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 June 30, 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
(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: 2,509,085 shares
<PAGE>
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended June 30, 1999
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998.........3
Consolidated Statements of Income
for the Quarters and Six-Month Periods
Ended June 30, 1999 and 1998................4
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended
June 30, 1999 and 1998......................5
Consolidated Statement of Changes in
Stockholders' Equity for the Six-Months
Ended June 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
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------
(Unaudited)
(Amounts in thousands) June 30, December 31,
1999 1998
--------- ---------
ASSETS
Cash and due from banks $ 10,424 $ 9,324
Federal funds sold 345 1,670
Investment securities available for sale
(amortized cost; $68,903 June 30, 1999; $51,506
December 31, 1998) 68,463 51,355
Loans,net of allowance for credit losses
$2,195 June 30, 1999; $2,008 December 31, 1998 245,942 231,363
Bank premises and equipment 9,155 8,270
Interest receivable 2,153 1,875
Other assets 2,954 3,907
--------- ---------
Total Assets $ 339,436 $ 307,764
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits, non-interest bearing $ 37,602 $ 36,187
Deposits, interest bearing 253,847 236,154
--------- ---------
Total Deposits 291,449 272,341
--------- ---------
Federal Funds Purchased 4,393 503
Short-term borrowings 8,168 164
Notes Payable- long term 6,513 6,599
Interest, taxes and other liabilities 2,397 2,378
Capital Securities 7,500 7,500
Total Liabilities 320,420 289,485
--------- ---------
STOCKHOLDERS' EQUITY
Commonstock, $1.25 par value; 20,000,000
shares authorized; 2,509,085 issued and
outstanding June 30, 1999 3,136 3,116
Surplus 5,357 5,265
Undivided profits 10,813 9,998
Unrealized gains (losses) on securities
available for sale, net of deferred taxes (290) (100)
--------- ---------
Total Stockholders' Equity 19,016 18,279
--------- ---------
Total Liabilities and Stockholders'
Equity $ 339,436 $ 307,764
========= =========
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>
<S> <C> <C>
Six Month Period
Quarter Ended June 30, Ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans $ 5,323 $ 4,786 $10,606 $ 9,337
Interest on securities available for sale:
Taxable 876 793 1,607 1,507
Exempt from taxable income 15 52 20 60
Interest on federal funds sold 14 53 38 172
------- ------- ------- -------
Total Interest Income 6,228 5,684 12,271 11,076
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 3,133 3,094 6,171 6,054
Interest on short-term borrowings 288 287 557 453
Interest on federal funds purchased 23 12 32 12
------- ------- ------- -------
Total Interest Expense 3,444 3,393 6,760 6,519
------- ------- ------- -------
Net Interest Income 2,784 2,291 5,511 4,557
------- ------- ------- -------
Provision for loan losses 327 303 696 604
------- ------- ------- -------
Net Interest Income After Provision Loan Losses 2,457 1,988 4,815 3,953
------- ------- ------- -------
NON-INTEREST INCOME
Securities gains(losses), net 4 12 24 44
Service charges on deposit accounts 177 123 331 243
Other fee income 103 90 171 131
Other operating income 53 34 100 54
------- ------- ------- -------
Total Non-Interest Income 337 259 626 472
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,074 865 2,105 1,717
Occupancy expense of bank premises 96 80 192 156
Furniture and Equipment Expense 276 217 499 407
Other operating expenses 599 476 1,190 934
------- ------- ------- -------
Total Non-Interest Expense 2,045 1,638 3,986 3,214
------- ------- ------- -------
Income Before Applicable Income Taxes 749 609 1,455 1,211
Income tax expense 250 208 490 409
------- ------- ------- -------
Net Income $ 499 $ 401 $ 965 $ 802
======= ======= ======= =======
Basic Earnings Per Share (Weighted Average
Basis) $ .20 $ .17 $ .38 $ .33
======= ======= ======= =======
Diluted Earnings Per Share $ .19 $ .17 $ .36 $ .32
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Unaudited) Six Month Period Six Month Period
(Amounts in thousands) Ended June Ended June
30, 1999 30, 1998
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 965 $ 802
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 696 604
Provision for deferred taxes -- --
