UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
Of The Securities Exchange Act of 1934
For The Quarter Ended September 30, 1999
Commission File Number: Applied For
Highlands Bankshares, Inc.
Incorporated in the State of Virginia
E.I. Number: 54-1796693
P.O. Box 1128
Abingdon, Virginia 24212
(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.
(1) YES__X__ NO_____
(2) 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 $1.25 per share
Outstanding June 30, 1999: 2,510,685 shares
<PAGE>
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION REFERENCE
---------
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998.............. 3
Consolidated Statements of Income
for the Quarters and Nine-Month Periods
Ended September 30, 1999 and 1998.................... 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended
September 30, 1999 and 1998........................... 5
Consolidated Statement of Changes in
Stockholders' Equity for the Nine-Months
Ended September 30, 1999 and 1998..................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................ 7-8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 9
Item 2. Changes in Securities........................................... 9
Item 3. Defaults Upon Senior Securities................................. 9
Item 4. Submission of Matters to a Vote of
Security Holders...................................... 9
Item 5. Other Information............................................... 9
Item 6. Exhibits and Reports on Form 8-K................................ 9
SIGNATURES....................................................................... 10
</TABLE>
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) September 30, December 31,
(Amounts in thousands) 1999 1998
- ---------------------- ------------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 11,775 $ 9,324
Federal funds sold 590 1,670
Investment securities available for sale
(amortized cost; $70,328 September 30, 1999; $51,506
December 31, 1998) 69,484 51,355
Loans, net of allowance for credit losses
$2,348 September 30, 1999; $2,008 December 31, 1998 252,207 231,363
Bank premises and equipment 9,201 8,270
Interest receivable 2,119 1,875
Other assets 2,827 3,907
---------- ----------
Total Assets $ 348,203 $307,764
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 39,910 $ 36,187
Deposits, interest bearing 266,136 236,154
---------- ----------
Total Deposits 306,046 272,341
---------- ----------
Federal Funds Purchased 2,171 503
Short-term borrowings 4,162 164
Notes Payable- long term 6,513 6,599
Interest, taxes and other liabilities 2,416 2,378
Capital Securities 7,500 7,500
---------- ----------
Total Other Liabilities 22,762 17,144
---------- ----------
Total Liabilities 328,808 289,485
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $1.25 par value; 20,000,000
shares authorized; 2,510,685 issued and
outstanding September 30, 1999 3,138 3,116
Surplus 5,377 5,265
Undivided profits 11,437 9,998
Unrealized gains (losses) on securities
available for sale, net of deferred taxes (557) (100)
---------- ----------
Total Stockholders' Equity 19,395 18,279
---------- ----------
Total Liabilities and Stockholders'
Equity $ 348,203 $ 307,764
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------
(Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Nine Months Ended
Ended September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- -----------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $5,557 $5,060 $16,163 $14,397
Interest on securities available for sale:
Taxable 991 776 2,598 2,283
Exempt from taxable income 22 33 42 93
Interest on federal funds sold 9 21 47 193
--------- ---------- ---------- ----------
Total Interest Income 6,579 5,890 18,850 16,966
--------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 3,236 3,151 9,407 9,205
Interest on short-term borrowings 356 275 912 729
Interest on federal funds purchased 27 41 60 53
--------- ---------- ---------- ----------
Total Interest Expense 3,619 3,467 10,379 9,987
--------- ---------- ---------- ----------
Net Interest Income 2,960 2,423 8,471 6,979
--------- ---------- ---------- ----------
Provision for loan losses 415 351 1,111 955
--------- ---------- ---------- ----------
Net Interest Income After Provision Loan Losses 2,545 2,072 7,360 6,024
--------- ---------- ---------- ----------
NON-INTEREST INCOME
Securities gains(losses), net 93 71 117 115
Service charges on deposit accounts 179 141 510 371
