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, 2000
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: 2,629,277
<PAGE>
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended March 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION REFERENCE
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 ..........................................................3
Consolidated Statement of Income
for the Three Months Ended
March 31, 2000 and 1999 .......................................................................4
Consolidated Statement of Cash Flows
for the Three Months Ended
March 31, 2000 and 1999 .......................................................................5
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Months Ended March 31, 2000 and 1999 .........................................................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
ACCOUNTANT'S REPORT ..........................................................................................12
</TABLE>
<PAGE>
Part 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
unaudited
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
--------- ---------
<S> <C> <C>
Cash and due from banks (Note 18) $ 8,881 $ 13,988
Federal funds sold - -
--------- ---------
Total Cash and Cash Equivalents 8,881 13,988
Investment securities available for sale 79,853 70,798
(amortized cost $81,161 as of March 31, 2000,
$ 71,736 December 31, 1999)
Loans, net of allowance for loan losses of $2,672
March 31, 2000, 2,494 December 31,1999 265,469 259,184
Premises and equipment, net 10,751 9,425
Interest receivable 2,254 2,155
Other assets 3,384 2,798
--------- ---------
Total Assets $ 370,592 $ 358,348
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 45,363 $ 39,504
Interest bearing 273,887 266,689
--------- ---------
Total Deposits 319,250 306,193
--------- ---------
Federal funds purchased 1,377 3,187
Interest, taxes and other liabilities 3,033 2,461
Other short term borrowings 143 8,000
Long-term debt 18,700 10,599
Capital securities 7,500 7,500
--------- ---------
30,753 31,747
--------- ---------
Total Liabilities 350,003 337,940
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 3,287 3,280
Additional paid-in capital 5,849 5,768
Retained Earnings 12,433 11,979
Accumulated other comprehensive income (loss) (980) (619)
--------- ---------
Total Stockholders' Equity 20,589 20,408
--------- ---------
Total Liabilities and Stockholders' Equity $ 370,592 $ 358,348
========= =========
See accompanying notes to Consolidated Financial Statements and Accountant's Report
</TABLE>
<PAGE>
Part 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
unaudited
(In thousands)
<TABLE>
<CAPTION>
March 31, March 31,
INTEREST INCOME 2000 1999
------- -------
<S> <C> <C>
Loans receivable and fees on loans $ 5,781 $ 5,283
Securities available for sale
Taxable 1,120 729
Exempt from taxable income 59 8
Federal funds sold 15 24
------- -------
Total Interest Income 6,975 6,044
------- -------
INTEREST EXPENSE
Deposits 3,483 3,038
Federal funds purchased 20 10
Other borrowed funds 418 269
------- -------
Total interest expense 3,921 3,317
------- -------
Net interest income 3,054 2,727
ALLOWANCE FOR LOAN LOSSES 362 369
------- -------
Net interest income after allowance for loan losses 2,692 2,358
------- -------
NON-INTEREST INCOME
Securities gains (losses), net (96) 20
Service charges on deposit accounts 424 147
Other service charges, commissions and fees 100 68
Other operating income, rents 45 78
------- -------
Total Non-Interest Income 473 313
------- -------
NON-INTEREST EXPENSES
Salaries and employee benefits 1,200 1,049
Occupancy expense of bank premises 83 79
Furniture and equipment expense 361 265
Other operating expenses 583 573
------- -------
Total Non-Interest Expenses 2,227 1,966
------- -------
Income Before Income Taxes 938 705
Income Tax Expense 300 239
------- -------
Net Income $ 638 $ 466
======= =======
Basic Earnings Per Common Share Weighted Average $ 0.24 $ 0.19
======= =======
Earnings Per Common Share - assuming dilution $ 0.24 $ 0.18
======= =======
See accompanying notes to Consolidated Financial Statements and Accountant's report
</TABLE>
<PAGE>
Part 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
unaudited
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------ Paid-in Retained Comprehensive Stockholders'
Shares Par Value Capital Earnings Income Equity
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 2,492 $ 3,116 $ 5,265 $ 9,998 $ (100) $ 18,279
--------
Comprehensive income:
Net income - - - 466 - 466
Change in unreaized gain
(loss) on securities available
for sale, net of deferred
income tax expense of $ 55 - - - - 105 105
Less: reclassification adjustment - - - - 3 3
--------
Total comprehensive income - - - - - 574
--------
Common stock issued for
stock options exercised, net 10 12 27 - - 39
Cash dividend - - - (150) - (150)
--------- -------- -------- -------- -------- --------
Balance, March 31, 1999 2502 $ 3,128 $ 5,292 $ 10,314 $ 8 $ 18,742
========= ======== ======== ======== ======== ========
Balance, December 31, 1999 2,624 $ 3,280 $ 5,768 $ 11,979 (619) 20,408
Comprehensive income:
Net income - - - 638 - 638
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income tax benefit of $186 - - - - (344) (344)
Less: reclassification adjustment - - - - (17) (17)
--------
Total comprehensive income - - - - - 277
--------
Common stock issued for
stock options exercised, net 5 7 81 - - 88
Cash dividend - - - (184) - (184)
--------- -------- -------- -------- -------- --------
Balance, March 31, 2000 2629 $ 3,287 $ 5,849 $ 12,433 $ (980) $ 20,589
========= ======== ======== ======== ======== ========
See accompanying notes to Consolidated Financial Statements and Accountant's report.
