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 June 30, 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: 2,633,322
<PAGE>
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended June 30, 2000
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 ........................... 3
Consolidated Statement of Income
for the Six Months Ended
June 30, 2000 and 1999 ........................................ 4
Consolidated Statement of Cash Flows
for the Six Months Ended
June 30, 2000 and 1999 ........................................ 5
Consolidated Statements of Changes in
Stockholders' Equity for the Six
Months Ended June 30, 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
<PAGE>
Part 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
unaudited
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
--------- ---------
<S> <C> <C>
Cash and due from banks (Note 18) $ 10,125 $ 13,988
Federal funds sold - -
--------- ---------
Total Cash and Cash Equivalents 10,125 13,988
Investment securities available for sale 79,815 70,798
(amortized cost $81,312 as of June 30, 2000,
$ 71,736 December 31, 1999)
Loans, net of allowance for loan losses of $2,813
June 30, 2000; 2,494 December 31,1999 276,223 259,184
Premises and equipment, net 11,098 9,425
Interest receivable 2,549 2,155
Other assets 3,430 2,798
--------- ---------
Total Assets $ 383,240 $ 358,348
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 43,557 $ 39,504
Interest bearing 282,127 266,689
--------- ---------
Total Deposits 325,684 306,193
--------- ---------
Federal funds purchased 2,020 3,187
Interest, taxes and other liabilities 2,819 2,461
Other short term borrowings 5,142 8,000
Long-term debt 18,619 10,599
Capital securities 7,500 7,500
--------- ---------
36,100 31,747
--------- ---------
Total Liabilities 361,784 337,940
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 3,292 3,280
Additional paid-in capital 5,903 5,768
Retained Earnings 13,249 11,979
Accumulated other comprehensive income (loss) (988) (619)
--------- ---------
Total Stockholders' Equity 21,456 20,408
--------- ---------
Total Liabilities and Stockholders' Equity $ 383,240 $ 358,348
========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements and Accountant's
Report
<PAGE>
Part 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
unaudited
<TABLE>
<CAPTION>
(In thousands) Quarter ended Quarter ended Six Month Period Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable and fees on loans $ 6,104 $ 5,323 $ 11,885 $ 10,606
Securities available for sale
Taxable $ 1,163 $ 878 2,283 1,607
Exempt from taxable income $ 157 $ 12 216 20
Federal funds sold $ 1 $ 14 16 38
-------- -------- -------- --------
Total Interest Income $ 7,425 $ 6,227 14,400 12,271
-------- -------- -------- --------
INTEREST EXPENSE
Deposits $ 3,690 $ 3,133 7,173 6,171
Federal funds purchased $ 38 $ 22 58 32
Other borrowed funds $ 525 $ 288 943 557
Total interest expense $ 4,253 $ 3,443 8,174 6,760
-------- -------- -------- --------
Net interest income $ 3,172 $ 2,784 6,226 5,511
ALLOWANCE FOR LOAN LOSSES $ 314 $ 327 676 696
-------- -------- -------- --------
Net interest income after allowance for loan losses $ 2,858 $ 2,457 5,550 4,815
-------- -------- -------- --------
NON-INTEREST INCOME
Securities gains (losses), net $ - $ 4 (96) 24
Service charges on deposit accounts $ 474 $ 184 898 331
Other service charges, commissions and fees $ 140 $ 103 240 171
Other operating income, rents $ 21 $ 22 66 100
-------- -------- -------- --------
Total Non-Interest Income $ 635 $ 313 1,108 626
-------- -------- -------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits $ 1,230 $ 1,058 2,430 2,107
Occupancy expense of bank premises $ 126 $ 114 209 193
Furniture and equipment expense $ 361 $ 322 722 587
Other operating expenses $ 618 $ 526 1,201 1,099
-------- -------- -------- --------
Total Non-Interest Expenses $ 2,335 $ 2,020 4,562 3,986
-------- -------- -------- --------
Income Before Income Taxes $ 1,158 $ 750 2,096 1,455
Income Tax Expense $ 342 $ 251 642 490
-------- -------- -------- --------
Net Income $ 816 $ 499 $ 1,454 $ 965
======== ======== ======== ========
Basic Earnings Per Common Share Weighted Average $ 0.31 $ 0.20 $ 0.55 $ 0.38
