SECURITIES AND EXCHANGE C0MMISSION
WASHINGTON DC 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 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.
Class: Common Stock, par value $2.50 per share
Outstanding June 30, 1998: 1,238,430 shares
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended June 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . 3
Consolidated Statements of Income
for the Three and Six Month Periods Ended
June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the Six Month Periods Ended
June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . .6
Consolidated Statements of Changes in
Stockholders' Equity for the Six
Month Periods Ended June 30, 1998 and 1997. . . . . . . . . . 8
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . .12
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . .12
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
EXHIBIT 27. Financial Data Schedule . . . . . . . . . . . . . . . . . . . . 14
PART 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
____ ____
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,076 $ 7,712
Federal funds sold 4,971 7,213
Investment securities available for sale
(amortized cost $59,607 June 30,1998;
$41,805 December 31, 1997) 59,490 41,963
Loans, net of allowance for credit losses
$1,798 June 30,1998; $1,636 December 31,
1997 211,063 190,369
Bank premises and equipment 7,680 7,062
Interest receivable 1,834 1,495
Other assets 2,870 2,422
_________ _________
Total assets $ 294,984 $ 258,236
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 34,086 $ 30,930
Deposits, interest bearing 226,737 205,716
_________ _________
Total deposits 260,823 236,646
Short-term borrowings 143 -
Notes payable-long term 6,643 2,614
Other long-term debt 7,500 -
Interest, taxes and other liabilities 2,576 2,174
_________ _________
Total liabilities 277,685 241,434
STOCKHOLDERS' EQUITY
Common stock; $2.50 par value; 10,000,000
shares authorized; 1,238,430 issued and
outstanding at June 30, 1998; 1,232,250
outstanding at December 31, 1997 3,096 3,081
Surplus 5,255 5,271
Undivided profits 9,025 8,346
Unrealized gains (losses) on securities
available for sale, net of deferred taxes (77) 104
_________ _________
Total stockholders' equity 17,299 16,802
_________ _________
Total liabilities and
stockholders' equity $ 294,984 $ 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>
QUARTER ENDED SIX MONTH PERIOD
JUNE 30, ENDED JUNE 30,
________________ ________________
1998 1997 1998 1997
____ ____ ____ ____
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 4,712 $ 3,865 $ 9,201 $ 7,454
Interest on securities
available for sale:
Taxable 793 574 1,507 1,098
Exempt from taxable income 52 7 60 15
Interest on federal funds sold 52 30 172 123
_______ _______ _______ _______
Total interest income 5,609 4,476 10,940 8,690
_______ _______ _______ _______
INTEREST EXPENSE
Interest on deposits 3,094 2,432 6,054 4,731
Interest on borrowings 287 27 454 63
Interest on federal funds purchased 12 6 12 6
_______ _______ _______ _______
Total interest expense 3,393 2,465 6,520 4,800
_______ _______ _______ _______
Net interest income 2,216 2,011 4,420 3,890
Provision for loan losses 302 249 604 390
_______ _______ _______ _______
Net interest income after
provision loan losses 1,914 1,762 3,816 3,500
_______ _______ _______ _______
NON-INTEREST INCOME
Securities gains (losses), net 12 11 44 (7)
Service charges on deposit accounts 117 127 230 252
Other fee income 94 72 169 129
Other operating income 99 76 162 116
_______ _______ _______ _______
Total non-interest income 322 286 605 490
_______ _______ _______ _______
NON-INTEREST EXPENSE
Salaries and employee benefits 889 697 1,747 1,358
Occupancy expense of bank premises 299 255 578 462
Other operating expenses 439 358 885 686
_______ _______ _______ _______
Total non-interest expense 1,627 1,310 3,210 2,506
_______ _______ _______ _______
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>4
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
(unaudited)
(Amounts in thousands, except per share data)
________________________________________________________________________________
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTH PERIOD
JUNE 30, ENDED JUNE 30,
________________ ________________
1998 1997 1998 1997
____ ____ ____ ____
<S> <C> <C> <C> <C>
Income before applicable
income taxes 609 738 1,211 1,484
Income tax expense 208 261 409 510
_______ _______ _______ _______
Net income $ 401 $ 477 $ 802 $ 974
_______ _______ _______ _______
Basic earnings per share $ .33 $ .39 $ .65 $ .79
_______ _______ _______ _______
Diluted earnings per share $ .33 $ .39 $ .64 $ .77
_______ _______ _______ _______
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>5
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 1998 30, 1997
________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 802 $ 974
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 604 390
Provision for deferred taxes - 21
Deferred compensation expense (25) 32
Other compensation expense - 42
Depreciation 231 141
Securities (gains) losses (44) 7
Net amortization on securities 242 83
(Increase) decrease in interest receivable (339) (190)
(Increase) decrease in other assets (353) (178)
Increase (decrease) in interest, taxes
and other liabilities 402 45
_________ _________
Net cash provided by operating activities 1,520 1,367
