SECURITIES AND EXCHANGE C0MMISSION
WASHINGTON DC 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998
Commission File Number: 0-27622
Highlands Bankshares, Inc.
Incorporated in the State of Virginia E.I. Number: 54-1796693
P.O. Box 1128
Abingdon Virginia 24212-1128
540-628-9181
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO __
YES X NO __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: 1,238,400
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended March 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 . . . . . . . . . . . . . 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . .5
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Months Ended March 31, 1998 and 1997. . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . .10
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . .10
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . .10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
____ ____
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,168 $ 7,712
Federal Funds Sold 8,826 7,213
Investment Securities available for sale
(amortized cost $60,488 March 31,1998;
$41,805 December 31, 1997) 60,532 41,963
Loans, net of allowance for credit losses
$1,714 March 31,1998; $1,636 December 31, 1997 199,920 190,369
Bank premises and equipment 7,281 7,062
Interest receivable 1,770 1,495
Other assets 2,832 2,422
_________ _________
Total Assets $ 289,329 $ 258,236
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 33,521 $ 30,930
Deposits, interest bearing 221,037 205,716
_________ _________
Total Deposits 254,558 236,646
Short-term borrowings 143 -
Interest, taxes, and other liabilities 2,481 2,174
Long-term debt 15,144 2,614
_________ _________
Total Liabilities 272,326 241,434
STOCKHOLDERS' EQUITY
Common Stock; $2.50 par value; 10,000,000
shares authorized; 1,238,400 issued and
outstanding at March 31, 1998 3,096 3,081
Surplus 5,255 5,271
Undivided profits 8,624 8,346
Unrealized gains (losses) on securities
available for sale, net of deferred taxes 28 104
_________ _________
Total Stockholders' Equity 17,003 16,802
_________ _________
Total Liabilities and
Stockholders' Equity $ 289,329 $ 258,236
</TABLE>
See accompanying notes to Consolidated Financial Statements
<PAGE>3
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Amounts in thousands, except per share data)
________________________________________________________________________________
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1997
____ ____
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 4,489 $ 3,589
Interest on securities available for sale:
Taxable 714 524
Exempt from taxable income 8 8
Interest on federal funds sold 120 93
_________ ________
Total Interest Income 5,331 4,214
INTEREST EXPENSE
Interest on deposits 2,960 2,299
Interest on borrowings 167 36
_________ _________
Total Interest Expense 3,127 2,335
_________ _________
Net Interest Income 2,204 1,879
Provision for loan losses 302 141
_________ _________
Net Interest Income After Provision
Loan Losses 1,902 1,738
_________ ________
NON-INTEREST INCOME
Securities gains (losses), net 32 (18)
Service charges on deposit accounts 113 125
Other fee income 75 57
Other operating income 63 40
_________ ________
Total Non-interest Income 283 204
_________ ________
NON-INTEREST EXPENSE
Salaries and employee benefits 858 661
Occupancy expense of bank premises 279 207
Other operating expenses 446 328
_________ _________
Total Non-interest Expense 1,583 1,196
_________ _________
Income Before Applicable Income Taxes 602 746
Income tax expense 201 249
_________ _________
Net Income $ 401 $ 497
_________ _________
Basic earnings per share $ .32 $ .40
_________ _________
Diluted earnings per share $ .31 $ .38
See Accompanying Notes to Consolidated Financial Statements
<PAGE>4
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 1998 31, 1997
________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 401 $ 497
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 302 141
Provision for deferred taxes - 5
Deferred compensation expense (25) 10
Depreciation 115 65
Securities (gains) losses (32) 18
Net amortization on securities 99 27
Amortization capital issue costs 3 -
(Increase) decrease in interest receivable (275) (89)
(Increase) decrease in other assets (375) (190)
Increase (decrease) in interest, taxes
and other liabilities 184 71
_________ _________
Net Cash Provided by Operating Activities 397 555
_________ _________
CASH FLOW FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 2,914 2,723
Proceeds from maturity of securities 5,666 1,484
Purchase of securities (27,330) (11,821)
Net (increase) decrease in Federal funds sold (1,613) 5,997
Net (increase) in loans (9,853) (12,023)
Premises and equipment expenditures (334) (1,279)
_________ _________
Net Cash used in Investing Activities (30,550) (14,919)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 9,911 8,883
Net increase in demand, savings, and other deposits 8,001 4,049
Net increase in short-term borrowings 143 18
Net increase in long-term debt 12,530 880
Proceeds from sale of stock 24 31
_________ _________
Net Cash Provided by Financing Activities 30,609 13,861
_________ _________
Net Increase in Cash and Cash equivalents 456 (503)