======== ======== ======== ========
Earnings Per Common Share - assuming dilution $ 0.31 $ 0.19 $ 0.55 $ 0.36
======== ======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements and Accountant's
report
<PAGE>
Part 1. ITEM 1. - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
unaudited
(In thousands)
<TABLE>
<CAPTION>
Six Month Period Six Month Period
Ended June 30, 2000 Ended June 30, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,454 $ 965
Adjustments to reconcile net income to net cash
provided by operating activities:
Allowances for loan losses $ 676 $ 696
Depreciation $ 376 $ 312
Net realized (gains) losses on available for sale securities $ 96 $ (24)
Net amortization on securities $ 4 $ 195
Amortization of Capital Issue costs $ 5 $ 5
(Increase) in interest receivable $ (245) $ (279)
(Increase) decrease in other assets $ (463) $ 1,038
Increase in interest, taxes and other $ 358 $ 19
liabilities
--------
Net Cash Provided by Operating Activities $ 2,261 $ 2,927
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities 3,249 $ 1,963
Proceeds from maturities of debt securities 3,852 $ 13,447
Purchase of securities (16,777) $(32,978)
Net (increase) decrease in fed funds sold $ - $ 1,325
Net increase in loans $(17,847) $(15,275)
Premises and equipment expenditures $ (2,050) $ (1,147)
--------
Net Cash Used in Investing Activities $(29,573) $(32,665)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit $ 9,199 $ 6,911
Net increase in demand, savings and other deposits $ 10,292 $ 12,196
Increase (decrease ) in federal funds purchased $ (1,167) $ -
Net increase (decrease) in short-term borrowings $ (2,858) $ 11,894
Net increase in long-term debt $ 8,020 $ (86)
Cash dividends paid $ (184) $ (150)
Proceeds from issuance of common stock $ 147 $ 73
--------
Net Cash Provided by Financing Activities 23,449 30,838
Net increase (decrease) in cash and cash equivalents $ (3,863) $ 1,100
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 13,988 $ 9,324
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 10,125 $ 10,424
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Unrealized gain (loss) in value of securities available for
sale (net of tax effects of $ (98), and $ (190), at $ (369) $ (190)
June 30, 1999 and June 30, 2000, respectively.)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 8,033 $ 6,755
Income taxes $ 623 $ 535
</TABLE>
See accompanying notes to Consolidated Financial Statements and Accountant's
Report.
<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 - - - 965 - 965
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income tax benefit of $ 98 - - - - (199) (199)
Less: reclassification adjustment - - - - 9 9
--------
Total comprehensive income - - - - - 775
--------
Common stock issued for
stock options exercised, net 17 20 92 - - 112
Cash dividend (150) (150)
Balance, June 30, 1999 2509 $ 3,136 $ 5,357 $ 10,813 $ (290) $ 19,016
--------
Balance, December 31, 1999 2,624 $ 3,280 $ 5,768 $ 11,979 (619) 20,408
Comprehensive income:
Net income - - - 1,454 - 1,454
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income tax benefit of $190 - - - - (352) (352)
Less: reclassification adjustment - - - - (17) (17)
--------
Total comprehensive income - - - - - 1,085
--------
Common stock issued for
stock options exercised, net 9 12 135 - - 147
Cash dividend - - - (184) - (184)
-------- -------- -------- -------- -------- --------
Balance, June 30, 2000 2633 $ 3,292 $ 5,903 $ 13,249 $ (988) $ 21,456
--------
</TABLE>
See accompanying notes to Consolidated Financial Statements and Accountant's
report.
<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
six months ended June 30, follows:
2000 1999
---- ----
Balance, January 1 $ 2,494 $ 2,008
Provision 676 696
Recoveries 76 67
Charge-offs (433) (576)
------- -------
Balance, June 30 $ 2,813 $ 2,195
------- -------
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:
2000 1999
---- ----
Tax expense at statutory rate $ 713 $ 495
Increase (reduction) in taxes resulting from:
Tax exempt interest (73) (7)
Other, net 2 2
----- -----
Provision for income taxes $ 642 $ 490
----- -----
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 June 30, 2000.