_________ _________
CASH FLOW FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 4,866 3,426
Proceeds from maturity of securities 11,994 3,297
Purchase of securities (34,860) (14,580)
Net (increase) decrease in Federal funds sold 2,242 7,948
Net (increase) in loans (21,299) (20,341)
Premises and equipment expenditures (849) (1,552)
_________ _________
Net cash used in investing activities (37,906) (21,802)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 10,858 12,156
Net increase in demand, savings, and other deposits 13,319 4,793
Net increase (decrease) in short-term borrowings 143 2,216
Proceeds from issuance of common stock 24 17
Cash dividends paid (123) -
Net increase in long-term debt 11,529 881
_________ _________
Net cash provided by financing activities 35,750 20,063
_________ _________
Net increase in cash and cash equivalents (636) (372)
Cash and cash equivalents at beginning of year 7,712 8,008
_________ _________
Cash and cash equivalents at end of quarter $ 7,076 $ 7,636
_________ _________
See accompanying notes to consolidated financial statements
/TABLE
<PAGE>6
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 1998 30, 1997
________ ________
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 5,794 $ 4,545
Income taxes $ 468 $ 543
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>7
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(Amounts in thousands)
________________________________________________________________________________
<TABLE>
<CAPTION> Accumulated Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income (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 - - - 974 - 974
Net changes in
unrealized gains
(losses) on
investment securities
available for sale,
net of taxes - - - - 98 98
______ _______ _______ _______ _______ _______
Total comprehensive
income - - - 974 98 1,072
______ _______ _______ _______ _______ _______
Dividends paid - - - - - -
Stock options
exercised 6 17 42 - - 59
______ _______ _______ _______ _______ _______
Balance, 06/30/97 1,228 $ 3,071 $ 5,229 $ 7,368 $ 80 $15,748
______ _______ _______ _______ _______ _______
Balance, 01/01/98 1,232 $ 3,081 $ 5,271 $ 8,346 $ 104 $16,802
Comprehensive income
Net income - - - 802 - 802
Net changes in
unrealized gains
(losses) on
investment securities
available for sale,
net of taxes - - - - (181) (181)
______ _______ _______ _______ _______ _______
Total comprehensive
income - - - 802 (181) 621
______ _______ _______ _______ _______ _______
Dividends paid
($0.10 per share) - - - (123) - (123)
Stock options
exercised 6 15 (16) - - (1)
______ _______ _______ _______ _______ _______
Balance, 06/30/98 1,238 $ 3,096 $ 5,255 $ 9,025 $ (77) $17,299
______ _______ _______ _______ _______ _______
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>8
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 six months ended June 30 follows:
<TABLE>
1998 1997
____ ____
<S> <C> <C>
Balance, January 1 $ 1,636 $ 1,072
Provision 604 390
Recoveries 127 7
Charge-offs (569) (148)
_______ _______
Balance, June 30 $ 1,798 $ 1,321
</TABLE>
Note 3. - Income Taxes
Income tax expense for the six months ended June 30 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 $ 412 $ 505
Increase (reduction) in taxes
resulting from:
Tax exempt interest (20) (5)
Other, net 17 10
_______ _______
Provision for income taxes $ 409 $ 510
</TABLE>
Note 4. - Regulatory Capital
Regulators of the corporation and its subsidiaries have
implemented risk-based capital guidelines which requires the
maintenance of certain minimum capital as a percent of assets and
certain off-balance sheet items adjusted for predefined credit risk factors.
The regulatory minimum for Tier 1 and combined Tier 1 and Tier 2
capital ratios were 4.0% and 8.0%, respectively. Tier 1 capital includes
<PAGE>9
tangible common shareholder's equity reduced by goodwill and certain
other intangibles. Tier 2 capital includes portions of the allowance for
loan losses, not to exceed Tier 1 capital. In addition to the risk-based
guidelines, a minimum leverage ratio (Tier 1 capital as a percentage of
average total consolidated assets) of 4.0% is required. This minimum
may be increased by at least 1.0% or 2.0% for entities with higher levels
of risk or that are experiencing or anticipating significant growth. The
following table contains the capital ratios for the Corporation and it's
subsidiary as of June 30, 1998.
<TABLE>
Entity Tier 1 Tier 2 Leverage
______ ______ ______ ________
<C> <C> <C> <C>
Highlands Bankshares, Inc. 8.56% 9.37% 5.92%
Highlands Union Bank 9.27% 10.11% 6.52%
</TABLE>
Note 5. - Other Long-Term Debt
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.
PART 1. ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis is provided to address information about
the Company's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements incorporated
by reference or included in this report. Reference should be made to those
statements for an understanding of the following discussion and analysis.
Results of Operations
Results of operations for the period ended June 30, 1998 reflected
net income of $802 thousand, a decrease of 17.66% over net income reported
for the corresponding period in 1997. Operating results of the Company
when measured as a percentage of average equity reveals a decrease in
return on average equity from 12.62% for the six-month period in 1997
to 9.42% for the corresponding period in 1998.