</TABLE>
<PAGE>
Part 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
unaudited
(In thousands)
<TABLE>
<CAPTION>
Three months Three months
ended March 31, ended March 31,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 638 $ 466
Adjustments to reconcile net income to net cash
provided by operating activities:
Allowances for loan losses 362 369
Depreciation 184 148
Net realized (gains) losses on available for sale securities 96 (20)
Net amortization on securities 9 117
Amortization of Capital Issue costs 3 4
Increase in interest receivable (99) (64)
(Increase) decrease in other assets (580) (34)
Increase in interest, taxes and other
liabilities 573 222
-------- --------
Net Cash Provided by Operating Activities 1,186 1,208
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 3,249 783
Proceeds from maturities of debt securities 1,779 8,823
Purchase of securities (14,559) (17,879)
Net (increase) decrease in fed funds sold - 430
Net increase in loans (6,647) (5,893)
Premises and equipment expenditures (1,510) (273)
-------- --------
Net Cash Used in Investing Activities (17,688) (14,009)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit 2,158 5,852
Net increase in demand, savings and other deposits 10,899 5,511
Increase (decrease ) in federal funds purchased (1,810) 2,583
Proceeds from issuance of short-term borrowings - -
Repayment of short-term borrowings (8,000) -
Proceeds from issuance of long-term debt 8,250 -
Repayment of long-term debt (6) (6)
Cash dividends paid (184) -
Proceeds from issuance of common stock 88 39
-------- --------
Net Cash Provided by Financing Activities 11,395 13,979
-------- --------
Net increase (decrease) in cash and cash equivalents (5,107) 1,178
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,988 9,324
-------- --------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 8,881 $ 10,502
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Unrealized gain (loss) in value of securities available for
sale (net of tax effects of $ 56, and $ (186), at
March 31, 1999 and March 31, 2000, respectively.) $ (361) $ 108
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 3,593 $ 3,216
======== ========
Income taxes $ - $ 235
======== ========
See accompanying notes to Consolidated Financial Statements and Accountant's Report.
</TABLE>
<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 1999 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:
2000 1999
---- ----
Balance, January 1 $ 2,494 $ 2,008
Provision 362 369
Recoveries 38 41
Charge-offs (222) (307)
------- -------
Balance, March 31 $ 2,672 $ 2,111
======= =======
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:
2000 1999
---- ----
Tax expense at statutory rate $ 320 $ 243
Increase (reduction) in taxes resulting from:
Tax exempt interest (20) (4)
Other, net -0- (0)
----- -----
Provision for income taxes $ 300 $ 239
===== =====
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, 2000.
Entity Tier 1 Combined Capital Leverage
- ------ ------ ---------------- --------
Highlands Bankshares, Inc. 10.98% 12.30% 7.62%
Highlands Union Bank 9.29% 10.37% 6.45%
<PAGE>
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.
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, 2000 reflected net income
of $638 thousand, an increase of 36.91% over net income for the corresponding
period in 1999. Operating results of the Company when measured as a percentage
of average equity reveals an increase of return on average equity from 10.05%
for the three-month period in 1999 to 12.49% for the corresponding period in
2000.
Return on average assets at 0.71% reflects an increase from 0.59% for the same
period in 1999.