Deferred compensation expense -- (25)
Depreciation and Amortization 312 231
Securities (gains) losses (24) (44)
Net amortization on securities 195 242
Amortization of Capital Issue Costs 5 --
(Increase)decrease in interest receivable (279) (339)
(Increase)decrease in other assets 1,038 (353)
Increase (decrease) in interest, taxes
and other liabilities 19 402
-------- --------
Net Cash Provided by Operating Activities 2,927 1,520
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 1,963 4,866
Proceeds from maturities of debt securities 13,447 11,994
Purchase of securities (32,978) (34,860)
Net (increase) decrease in federal funds
sold 1,325 2,242
Net increase in loans (15,275) (21,299)
Premises and equipment expenditures (1,147) (849)
-------- --------
Net Cash Used in Investing Activities (32,665) (37,906)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: 6,911 10,858
Net increase in certificates of deposit
Net increase in demand, savings and other 12,196 13,319
deposits 11,894 143
Net increase in short-term borrowings 73 24
Proceeds from issuance of common stock (150) (123)
Cash dividends paid (86) 11,529
Net increase in long-term debt -------- --------
30,838 35,750
Net Cash Provided by Financing Activities -------- --------
1,100 (636)
Net Increase in Cash and Cash Equivalents -------- --------
9,324 7,712
Cash and Cash Equivalents at Beginning of Year -------- --------
$ 10,424 $ 7,076
Cash and Cash Equivalents at End of Quarter ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 6,755 $ 5,794
Income taxes $ 535 $ 468
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
PART I. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands)
- --------------------------------------------------------------------------------
COMMON STOCK
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Accumulated
Other
Comprehensive
Retained Income
Shares Amount Surplus Earnings (Loss) Total
----- -------- -------- -------- -------- --------
BALANCE, JANUARY
1, 1998 2,464 $ 3,081 $ 5,271 $ 8,346 $ 104 $ 16,802
COMPREHENSIVE INCOME
Net income -- -- -- 802 -- 802
Net change in
unrealized gains
(losses) on invest-
ment securities
available for sale,
net of taxes -- -- -- -- (181) (181)
TOTAL COMPREHENSIVE ----- -------- -------- -------- -------- --------
INCOME 802 (181) 621
Dividends paid (123) (123)
Stock exercised options 12 15 (16) -- -- (1)
----- -------- -------- -------- -------- --------
BALANCE, JUNE 30,
1998 2,476 $ 3,096 $ 5,255 $ 9,025 (77) $ 17,299
----- -------- -------- -------- -------- --------
BALANCE, JANUARY
1, 1999 2,492 $ 3,116 $ 5,265 $ 9,998 $ (100) $ 18,279
COMPREHENSIVE INCOME
Net income -- -- -- 965 -- 965
Net change in
unrealized gains
(losses) on invest-
ment securities
available for sale,
net of taxes -- -- -- -- (190) (190)
----- -------- -------- -------- -------- --------
TOTAL COMPREHENSIVE
INCOME -- -- -- 965 (190) 775
----- -------- -------- -------- -------- --------
Dividends paid ($.10
per share) -- -- -- (150) -- (150)
Stock options
exercised 17 20 92 -- -- 112
----- -------- -------- -------- -------- --------
BALANCE, JUNE 30,
1999 2,509 $ 3,136 $ 5,357 $ 10,813 $ (290) $ 19,016
----- -------- -------- -------- -------- --------
</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
six months ended June 30 follows:
1999 1998
------- -------
Balance, January 1 $ 2,008 $ 1,636
Provision 696 604
Recoveries 67 127
Charge-offs (576) (569)
------- -------
Balance, June 30 $ 2,195 $ 1,798
------- -------
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:
1999 1998
----- -----
Tax expense at statutory rate $ 495 $ 412
Increase (reduction) in taxes
resulting from:
Tax exempt interest (7) (20)
Other, net 2 17
----- -----
Provision for income taxes $ 490 $ 409
----- -----
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
<PAGE>
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 June 30, 1999.
Tier 1 Tier 2 Leverage
------ ------ --------
Highlands Bankshares, Inc. 11.00% 12.46% 7.70%
Highlands Union Bank 9.26% 10.22% 6.50%
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 June 30, 1999 reflected net income of
$965 thousand, a increase of 20.32% over net income reported for the
corresponding period in 1998. Operating results of the Company when measured as
a percentage of average equity reveals a increase in returns on average equity
from 9.42% for the six-month period in 1998 to 10.29% for the corresponding
period in 1999.