Return on average assets at .57% reflects a decrease from .87% for the
comparable 1997 period. These decreases in the profitability ratios over the
comparable period are the result of the absorption of the additional costs
associated with the opening of a new branch in December of 1997, additional
costs relating to the $7.5 million capital issue in January of 1998 and the
continued increased funding of the Bank's loan loss reserve.
Net interest income for the six months ended June 30, 1998
increased 13.62%, approximately $530 thousand over the comparable
1997 period. Average interest-earning assets increased approximately
$47.50 million from June 30, 1997 to the current period while
<PAGE>10
average interest-bearing liabilities increased $61.16 million during the
same comparative period. The yield on average interest-earning assets
increased 15 basis points to 8.51% in 1998 as compared to 8.36% in
1997. The yield on average interest-bearing liabilities decreased 9 basis
points to 5.28% in 1998 as compared to 5.37% in 1997.
Through the second quarter of 1998, the provision for possible loan losses
totaled $604 thousand, a $214 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 for the first six months of
1998 were $442 thousand compared with $141 thousand in 1997. Net charge-offs
were .21% of total loans for the six months ended June 30, 1998 as compared
to .08% for the six months ended June 30, 1997. Loan loss reserves increased
36.11% to $1.79 million at June 30, 1998 as compared to June 30, 1997.
Reserves as of June 30, 1998 represent .85% of total loans versus .70% for the
1997 period.
Financial Position
Total loans have increased from $175.2 million at June 30, 1997 to
$212.9 million at June 30, 1998. The loan to deposit ratio has
decreased from 84.85% at June 30, 1997 to 81.61% at June 30, 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 $2.8 million at June 30, 1998,
or 1.30% of total loans, compared with $823 thousand, at June 30, 1997.
Securities totaled $59.5 million (market value) at June 30, 1998 which
reflects an increase of $20.2 million or 51.4% from the June 30, 1997
total of $39.3 million. The majority of this increase is in purchases
of adjustable rate securities in order to match the current volatile
rate environment. The Corporation has also increased its investments
in municipal securities. Securities, as of June 30, 1998, are comprised of
obligations of the U.S. Government, approximately 89.65% of the total
securities portfolio, municipal issues, approximately 8.24% of the securities
portfolio, and equity securities, approximately 2.11% 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 $17.3 million at June
30, 1998, representing an increase of $1.6 million or 9.85% over
June 30, 1997. The Company maintains a significant level of liquidity
in the form of cash and cash equivalents ($7.1 million at June 30, 1998),
overnight investment in Federal Funds Sold (4.9 million at June 30, 1998)
and investment securities available for sale ($59.5 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 conversation to liquid funds in the event of
extraordinary needs.
<PAGE>11
HIGHLANDS BANKSHARES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
(a) N/A
(b) N/A
Item 3. Defaults Upon Senior Securities
(a) N/A
(b) N/A
Item 4. Submission of Matters to Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 13, 1998.
(b) The following directors were elected to serve a one-year term
to the date of the 1999 Annual Meeting of Stockholders:
Votes Votes
Director's Name Votes For Against Withheld
_______________ _________ _______ ________
James D. Morefield 809,393 0 900
James D. Moore, Jr. 808,793 600 900
J. Carter Lambert 802,082 0 7,311
Clydes B. Kiser 809,393 0 900
William E. Chaffin 809,393 0 900
William J. Singleton 809,393 0 900
Verne D. Kendrick 809,393 0 900
Charles P. Olinger 809,393 0 900
H. Ramsey White, Jr. 809,017 376 900
(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>12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on it's behalf by
the undersigned thereunto duly authorized.
Highlands Bankshares, Inc.
Date: August 13, 1998 /S/ Samuel L. Neese
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: August 13, 1998 /S/ James T. Riffe
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<PAGE>13
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HIGHLANDS BANKSHARES INC /VA/ CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> $ 7,076
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,971
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,490
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 212,861
<ALLOWANCE> 1,798
<TOTAL-ASSETS> 294,984
<DEPOSITS> 260,823
<SHORT-TERM> 143
<LIABILITIES-OTHER> 2,576
<LONG-TERM> 14,143
0
0
<COMMON> 3,096
<OTHER-SE> 14,203
<TOTAL-LIABILITIES-AND-EQUITY> 294,984
<INTEREST-LOAN> 9,201
<INTEREST-INVEST> 1,739
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,940
<INTEREST-DEPOSIT> 6,054
<INTEREST-EXPENSE> 6,520
<INTEREST-INCOME-NET> 4,420
<LOAN-LOSSES> 604
<SECURITIES-GAINS> 44
<EXPENSE-OTHER> 3,210
<INCOME-PRETAX> 1,211
<INCOME-PRE-EXTRAORDINARY> 802
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 802
<EPS-PRIMARY> .65
<EPS-DILUTED> .64
<YIELD-ACTUAL> 3.42
<LOANS-NON> 1,130
<LOANS-PAST> 1,645
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,636
<CHARGE-OFFS> 569
<RECOVERIES> 127
<ALLOWANCE-CLOSE> 1,798
<ALLOWANCE-DOMESTIC> 1,798
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