Entity Tier 1 Combined Capital Leverage
------ ------ ---------------- --------
Highlands Bankshares, Inc. 11.22% 12.38% 7.92%
Highlands Union Bank 9.28% 10.36% 6.51%
<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.
Note 7 - Commitments and Contingencies
On May 25, 2000 the Bank entered into a definitive agreement for the purchase of
a branch bank of a Tennessee banking corporation located in East Tennessee. The
purchase will include the building, real estate, certain furniture, fixtures and
equipment as well as all of the deposits and the related overdraft loans of this
branch location. The purchase price will not be determined until the closing
date. This purchase is contingent upon regulatory approval.
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, 2000 reflected net income of
$1.454 million, an increase of 50.67% 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 10.29%
for the six-month period in 1999 to 14.01% for the corresponding period in 2000.
Return on average assets at 0.79% reflects an increase from 0.60% for the same
period in 1999.
Net interest income for the six months ended June 30, 2000 increased 12.97%
approximately $715 thousand over the comparable 1999 period. Average
interest-earning assets increased approximately $44.76 million from June 30,
1999 to the current period while average interest-bearing liabilities increased
$38.80 million during the same comparative period. The
<PAGE>
yield on average interest-earning assets was 8.17% in 2000 compared to the rate
of 8.19% in 1999. The yield on average interest-bearing liabilities increased 17
basis points to 5.30% in 2000 as compared to 5.14% in 1999. Non-interest income
for the six months ended June 30, 2000 increased $482 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 six months provision for possible loan losses totaled $676 thousand, a
$20 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 six months of 2000 were $357 thousand compared with $509 thousand
in 1999. Net charge-offs were .13% and .21% of total loans for the quarters
ended June 30, 2000 and June 30, 1999. Loan loss reserves increased 28.15% to
$2.813 million at June 30, 2000 from the comparable 1999 period. Reserves as of
June 30, 2000 represent 1.0% of total loans versus 0.88% for the 1999 period.
Financial Position
Total loans have increased from $248.1 million at June 30, 1999 to $279.0
million at June 30, 2000. The loan to deposit ratio has increased from 85.14% at
June 30, 1999 to 85.68% at June 30, 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 $1.8 million at June 30, 2000 or 0.63% of total
loans, compared with $2.7 million at June 30, 1999.
Securities totaling approximately $79.8 million (market value) at June 30, 2000
reflect an increase of $11.3 million or 16.50% from the June 30, 1999 total of
$68.5 million. Securities, as of June 30, 2000 are comprised of obligations of
the U.S. Government, approximately 82.82% of the securities portfolio, municipal
issues, approximately 14.26% 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 $21.5 million at June 30, 2000,
representing an increase of $2.4 million or 12.83% over June 30, 1999. The
Company maintains a significant level of liquidity in the form of cash and cash
equivalents ($10.1 million at June 30, 2000) and investment securities available
for sale ($79.8 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
<PAGE>
(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 10, 2000.
(b) The following directors were elected to serve a one-year term to
the date of the 2000 Annual Meeting of Stockholders:
Director's Name Votes For Votes Against Votes Withheld
--------------- --------- ------------- --------------
James D. Morefield 1,815,803 600 12,074
James D. Moore, Jr. 1,816,403 12,074
J. Carter Lambert 1,813,003 3,400 12,074
Clydes B. Kiser 1,816,403 12,074
William E. Chaffin 1,816,403 12,074
William J. Singleton 1,816,403 12,074
E. Craig Kendrick 1,816,403 12,074
Charles P. Olinger 1,816,403 12,074
H. Ramsey White, Jr 1,814,603 1,800 12,074
(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>
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: August 3, 2000 /S/ Samuel L. Neese
---------------------------------------------------------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: August 3, 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 June 30, 2000, and for the six-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 auditing 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 modifications
that should be made to the accompanying Form 10-Q for it to be in conformity
with generally accepted accounting principles.
Brown, Edwards & Company, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
468 East Main Street
Abingdon, Virginia 24210
August 2, 2000