Cash and Cash Equivalents at Beginning of Year 7,712 8,008
Cash and Cash Equivalents at End of Quarter $ 8,168 $ 7,505
_________ _________
See Accompanying notes to Consolidated Financial Statements
<PAGE>5
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION> Accumulated
Other
Comprehensive
Common Stock Retained Income
Shares Amount Surplus Earnings (Loss) Total
______ _______ _______ ________ ________ ________
<S> <C> <C> <C> <C> <C> <C>
Balance, 01/01/97 1,222 $ 3,054 $ 5,187 $ 6,394 $ (18) $14,617
Comprehensive
income
Net income - - - 497 - 497
Net changes in
unrealized gains
(losses) on
investment
securities
available for
sale, net of
taxes - - - - 47 47
Total comprehensive _______
income 544
Dividends paid - - - - - -
Sale of stock 5 15 16 - - 31
______ _______ _______ _______ _______ _______
Balance, 03/31/97 1,227 $ 3,069 $ 5,203 $ 6,891 $ 29 $15,192
______ _______ _______ _______ _______ _______
Balance, 01/01/98 1,232 $ 3,081 $ 5,271 $ 8,346 $ 104 $16,802
Comprehensive
income
Net Income - - - 401 - 401
Net changes in
unrealized gains
(losses) on
investment
securities
available for
sale, net of
taxes - - - - (76) (76)
Total comprehensive _______
income 325
Dividends paid
($0.10 per share) - - - (123) - (123)
Stock options
exercised 6 15 (16) - - (1)
______ _______ _______ _______ _______ _______
Balance, 03/31/98 1,238 $ 3,096 $ 5,255 $ 8,624 $ 28 $17,003
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>6
Notes to Consolidated Financial Statements
(in thousands)
________________________________________________________________________________
Note 1. - General
The consolidated financial statements conform to generally accepted
accounting principles and to industry practices. The accompanying
consolidated financial statements are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been included. All such
adjustments are of normal and recurring nature. The notes included
herein should be read in conjunction with the notes to consolidated
financial statements included in the Corporation's 1997 Annual Report
to shareholders.
Note 2. - Allowance for Loan Losses
A summary of transactions in the consolidated allowance for loan
losses for the three months ended March 31 follows:
<TABLE>
1998 1997
____ ____
<S> <C> <C>
Balance, January 1 $ 1,636 $ 1,072
Provision 302 141
Recoveries 60 2
Charge-offs (284) (90)
_______ _______
Balance, March 31 $ 1,714 $ 1,125
</TABLE>
Note 3. - Income Taxes
Income tax expense for the three months ended March 31 is different
than the amount computed by applying the statutory corporate federal
income tax rate of 34% to income before taxes. The reasons for this
difference are as follows:
<TABLE> 1998 1997
____ ____
<S> <C> <C>
Tax expense at statutory rate $ 211 $ 254
Increase (reduction) in taxes
resulting from:
Tax exempt interest (6) (3)
Other, net (4) (2)
_______ _______
Provision for income taxes $ 201 $ 249
</TABLE>
Note 4. Regulators of the corporation and its subsidiaries have
implemented risk-based capital guidelines which require the
maintenance of certain minimum capital as a percent of assets and
certain off-balance sheet items adjusted for predefined credit risk factors.
The regulatory minimum for Tier and combined Tier 1 and Tier 2
capital ratios were 4.0% and 8.0%, respectively. Tier 1 capital includes
tangible common shareholder's equity reduced by goodwill and certain
other intangibles. Tier 2 capital includes portions of the allowance for
loan losses, not to exceed Tier 1 capital. In addition to the risk-based
guidelines, a minimum leverage ratio (Tier 1 capital as a percentage of
<PAGE>7
average total consolidated assets) of 4.0% is required. This minimum
may be increased by at least 1.0% or 2.0% for entities with higher levels
of risk or that are experiencing or anticipating significant growth. The
following table contains the capital ratios for the Corporation and it's
subsidiary as of March 31, 1998.
<TABLE> Combined
Entity Tier 1 Capital Leverage
______ ______ ________ ________
<C> <C> <C> <C>
Highlands Bankshares, Inc. 8.58% 9.44% 6.18%
Highlands Union Bank 9.30% 10.18% 6.78%
</TABLE>
PART 1. ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis is provided to address information about
the Company's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements incorporated
by reference or included in this report. Reference should be made to those
statements for an understanding of the following discussion and analysis.
Results of Operations
Results of operations for the period ended March 31, 1998 reflected
net income of $401 thousand, a decrease of 19.32% over net income
for the corresponding period in 1997. Operating results of the Company
when measured as a percentage of average equity reveals a decrease of
return on average equity from 13.38% for the three-month period in 1997
to 9.47% for the corresponding period in 1998.
Return on average assets at .58% reflects a decrease from .93% for the
same period in 1997. These decreases in the profitability ratios over
the comparable period are the result of the absorption of costs associated
with opening a new branch in December of 1997, additional cost relating
to the $7.5 million capital issue in January of 1998 and the continued
increased funding of loan loss reserve.