Other fee income 112 107 283 276
Other operating income 55 52 155 78
--------- ---------- ---------- ----------
Total Non-Interest Income 439 371 1,065 840
--------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,107 1,023 3,212 2,770
Occupancy expense of bank premises 125 146 317 361
Furniture and equipment expense 292 182 791 545
Other operating expenses 529 461 1,719 1,346
--------- ---------- ---------- ----------
Total Non-Interest Expense 2,053 1,812 6,039 5,022
--------- ---------- ---------- ----------
Income Before Applicable Income Taxes 931 631 2,386 1,842
Income tax expense 307 181 797 590
--------- ---------- ---------- ----------
Net Income $ 624 $ 450 $ 1,589 $ 1,252
========= ========== ========== ==========
Basic Earnings Per Share (Weighted Average
Basis) $ .25 $ .36 $ .63 $ .51
========= ========== ========== ==========
Diluted Earnings Per Share $ .23 $ .34 $ .59 $ .50
========= ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Month Period Nine Month Period
(Unaudited) Ended September Ended September
(Amounts in thousands) 30, 1999 30, 1998
------------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 1,589 $ 1,252
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,111 955
Provision for deferred taxes - -
Deferred compensation expense - (25)
Depreciation and Amortization 483 366
Securities (gains)losses (117) (115)
Net amortization on securities 256 383
Amortization of Capital Issue Costs 12 12
(Increase) decrease in interest receivable (244) (378)
(Increase) decrease in other assets 1,314 (520)
Increase (decrease) in interest, taxes 28 454
and other liabilities ----------- ---------
4,432 2,384
Net Cash Provided by Operating Activities ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale: 7,624 8,497
Proceeds from sale of securities 17,830 21,341
Proceeds from maturities of debt securities (44,415) (44,589)
Purchase of securities
Net (increase) decrease in federal funds 1,080 5,434
sold
Net increase in loans (21,955) (32,538)
Premises and equipment expenditures (1,414) (1,358)
----------- ---------
Net Cash Used in Investing Activities (41,250) (43,213)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 11,093 13,332
Net increase in demand, savings and other
deposits 22,612 16,796
Net increase in short-term borrowings 5,666 164
Proceeds from issuance of common stock 134 36
Cash dividends paid (150) (123)
Net increase in long-term debt (86) 11,562
---------- ---------
Net Cash Provided by Financing Activities 39,269 41,767
---------- ---------
Net Increase in Cash and Cash Equivalents 2,451 938
---------- ---------
Cash and Cash Equivalents at Beginning of Year 9,324 7,712
---------- ---------
Cash and Cash Equivalents at End of Quarter $ 11,775 8,650
=========== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 10,353 $9,310
Income taxes $ 722 $ 638
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
COMMON STOCK Comprehensive
Retained Income
Shares Amount Surplus Earnings (Loss) Total
---------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 2,464 $3,081 $5,271 $8,346 $ 104 $16,802
COMPREHENSIVE INCOME
Net income - - - 1,252 - 1,252
Net change in
unrealized gains
(losses) on invest-
ment securities
available for sale,
net of taxes - - - - (27) (27)
----------- ---------- --------- --------- -------- ---------
TOTAL COMPREHENSIVE 1,252 (27) 1,225
INCOME
Dividends paid
Stock options (123) (123)
exercised 16 19 (8) - - 11
----------- ----------- ---------- --------- --------- ----------
BALANCE, SEPT. 30,
1998 2,480 $3,100 $5,263 $9,475 77 $17,915
----------- ----------- ---------- --------- --------- ----------
BALANCE, JANUARY
1, 1999 2,493 $3,116 $5,265 $9,998 $ (100) $18,279
COMPREHENSIVE INCOME
Net income - - - 1,589 - 1,589
Net change in
unrealized gains
(losses) on invest-
ment securities
available for sale,
net of taxes - - - - (457) (457)
----------- ----------- ---------- -------- --------- ----------
TOTAL COMPREHENSIVE
INCOME - - - 1,589 (457) 1,132
----------- ----------- ---------- -------- --------- ----------
Dividends paid ($.10
per share) - - - (150) - (150)
Stock options
exercised 18 22 112 - - 134
------------ ------------ ----------- --------- --------- ----------
BALANCE, SEPT. 30,
1999 2,511 $3,138 $5,377 $11,437 $ (557) $19,395
------------ ------------ ----------- ---------- --------- ----------
</TABLE>
<PAGE>
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 opinions 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 1998 Annual
Report to Shareholders.
