,085 thousand for the years ended December 31,
1996, 1995 and 1994, respectively. These instruments contain
various elements of credit and interest rate risk in excess of
the amount recognized in the statements of financial
condition.
The Bank's exposure to credit loss, in the event of
non-performance by the other party to the financial instrument
for commitments to extend credit and standby letters of
credit, is the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and
conditional obligations that they do for on-balance sheet
instruments.
The Bank has made arrangements with and has available from
other corresponding banks, approximately $48,942,000 of unused
lines of credit to fund any necessary cash requirements. The
Bank has $1,929,000 of Federal Home Loan Bank advances
outstanding as of December 31, 1996.
(Continued)
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 15. Commitments, Contingencies and Concentrations of Credit
(Continued)
The Bank grants various types of credit including but not
limited to, agribusiness, commercial, consumer, and
residential loans to customers primarily located throughout
Southwest Virginia. Each customer's credit worthiness is
examined on a case by case basis. The amount of collateral
obtained, if any, is determined by management's credit
evaluation of the customer. Collateral held varies, but may
include property, accounts receivable, inventory, plant and
equipment, securities and other income producing properties.
Although the loan portfolio is generally well diversified and
geographically dispersed within the region, aggregate loans
extended for real estate mortgages represent greater than 50%
of the loan portfolio. A substantial portion of the customers'
ability to honor their contractual commitment is largely
dependent upon the economic conditions of the region.
Note 16. Fair Values of Financial Instruments
The carrying amounts and fair values of the Bank's financial
instruments at December 31 were as follows (asset/liability):
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and short-term
investments $ 15,956 $ 15,956 $ 11,153 $ 11,153
Investments in
securities 31,345 31,345 32,276 32,276
Loans, net 153,879 156,977 112,835 115,272
Deposits (189,471) (190,071) (147,327) (148,463)
Short-term
borrowings ( 1,929) ( 1,929) ( 1,000) ( 1,000)
Cash and Short-Term Investments
The carrying amount reported in the balance sheets for cash
and short-term investments approximates fair value.
Investments in Securities
The carrying amount reported in the balance sheets for cash
and short-term investments approximates fair value.
Loans
The fair values of loans represents the amount at which the
loans of the Bank could be exchanged on the open market, as
determined based on the current lending rate for similar types
of lending arrangements discounted over the remaining life of
the loans.
Deposits
The fair values of deposits represent the amount at which the
liabilities of the Bank could be exchanged on the open market,
as determined based on the incremental borrowing rate of the
Bank for similar types of borrowing arrangements.
Short-Term Borrowings
The carrying amount reported in the balance sheets for cash
and short-term investments approximates fair value.
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 17. Related Party Transactions
In the normal course of business, the Bank has made loans to
directors and officers of the Bank. All loan and commitments
made to such officers and directors and to companies in which
they are officers or have significant ownership interest have
been made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons, and did not
involve more than the normal risk of collectibility or present
other unfavorable features. The activity of such loans is
approximately as follows:
1996 1995 1994
Balance, beginning $ 6,317 $ 5,712 $ 4,528
Loan additions 2,712 3,525 1,889
Amounts collected ( 3,488) ( 2,920) ( 705)
------- -------- --------
Balance, ending $ 5,541 $ 6,317 $ 5,712
======= ======== ========
Note 18. Restrictions on Cash
The Bank is required to maintain reserve balances in cash with
the Federal Reserve Bank. The total of those reserve balances
was approximately $789 thousand at December 31, 1996.
Note 19. Undivided Profits and Capital
Banking laws and regulations limit the amount of dividends
that may be paid without prior approval of the Bank's
regulatory agency. Under that limitation, the Bank could have
declared dividends of $9,080 and $5,216 thousand in 1996 and
1995, respectively.
Federal regulatory agencies have adopted various capital
standards for financial institutions, including risk-based
capital standards. The primary objectives of comparing capital
positions of financial institutions are to take into account
the different risks among financial institutions' assets and
off-balance sheet items.
