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 September 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: 2,636,368
<PAGE>
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended September 30, 2000
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 .................. 3
Consolidated Statements of Income
for the Quarter and Nine Months Ended
September 30, 2000 and 1999 ............................... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 2000 and 1999 ............................... 5
Consolidated Statements of Changes in
Stockholders' Equity for the Nine
Months Ended September 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
(In thousands)
<TABLE>
<CAPTION>
Unaudited Audited
September 30, December 31,
ASSETS 2000 1999
---- ----
<S> <C> <C>
Cash and due from banks $ 8,901 $ 13,988
Federal funds sold 2,797 -
------------ ---------
Total Cash and Cash Equivalents 11,698 13,988
Investment securities available for sale 82,002 70,798
(amortized cost $83,047 as of September 30, 2000,
$ 71,736 December 31, 1999)
Loans, net of allowance for loan losses of $2,893
September 30, 2000; 2,494 December 31,1999 283,758 259,184
Premises and equipment, net 11,818 9,425
Interest receivable 2,781 2,155
Other assets 3,449 2,798
------------ ---------
Total Assets $ 395,506 $ 358,348
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 44,257 $ 39,504
Interest bearing 294,104 266,689
------------ ---------
Total Deposits 338,361 306,193
------------ ---------
Federal funds purchased - 3,187
Interest, taxes and other liabilities 3,329 2,461
Other short term borrowings 5,143 8,000
Long-term debt 18,609 10,599
Capital securities 7,500 7,500
------------ ---------
34,581 31,747
------------ ---------
Total Liabilities 372,942 337,940
------------ ---------
STOCKHOLDERS' EQUITY
Common stock 3,295 3,280
Additional paid-in capital 5,944 5,768
Retained Earnings 14,015 11,979
Accumulated other comprehensive income (loss) (690) (619)
------------ ---------
Total Stockholders' Equity 22,564 20,408
------------ ---------
Total Liabilities and Stockholders' Equity $ 395,506 $ 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 Nine Month Period Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans receivable and fees on loans $ 6,451 $ 5,557 $ 18,336 $ 16,163
Securities available for sale
Taxable 1,190 991 3,473 2,598
Exempt from taxable income 156 22 372 42
Federal funds sold 33 9 49 47
------------------------- --------------------------
Total Interest Income $ 7,830 $ 6,579 $ 22,230 $ 18,850
------------------------- --------------------------
INTEREST EXPENSE
Deposits $ 4,088 $ 3,236 $ 11,261 $ 9,407
Federal funds purchased 4 27 62 60
Other borrowed funds 551 356 1,494 912
------------------------- --------------------------
Total interest expense $ 4,643 $ 3,619 12,817 10,379
------------------------- --------------------------
Net interest income $ 3,187 $ 2,960 $ 9,413 $ 8,471
ALLOWANCE FOR LOAN LOSSES $ 297 $ 415 $ 973 $ 1,111
------------------------- --------------------------
Net interest income after
allowance for loan losses $ 2,890 $ 2,545 $ 8,440 $ 7,360
------------------------- --------------------------
NON-INTEREST INCOME
Securities gains (losses), net $ - $ 93 $ (96) $ 117
Service charges on deposit accounts 485 179 1,383 510
Other service charges, commissions and fees 124 112 364 283
Other operating income, rents 53 55 119 155
------------------------- --------------------------
Total Non-Interest Income $ 662 $ 439 $ 1,770 $ 1,065
------------------------- --------------------------
NON-INTEREST EXPENSES
Salaries and employee benefits $ 1,353 $ 1,107 $ 3,783 $ 3,212
Occupancy expense of bank premises 100 125 309 317
Furniture and equipment expense 356 292 1,078 791
Other operating expenses 656 529 1,857 1,719
------------------------- --------------------------
Total Non-Interest Expenses $ 2,465 $ 2,053 $ 7,027 $ 6,039
------------------------- --------------------------
Income Before Income Taxes $ 1,087 $ 931 3,183 2,386
Income Tax Expense $ 321 $ 307 $ 963 $ 797
------------------------- --------------------------
Net Income $ 766 $ 624 $ 2,220 $ 1,589
========================= ==========================