Note 2. - Allowance for Loan Losses
A summary of transactions in the consolidated allowance for loan losses for the
nine months ended September 30 follows:
1999 1998
---- ----
Balance, January 1 $ 2,008 $ 1,636
Provision 1,111 955
Recoveries 112 155
Charge-offs (883) (841)
----------- -----------
Balance, September 30 $ 2,348 $ 1,905
----------- -----------
Note 3. - Income Taxes
Income tax expense for the nine months ended September 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:
1999 1998
---- ----
Tax expense at statutory rate $ 809 $ 626
Increase (reduction) in taxes
resulting from:
Tax exempt interest (14) (32)
Other, net 2 (4)
------ ------
Provision for income taxes $ 797 $ 590
------ -------
Note 4. - Regulatory Capital
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 1 and combined Tier 1 and
Tier 2 capital ratios were 4.0% and 8.0%, respectively. Tier 1 capital includes
<PAGE>
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, 1999.
Tier 1 Tier 2 Leverage
------ ------ --------
Highlands Bankshares, Inc. 11.68% 12.68% 7.53%
Highlands Union Bank 9.39% 10.40% 6.45%
Note 5 - Capital Securities
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.
Note 6 - Stock Split
On April 14, 1999, the Board authorized a 2 for 1 stock split to be distributed
to all shareholders of record as of April 22, 1999. As a result, authorized
shares increased from 10,000,000 to 20,000,000 and par value decreased from
$2.50 to $1.25. All references in the financial statements to number of shares
and per share amounts of the Company's common stock have been retroactively
restated to reflect the increased number of common shares outstanding.
HIGHLANDS BANKSHARES, INC.
PART I. 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.
<PAGE>
RESULTS OF OPERATIONS
Results of operations for the period ended September 30, 1999 reflected net
income of $1,589 thousand, an increase of 26.98% over net income reported for
the corresponding period in 1998. Operating results of the Company when measured
as a percentage of average equity reveals an increase in return on average
equity from 9.62% for the nine-month period in 1998 to 11.21% for the
corresponding period in 1999.
Return on average assets at 0.64% reflects an increase from 0.59% for the
comparable 1998 period.
Net interest income for the nine months ended September 30, 1999 increased
21.38%, approximately $1.49 million over the comparable 1998 period. Average
interest-earning assets increased approximately $36.34 million from September
30, 1998 to the current period while average interest-bearing liabilities
increased $32.16 million during the same comparative period. The yield on
average interest-earning assets decreased 17 basis points to 8.20% in 1999 as
compared to 8.37% in 1998. The yield on average interest-bearing liabilities
decreased 48 basis points to 5.14% in 1999 as compared to 5.62% in 1998.
Through the third quarter of 1999, the provision for possible loan losses
totaled $1.1 million, a $156 thousand increase from the corresponding period in
1998. The Company continually monitors the loan portfolio for signs of credit
weakness 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 nine months of 1999 were $772 thousand
compared with $686 thousand in 1998. Net charge-offs were 0.30% of total loans
for the nine months ended September 30, 1999 as compared to 0.31% for the
comparable 1998 period. Loan loss reserves increased 23.26% to $2.348 million at
September 30, 1999. Reserves as of June 30, 1999 represent 0.92% of total loans
versus 0.85% for the 1998 period.
FINANCIAL POSITION
Total loans have increased from $223.9 million at September 30, 1998 to $254.6
million at September 30, 1999. The loan to deposit ratio has decreased from
83.91% at September 30, 1998 to 83.18% at September 30, 1999. Loan demand
continues at a high pace even within 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 $1.3 million at September 30, 1999, or 0.53% of total
loans, compared with $1.8 million, at September 30, 1998.
Securities totaled $69.5 million (market value) at September 30, 1999 which
reflects an increase of $13.1 million or 23.2% from the September 30, 1998 total
of $56.4 million. The majority of this increase is in purchases of adjustable
rate securities in order to match the current volatile rate environment.
Securities, as of
<PAGE>
September 30, 1999, are comprised of obligations of the U.S Government,
approximately 94.41% of the total securities portfolio, municipal issues,
approximately 2.59% of the securities portfolio, and equity securities,
approximately 2.30% of the securities portfolio. The Company's entire security
portfolio is classified as available for sale for both 1999 and 1998.