Risk-based capital standards have been supplemented with
requirements for a minimum leverage ratio. The leverage ratio
is the Company's Tier I Capital divided by the amount of the
Company's total assets as reported on the balance sheet. In
addition, the regulatory agencies consider the published
capital levels as minimum levels and may require a Financial
Institution to maintain capital at higher levels.
A comparison of the Company's capital as of December 31, 1996,
1995 and 1994 with the minimum requirements for well
capitalized and adequately capitalized institutions is
presented below.
<TABLE>
<CAPTION>
Minimum Requirements
1996 1995 1994 Well Adequately
Actual Actual Actual Capitalized Capitalized
<S> <C> <C> <C> <C> <C>
Tier I Risk-based Capital 9.41% 11.11% 12.10% 6.00% 4.00%
Total Risk-based Capital 10.12% 11.90% 13.00% 10.00% 8.00%
Leverage Ratio 6.82% 7.48% 8.32% 5.00% 4.00%
</TABLE>
<PAGE>
HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
Page F18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In thousands)
Note 20. Other Operating Expenses
Other operating expenses consist of the following:
1996 1995 1994
Data processing $ 9 $ 22 $ 12
FDIC insurance 2 134 214
Postage and freight 161 130 105
Regulatory agency assessments 33 34 29
Supplies 146 124 106
Bank stock tax 122 126 107
Other 570 341 313
------- ---- ----
$ 1,043 $ 911 $ 886
====== ==== ====
Note 21. Condensed Parent Company Balance Sheet
The condensed balance sheets below relates to Highlands
Bankshares, Inc. for December 31, 1996 and 1995 and for the
years then ended. Highlands Bankshares, Inc. was formed
December 29, 1995 and exchanged common stock for the common
stock of Highlands Union Bank. All significant transactions
of Highlands Bankshares, Inc. affect the balance sheet only
and accordingly, no condensed income statement or condensed
cash flow statement has been presented below.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1996 1995
ASSETS
<S> <C> <C>
Cash $ 331 $ -
Investments in subsidiaries 14,122 12,812
Land 141 -
Other assets 24 10
--------- --------
Total Assets $ 14,618 $ 12,822
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest, taxes and other
liabilities $ - $ 10
-------- --------
Total Liabilities $ - 10
-------- --------
STOCKHOLDERS' EQUITY
Unrealized gain (loss) securities ( 18) 18
Common stock 3,055 3,044
Surplus 5,187 5,120
Undivided profits 6,394 4,630
-------- --------
Total Stockholders' Equity 14,618 12,812
-------- --------
Total Liabilities and
Stockholders' Equity $ 14,618 $ 12,822
======== ========
</TABLE>
SUBSIDIARY OF HIGHLANDS BANKSHARES, INC.
Highlands Union Bank
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,008
<INT-BEARING-DEPOSITS> 163,468
<FED-FUNDS-SOLD> 7,948
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,345
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 154,951
<ALLOWANCE> 1,072
<TOTAL-ASSETS> 207,739
<DEPOSITS> 189,471
<SHORT-TERM> 71
<LIABILITIES-OTHER> 1,722
<LONG-TERM> 1,858
0
0
<COMMON> 3,054
<OTHER-SE> 11,563
<TOTAL-LIABILITIES-AND-EQUITY> 14,617
<INTEREST-LOAN> 12,310
<INTEREST-INVEST> 2,286
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,596
<INTEREST-DEPOSIT> 7,822
<INTEREST-EXPENSE> 7,822
<INTEREST-INCOME-NET> 6,774
<LOAN-LOSSES> 374
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 4,439
<INCOME-PRETAX> 2,621
<INCOME-PRE-EXTRAORDINARY> 2,621
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,764
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 8.61
<LOANS-NON> 99
<LOANS-PAST> 563
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 908
<CHARGE-OFFS> 255
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 1,072
<ALLOWANCE-DOMESTIC> 1,072
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