Net interest income for the three months ended March 31, 2000 increased 11.99%
approximately $327 thousand over the comparable 1999 period. Average
interest-earning assets increased approximately $45.01 million from March 31,
1999 to the current period while average interest-bearing liabilities increased
$38.97 million during the same comparative period. The yield on average
interest-earning assets was 8.28% in 2000 equaling the rate of 8.28% in 1999.
The yield on average interest-bearing liabilities increased 13 basis points to
5.30% in 2000 as compared to 5.17% in 1999. Non interest income for the three
months ended March 31, 2000 increased $160 thousand over the comparable 1999
period. The majority of this increase was related to the Company's adoption and
implementation of a more stringent policy concerning the assessment of overdraft
fees.
The first quarter provision for possible loan losses totaled $362 thousand, a $7
thousand decrease from the corresponding period in 1999. 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 2000 were $184 thousand compared with $266 thousand in 1999. Net
charge-offs were .07% and .11% of total loans for the quarters ended March 31,
2000 and March 31, 1999. Loan loss reserves increased 26.56% to $2,672 thousand
at March 31, 2000 from the comparable 1999 period. Reserves as of March 31, 2000
represent 1.0% of total loans versus 0.88% for the 1999 period.
<PAGE>
FINANCIAL POSITION
Total loans have increased from $239.0 million at March 31, 1999 to $268.1
million at March 31, 2000. The loan to deposit ratio has slightly decreased from
84.24% at March 31, 1999 to 83.99% at March 31, 2000. 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 March 31, 2000 or 0.49% of total
loans, compared with $1.8 million at March 31, 1999.
Securities totaled approximately $79.9 million (market value) at March 31, 2000
which reflects an increase of $20.2 million or 33.77% from the March 31, 1999
total of $59.7 million. Securities, as of March 31, 2000 are comprised of
obligations of the U.S. Government, approximately 84.19% of the securities
portfolio, municipal issues, approximately 12.89% of the securities portfolio,
and equity securities, approximately 2.92% of the securities portfolio. The
Company's entire security portfolio is classified as available for sale for both
2000 and 1999.
Total stockholders' equity of the Company was $20.6 million at March 31, 2000,
representing an increase of $1.9 million or 9.85% over March 31, 1999. The
Company maintains a significant level of liquidity in the form of cash and cash
equivalents ($8.9 million at March 31, 2000) and investment securities available
for sale ($79.9 million). Cash and cash equivalents 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.
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
<PAGE>
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 its behalf by the
undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
Date: May 4, 2000 /S/ Samuel L. Neese
----------------------------------------------------------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: May 4, 2000 /S/ James T. Riffe
-----------------------------------------------------------------------
James T. Riffe
Executive Vice President &
Chief Operations Officer
(Principal Accounting Officer)
<PAGE>
Board of Directors
Highlands Bankshares, Inc.
Abingdon, Virginia
We have reviewed the accompanying Form 10-Q of Highlands Bankshares,
Inc., as of March 31, 2000, and for the three month period then ended. This
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted accounting standards. The objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modification that
should be made to the accompanying Form 10-Q for it to be in conformity with
generally accepted accounting principles.
CERTIFIED PUBLIC ACCOUNTANTS
468 East Main Street
Abingdon, Virginia 24210
May 4, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,881
<INT-BEARING-DEPOSITS> 273,887
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,853
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 268,141
<ALLOWANCE> 2,672
<TOTAL-ASSETS> 370,592
<DEPOSITS> 319,250
<SHORT-TERM> 1,520
<LIABILITIES-OTHER> 3,033
<LONG-TERM> 26,200
0
0
<COMMON> 3,287
<OTHER-SE> 17,302
<TOTAL-LIABILITIES-AND-EQUITY> 370,592
<INTEREST-LOAN> 5,781
<INTEREST-INVEST> 1,194
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,975
<INTEREST-DEPOSIT> 3,483
<INTEREST-EXPENSE> 3,921
<INTEREST-INCOME-NET> 3,054
<LOAN-LOSSES> 362
<SECURITIES-GAINS> (96)
<EXPENSE-OTHER> 2,227
<INCOME-PRETAX> 938
<INCOME-PRE-EXTRAORDINARY> 638
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 638
<EPS-BASIC> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 3.62
<LOANS-NON> 1,144
<LOANS-PAST> 182
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,494
<CHARGE-OFFS> 222
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 2,672
<ALLOWANCE-DOMESTIC> 2,672
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