Total stockholders' equity of the Company was $19.4 million at September 30,
1999, representing an increase of $1.5 million or 8.26% over September 30, 1998.
The Company maintains a significant level of liquidity in the form of cash and
cash equivalents ($11.8 million at September 30, 1999), overnight investment in
Federal Funds Sold ($590 thousand at September 30, 1999) and investment
securities available for sale ($69.5 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.
YEAR 2000 ISSUE
It has been widely publicized that many computer applications will not operate
past the year 2000 without modifications. This problem results from the fact
that some computer systems store dates in a two digit format (i.e., 98) instead
of a four digit format (1998). On January 1, 2000 it is possible that some
systems with time sensitive software programs will recognize that year as "00"
and may incorrectly interpret the year as 1900 rather than 2000. In the Fall of
1997 the Company adopted a formalized plan of action to minimize the risk of the
Year 2000 event. As part of the plan the Company appointed an internal oversight
committee to assess, monitor, and review vendor compliance and certification and
to identify clearly all systems and equipment used in day to day operations of
the Company that might be affected. This assessment forms the basis for our full
remediation and testing process. During 1998, the Company has completed the
assessment phase, identified mission critical systems, put a testing strategy in
place, worked on contingency plans and undertaken steps to verify that all
vendors, suppliers and other related business parties will be ready for the year
2000. This phase also included conducting compliance certification surveys with
its large commercial loan customers in order to determine their ability to be
Year 2000 compliant. The Company is currently conducting tests of its mission
critical systems including its core application accounting systems and is on
track with the FFIEC time frames. The following table identifies each phase and
its estimated timetable for completion.
Phase Completed By
Awareness September 30, 1997
Assessment December 31, 1997
Implementation & Approval March 31, 1999
Final Review & Approval June 30, 1999
Monitoring Through Year 2000
The Company has estimated that the total costs directly relating to fixing the
Year 2000 issues, such as software modification and system
<PAGE>
testing, will not have a material effect on the performance of the Company. The
Year 2000 budget is currently $100,000. No direct costs other than human
resource hours) have been expensed as of this date. The Company's most
reasonable likely worst case Year 2000 scenarios may include the failure of a
vendor or third party provider - which is beyond the Company's control. In the
event a failure occurs - the Company will implement manual contingency systems
without serious impact on the Bank's financial condition. As of September 30,
1999, the Company has created several basic contingency plans. These plans, and
the Company's documentation of its Y2K testing results have been reviewed by an
independent third party which is the final phase of the FFIEC's Y2K testing
guidelines. Management believes the Company is adequately addressing the Year
2000 issue and that the current preparations and testing being conducted
throughout the organization, all seek to minimize any potential adverse effect
on the Company, its customers, or its shareholders.
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) N/A
(b) N/A
<PAGE>
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: October 28, 1999 /S/ Samuel L. Neese
---------------------------------------------------------------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: October 28, 1999 /S/ James T. Riffe
---------------------------------------------------------------------------
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,775
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 590
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,484
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 254,555
<ALLOWANCE> 2,348
<TOTAL-ASSETS> 348,203
<DEPOSITS> 306,046
<SHORT-TERM> 6,333
<LIABILITIES-OTHER> 2,416
<LONG-TERM> 14,013
0
0
<COMMON> 3,138
<OTHER-SE> 16,257
<TOTAL-LIABILITIES-AND-EQUITY> 348,203
<INTEREST-LOAN> 16,163
<INTEREST-INVEST> 2,687
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 18,850
<INTEREST-DEPOSIT> 10,319
<INTEREST-EXPENSE> 10,379
<INTEREST-INCOME-NET> 8,471
<LOAN-LOSSES> 1,111
<SECURITIES-GAINS> 117
<EXPENSE-OTHER> 6,039
<INCOME-PRETAX> 2,386
<INCOME-PRE-EXTRAORDINARY> 1,589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,589
<EPS-BASIC> .63
<EPS-DILUTED> .59
<YIELD-ACTUAL> 3.68
<LOANS-NON> 1,164
<LOANS-PAST> 170
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,008
<CHARGE-OFFS> 883
<RECOVERIES> 112
<ALLOWANCE-CLOSE> 2,348
<ALLOWANCE-DOMESTIC> 2,348
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