Return on average assets at 0.60% reflects an increase from 0.57% for the
comparable 1998 period.
Net interest income for the six months ended June 30, 1999 increased 20.96%,
approximately $955 thousand over the comparable 1998 period. Average
interest-earning assets increased approximately $34.60 million from June 30,
1998 to the current period while average interest-bearing liabilities increased
$31.30 million during the same comparative period. The yield on average
interest-earning assets decreased 16 basis points to 8.19% in 1999 as compared
to 8.35% 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 second quarter of 1999, the provision for possible loan losses
totaled $696 thousand, a $92 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 six months of 1999 were $509 thousand
compared with $442 thousand in 1998. Net charge-offs were 0.21% of total loans
for the six months ended June 30, 1999 as compared to 0.21% for the comparable
1998 period. Loan loss reserves increased 22.03% to $2.2 million at June 30,
1999. Reserves as of June 30, 1999 represent 0.88% of total loans versus 0.85%
for the 1998 period.
FINANCIAL POSITION
Total loans have increased from $212.9 million at June 30, 1998 to $248.1
million at June 30, 1999. The loan to deposit ratio has increased from 81.61% at
June 30, 1998 to 85.14% at June 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 $2.7 million at June 30, 1999, or 1.09% of total
loans, compared with $2.8 million, at June 30, 1998.
Securities totaled $68.5 million (market value) at June 30, 1999 which reflects
an increase of $9 million or 15.06% from the June 30, 1998 total of $59.5
million. The majority of this increase is in purchases of adjustable rate
securities in order to match the current volatile
<PAGE>
rate environment. Securities, as of June 30, 1999, are comprised of obligations
of the U.S Government, approximately 94.14% of the total securities portfolio,
municipal issues, approximately 2.80% of the securities portfolio, and equity
securities, approximately 3.06% 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 $19.0 million at June 30, 1999,
representing an increase of $1.7 million or 9.92% over June 30, 1998. The
Company maintains a significant level of liquidity in the form of cash and cash
equivalents ($10.4 million at June 30, 1999), overnight investment in Federal
Funds Sold ($345 thousand at June 30, 1999) and investment securities available
for sale ($68.5 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
<PAGE>
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 had 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
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 12,
1999.
(b) The following directors were elected to serve a one-year
term to the date of the 1999 Annual Meeting of Stockholders:
<PAGE>
Votes Votes
Director's Name Votes For Against Withheld
James D. Morefield 897,857 0 2,600
James D. Moore, Jr. 897,857 0 2,600
J. Carter Lambert 897,857 0 2,600
Clydes B. Kiser 897,857 0 2,600
William E. Chaffin 897,857 0 2,600
William J. Singleton 897,857 0 2,600
Verne D. Kendrick 897,857 0 2,600
Charles P. Olinger 897,857 0 2,600
H. Ramsey White, Jr. 897,857 0 2,600
(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
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 3, 1999 /s/ Samuel L. Neese
-------------------------------------------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: August 3, 1999 /s/ James T. Riffe
------------------------------------------------------
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,424
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 345
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,463
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 248,137
<ALLOWANCE> 2,195
<TOTAL-ASSETS> 339,436
<DEPOSITS> 291,449
<SHORT-TERM> 12,561
<LIABILITIES-OTHER> 2,397
<LONG-TERM> 14,013
0
0
<COMMON> 3,136
<OTHER-SE> 15,880
<TOTAL-LIABILITIES-AND-EQUITY> 339,436
<INTEREST-LOAN> 10,606
<INTEREST-INVEST> 1,665
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,271
<INTEREST-DEPOSIT> 6,171
<INTEREST-EXPENSE> 6,760
<INTEREST-INCOME-NET> 5,511
<LOAN-LOSSES> 696
<SECURITIES-GAINS> 24
<EXPENSE-OTHER> 3,986
<INCOME-PRETAX> 1,455
<INCOME-PRE-EXTRAORDINARY> 1,455
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 965
<EPS-BASIC> .38
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.68
<LOANS-NON> 892
<LOANS-PAST> 1,812
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,008
<CHARGE-OFFS> 576
<RECOVERIES> 67
<ALLOWANCE-CLOSE> 2,195
<ALLOWANCE-DOMESTIC> 2,195
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
