<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE C0MMISSION
WASHINGTON DC 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999
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.
(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.
Common Stock: 1,251,415
Highlands Bankshares, Inc.
<PAGE>
FORM 10-Q
For the Quarter Ended March 31, 1999
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
---------------------------------------------
<TABLE>
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998.......................... 3
Consolidated Statement of Income
for the Three Months Ended
March 31, 1999 and 1998....................................... 4
Consolidated Statement of Cash Flows
for the Three Months Ended
March 31, 1999 and 1998....................................... 5
Consolidated Statements of Changes in
Stockholder's Equity for the Three
Months Ended March 31, 1999 and 1998.......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................. 7-9
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
</TABLE>
<PAGE>
PART 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Amounts in thousands) March 31, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,502 $ 9,324
Federal Funds Sold 1,240 1,670
Investment Securities available for sale
(amortized cost $59,681 March 31,1999;
$51,506 December 31, 1998) 59,693 51,355
Loans, net of allowance for credit losses
$2,111 March 31,1999; $2,008 December 31, 1998 236,887 231,363
Bank premises and equipment 8,395 8,270
Interest receivable 1,939 1,875
Other assets 3,733 3,907
-------- --------
Total Assets $322,389 $307,764
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits, non-interest bearing $ 35,993 $ 36,187
Deposits, interest bearing 247,711 236,154
-------- --------
Total Deposits 283,704 272,341
Short-term borrowings 3,250 667
Interest, taxes, and other liabilities 2,600 2,378
Long-term debt 14,093 14,099
-------- --------
Total Liabilities 303,647 289,485
-------- --------
STOCKHOLDER'S EQUITY
Common Stock; $2.50 par value; 10,000,000
shares authorized; 1,251,415 issued and
outstanding at March 31, 1999 3,128 3,116
Surplus 5,292 5,265
Undivided profits 10,314 9,998
Unrealized gains (losses) on sale of securities
available for sale, net of deferred taxes 8 (100)
-------- --------
Total Stockholders Equity 18,742 18,279
-------- --------
Total Liabilities and Stockholder's Equity $322,389 $307,764
-------- --------
</TABLE>
See accompanying notes to Consolidated Financial Statements
PART I. ITEM 1. - FINANCIAL INFORMATION
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
===================================================================================================================================
(unaudited)
(Amounts in thousands, except per share data) March 31, March 31,
1999 1998
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $5,283 $4,489
Interest on securities available for sale:
Taxable 729 714
Exempt from taxable income 8 8
Interest on federal funds sold 24 120
------ ------
Total Interest Income 6,044 5,331
------ ------
INTEREST EXPENSE
Interest on deposits 3,038 2,960
Interest on borrows funds 279 167
------ ------
Total Interest Expense 3,317 3,127
------ ------
Net Interest Income 2,727 2,204
Provision for loan losses 369 302
------ ------
Net Interest Income After Provision
Loan Losses 2,358 1,902
------ ------
NON-INTEREST INCOME
Securities gains (losses), net 20 32
Service charges on deposit accounts 147 113
Other fee income 123 75
Other operating income 23 63
----- ------
Total Non-interest Income 313 283
----- ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,049 858
Occupancy expense of bank premises 344 279
Other operating expenses 573 446
------ ------
Total Non-interest Expense 1,966 1,583
------ ------
Income Before Applicable Income Taxes 705 602
Income tax expense 239 201
------ ------
Net Income $ 466 $ 401
------ ------
Basic Earnings Per Share (weighted Average Basis) $ .37 $ .32
------ ------
Diluted Earnings Per Share $ .35 $ .31
------ ------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------
(unaudited)
Three Months Three Months
Ended March Ended March
31, 1999 31, 1998
(Amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 466 $ 401
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 369 302
Deferred compensation expense (25)
Depreciation 148 115
Securities (gains) losses (20) (32)
Net amortization on securities 117 99
Amortization capital issue costs 4 3
(Increase) decrease in interest receivable (64) (275)
(Increase) decrease in other assets (34) (375)
Increase (decrease) in interest, taxes
and other liabilities 222 184
-------- --------
Net Cash Provided by Operating Activities 1,208 397
-------- --------
CASH FLOW FORM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 783 2,914
Proceeds from maturity of securities 8,823 5,666
Purchase of securities (17,879) (27,330)
Net (increase) decrease in fed funds sold 430 (1,613)
Net (increase) in loans (5,893) (9,853)
Premises and equipment expenditures (273) (334)
-------- --------
Net Cash used in Investing Activities (14,009) (30,550)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 5,852 9,911
Net increase in demand, savings, and other deposits 5,511 8,001
Net increase in short-term borrowings 2,583 143
Net increase in long-term debt (6) 12,530
Proceeds from issuance of common stock 39 24
-------- --------
Net Cash Provided by Financing Activities 13,979 30,609
-------- --------
Net Increase in Cash and Cash equivalents 1,178 456
Cash and Cash Equivalents at Beginning of Year 9,324 7,712
Cash and Cash Equivalents at End of Quarter $ 10,502 $ 8,168
======== ========
</TABLE>
See Accompanying notes to Consolidated Financial Statements
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------------------------------------
(unaudited)
(Amounts in thousands)
Common Stock Accumulated
Other
Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,232 $3,081 $5,271 $8,346 $ 104 $16,802
Comprehensive income
Net Income - - - 401 - 401
Net change 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, March 31, 1998 1,238 $3,096 $5,255 $8,624 $ 28 $17,003
----- ------ ------ ------ ----- -------
Balance, December 31, 1998 1,246 $3,116 $5,265 $9,998 $(100) $18,279
Comprehensive Income
Net Income - - - 466 - 466
Net change in unrealized gains
(losses) on investment securities
available for sale, net of taxes - - - - 108 108
-------
Total Comprehensive Income - - - - - 574
Dividends paid ($0.12 per share) - - - (150) - (150)
Stock options exercised 5 12 27 - - 39
----- ------ ------ ------- ----- -------
Balance, March 31, 1999 1,251 $3,128 $5,292 $10,314 $ 8 $18,742
===== ====== ====== ======= ===== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
(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 1998 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:
1999 1998
------ ------
Balance, January 1 $2,008 $1,636
Provision 369 302
Recoveries 41 60
Charge-offs (307) (284)
------ ------
Balance, March 31 $2,111 $1,714
------ ------
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:
1999 1998
----- -----
Tax expense at statutory rate $ 243 $ 211
Increase (reduction) in taxes
resulting from:
Tax exempt interest (4) (6)
Other, net -0- (4)
----- -----
Provision for income taxes $ 239 $ 201
----- -----
Note 4. Regulators of the corporation and it's 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 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, 1999.