Net interest income for the three months ended March 31, 1998
increased 17.30% approximately $325 thousand over the comparable
1997 period. Average, interest-earning assets increased approximately
$56.87 million from March 31, 1997 to the current period while
average interest-bearing liabilities increased $51.95 million during the
same comparative period. The yield on average interest-earning assets
decreased 1 basis point to 7.88% in 1998 as compared to 7.89% in
1997. The yield on average interest-bearing liabilities increased 14 basis
points to 5.61% in 1998 as compared to 5.47% in 1997.
The first quarter provision for possible loan losses totaled $302 thousand,
a $161 thousand increase from the corresponding period in 1997. The
Company continually monitors the loan portfolio for signs of credit
weaknesses or developing collection problems. Levels for each period
are determined after evaluating the loan portfolio and determining the
level necessary to absorb current charge-offs and maintain the reserve
at adequate levels. Net charge-offs in the first quarter of 1998 were
$224 thousand compared with $88 thousand in 1997. Net charge-offs were
<PAGE>8
.11% of total loans for the quarter ended March 31, 1998 as compared to
.05% for the 1997 quarter end. Loan loss reserves increased 52.28% to
$1,714 thousand at March 31, 1998 from the comparable 1997 period.
Reserves as of March 31, 1998 represent .85% of total loans versus .67%
for the 1997 period.
The Company completed a $7.5 million dollar capital issue on January 23,
1998. These trust preferred debt securities were issued by Highlands
Capital Trust, a wholly owned subsidiary of Highlands Bankshares, Inc.
These securities were issued at a 9.25% fixed rate with a 30 year term
and a 10 year call provision at the Company's discretion. This capital
was raised to meet current and future opportunities of the Company.
Financial Position
Total loans have increased from $166.9 million at March 31, 1997 to
$201.6 million at March 31, 1998. The loan to deposit ratio has
decreased from 82.22% at March 31, 1997 to 79.21% at March 31, 1998.
Loan demand continues at a high pace even with a competitive market
area.
Non-performing assets are comprised of loans on non-accrual status
and loans contractually past due 90 days or more and still accruing
interest. Non-performing assets were $2.6 million at March 31, 1998
or 1.29% of total loans, compared with $756 thousand at March 31, 1997.
Securities totaled approximately $60.5 million (market value) at March
31, 1998 which reflects an increase of $21.5 million or 55.26% from the
March 31, 1997 total of $39.0 million. The majority of this increase is
in purchase of adjustable rate securities in order to match the current
volatile rate environment. Securities, as of March 31, 1998 are comprised
of U.S. Treasuries, approximately 0.83% of the total securities portfolio,
obligations of the U.S. Government, approximately 92.12% of the securities
portfolio, municipal issues, approximately 4.98% of the securities
portfolio, and equity securities, approximately 2.07% of the securities
portfolio. The Company's entire security portfolio is classified as
available for sale for both 1998 and 1997.
Total stockholder's equity of the Company was $17.0 million at March
31, 1998, representing an increase of $1.8 million or 12.03% over March
31, 1997. The Company maintains a significant level of liquidity in the
form of cash and cash equivalents ($8.2 million at March 31, 1998),
overnight investment in Federal Funds Sold ($8.8 million at March 31,
1998), and investment securities available for sale ($60.5 million). Both
cash and Federal Funds Sold are immediately available for satisfaction
of deposit withdrawals, customer credit needs, and operations of the
Company. Investment securities available for sale represent a secondary
level of liquidity available for conversion to liquid funds in the event of
extraordinary needs.
<PAGE>9
HIGHLANDS BANKSHARES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
(a) N/A
(b) N/A
Item 3. Defaults Upon Senior Securities
(a) N/A
(b) N/A
Item 4. Submission of Matters to Vote of Security Holders
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) N/A
(b) N/A
<PAGE>10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on it's behalf by
the undersigned thereunto duly authorized.
Highlands Bankshares, Inc.
Date: May 13, 1998 /S/ Samuel L. Neese
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: May 13, 1998 /S/ James T. Riffe
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<PAGE>11
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HIGHLANDS BANKSHARES INC /VA/ CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> $ 8,168
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,826
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,532
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 201,634
<ALLOWANCE> 1,714
<TOTAL-ASSETS> 289,329
<DEPOSITS> 254,558
<SHORT-TERM> 143
<LIABILITIES-OTHER> 2,481
<LONG-TERM> 15,144
0
0
<COMMON> 3,096
<OTHER-SE> 13,907
<TOTAL-LIABILITIES-AND-EQUITY> 289,329
<INTEREST-LOAN> 4,489
<INTEREST-INVEST> 842
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,331
<INTEREST-DEPOSIT> 2,960
<INTEREST-EXPENSE> 3,127
<INTEREST-INCOME-NET> 2,204
<LOAN-LOSSES> 302
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 1,583
<INCOME-PRETAX> 602
<INCOME-PRE-EXTRAORDINARY> 401
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 401
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
<YIELD-ACTUAL> 7.88
<LOANS-NON> 642
<LOANS-PAST> 1,957
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,636
<CHARGE-OFFS> 284
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 1,714
<ALLOWANCE-DOMESTIC> 1,714
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