Entity Tier 1 Combined Capital Leverage
- ------ ------ ---------------- --------
Highlands Bankshares, Inc. 11.30% 12.89% 8.01%
Highlands Union Bank 9.31% 10.27% 6.62%
PART 1. ITEM 2.
<PAGE>
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, 1999 reflected net income
of $466 thousand, an increase of 16.21% over net income for the corresponding
period in 1998. Operating results of the Company when measured as a percentage
of average equity reveals an increase of return on average equity from 9.47% for
the three-month period in 1998 to 10.05% for the corresponding period in 1999.
Return on average assets at 0.59% reflects an increase from 0.58% for the same
period in 1998.
Net interest income for the three months ended March 31, 1999 increased 23.73%
approximately $523 thousand over the comparable 1998 period. Average, interest-
earning assets increased approximately $35.97 million from March 31, 1998 to the
current period while average interest-bearing liabilities increased $33.50
million during the same comparative period. The yield on average interest-
earning assets increased 40 basis points to 8.28% in 1999 as compared to 7.88%
in 1998. The yield on average interest-bearing liabilities decreased 44 basis
points to 5.17% in 1999 as compared to 5.61% in 1998.
The first quarter provision for possible loan losses totaled $369 thousand, a
$67 thousand increase from the corresponding period in 1998. 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 1999 were $266 thousand compared with $224 thousand
in 1998. Net charge-offs were .11% of total loans for the quarter ended March
31, 1999 and 1998. Loan loss reserves increased 23.16% to $2,111 thousand at
March 31, 1999 from the comparable 1998 period. Reserves as of March 31, 1999
represent 0.88% of total loans versus 0.85% for the 1998 period.
Financial Position
Total loans have increased from $201.6 million at March 31, 1998 to $239.0
million at March 31, 1999. The loan to deposit ratio has increased from 79.21%
at March 31, 1998 to 84.24% at March 31, 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 $1.8 million at March 31, 1999 or 0.76% of total loans,
compared with $2.6 million at March 31, 1998.
Securities totaled approximately $59.7 million (market value) at March 31, 1999
which reflects a decrease of $0.8 million or 1.32% from the March 31, 1998
total of $60.5 million. Securities, as of March 31, 1999 are comprised of
obligations of the U.S. Government, approximately 95.62% of the securities
portfolio, municipal issues, approximately 0.78% of the securities portfolio,
and equity securities, approximately 3.60% of the securities portfolio. The
Company's entire security portfolio is classified as available for sale for both
1999 and 1998.
Total stockholder's equity of the Company was $18.7 million at March 31, 1999,
representing an increase of $1.7 million or 10.0% over March 31, 1998. The
Company maintains a significant level of liquidity in the form of cash and cash
equivalents ($10.5 million at March 31, 1999), overnight investment in Federal
Funds Sold ($1.2 million at March 31, 1999), and investment securities available
for sale ($59.7 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
<PAGE>
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. 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
1. Awareness September 30, 1997
2. Assessment December 31, 1997
3. Implementation & Approval March 31, 1999
4. Final Review & Approval June 30, 1999
5. 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 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 March 31, 1999, the Company has created
several basic contingency plans. Planning efforts will continue during 1999
based on the latest FFIEC 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
<PAGE>
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
SIGNATURES
<PAGE>
Pursuant to the requirements 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: May 4, 1999 /S/ Samuel L. Neese .
-------------------------------------------------------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: May 4, 1999 /S/ James T. Riffe .
-------------------------------------------------------------------
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
HIGHLANDS BANKSHARES, INC.
FINANCIAL DATA SCHEDULE
EXHIBIT 27
<TABLE> <S> <C>
<PAGE>
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,502
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,240
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,693
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 238,998
<ALLOWANCE> 2,111
<TOTAL-ASSETS> 322,389
<DEPOSITS> 283,704
<SHORT-TERM> 3,250
<LIABILITIES-OTHER> 2,600
<LONG-TERM> 14,093
0
0
<COMMON> 3,128
<OTHER-SE> 15,614
<TOTAL-LIABILITIES-AND-EQUITY> 322,389
<INTEREST-LOAN> 5,283
<INTEREST-INVEST> 761
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,044
<INTEREST-DEPOSIT> 3,038
<INTEREST-EXPENSE> 3,317
<INTEREST-INCOME-NET> 2,727
<LOAN-LOSSES> 369
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 1,966
<INCOME-PRETAX> 705
<INCOME-PRE-EXTRAORDINARY> 466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 466
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 3.74
<LOANS-NON> 1,094
<LOANS-PAST> 711
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,008
<CHARGE-OFFS> 307
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 2,111
<ALLOWANCE-DOMESTIC> 2,111
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