Basic Earnings Per Common Share Weighted Average $ 0.29 $ 0.25 $ 0.84 $ 0.63
========================= ==========================
Earnings Per Common Share - assuming dilution $ 0.27 $ 0.23 $ 0.82 $ 0.59
========================= ==========================
</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>
Nine Month Period Nine Month Period
Ended September 30, 2000 Ended September 30, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,220 $ 1,589
Adjustments to reconcile net income to net cash
provided by operating activities:
Allowances for loan losses 973 1,111
Depreciation and Amortization 573 483
Net realized (gains) losses on available for sale securities 96 (117)
Net amortization on securities (12) 256
Amortization of Capital Issue costs 8 12
(Increase) in interest receivable (626) (244)
(Increase) decrease in other assets (622) 1,314
Increase in interest, taxes and other
liabilities 868 28
--------------- --------------
Net Cash Provided by Operating Activities $ 3,478 $ 4,432
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sale of securities $ 3,745 $ 7,624
Proceeds from maturities of debt securities 7,789 17,830
Purchase of securities (22,929) (44,415)
Net (increase) decrease in fed funds sold (2,797) 1,080
Net increase in loans (25,547) (21,955)
Premises and equipment expenditures (2,966) (1,414)
--------------- --------------
Net Cash Used in Investing Activities $ (42,705) $ (41,250)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposits $ 26,311 $ 11,093
Net increase in demand, savings and other deposits 5,857 22,612
Increase (decrease) in federal funds purchased (3,187) 1,668
Net increase (decrease) in short-term borrowings (2,857) 3,998
Net increase in long-term debt 8,010 (86)
Cash dividends paid (184) (150)
Proceeds from issuance of common stock 190 134
--------------- --------------
Net Cash Provided by Financing Activities $ 34,140 $ 39,269
--------------- --------------
Net increase (decrease) in cash and cash equivalents $ (5,087) $ 2,451
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 13,988 $ 9,324
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 8,901 $ 11,775
=============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Unrealized gain (loss) in value of securities available for
sale (net of tax effects of $(287), and $(355), at $ (690) $ (557)
September 30, 1999 and September 30, 2000, respectively.)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 12,123 $ 10,353
Income taxes $ 928 $ 722
</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 2,493 $ 3,116 $ 5,265 $ 9,998 $ (100) $ 18,279
Comprehensive income:
Net income 1,589 1,589
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income tax benefit of $ 235 (527) (527)
Less: reclassification adjustment 70 70
--------
Total comprehensive income 1,132
--------
Common stock issued for
stock options exercised, net 18 22 112 134
Cash dividend (150) (150)
----------------------------------------------------------------------------------
Balance, September 30, 1999 2,511 3,138 $ 5,377 $ 11,437 $ (557) $ 19,395
==================================================================================
Balance, December 31, 1999 2,624 $ 3,280 $ 5,768 $ 11,979 (619) 20,408
Comprehensive income:
Net income 2,220 2,220
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income tax benefit of $37 (54) (54)
Less: reclassification adjustment (17) (17)
--------
Total comprehensive income 2,149
--------
Common stock issued for
stock options exercised, net 12 15 176 191
Cash dividend (184) (184)
----------------------------------------------------------------------------------
Balance, September 30, 2000 2,636 $ 3,295 $ 5,944 $ 14,015 $ (690) $ 22,564
==================================================================================
</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
nine months ended September 30, follows:
2000 1999
---- ----
Balance, January 1 $2,494 $2,008
Provision 973 1,111
Recoveries 120 112
Charge-offs (694) (883)
------ ------
Balance, September 30 $2,893 $2,348
------ ------
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:
2000 1999
---- ----
Tax expense at statutory rate $1,082 $ 809
Increase (reduction) in taxes
resulting from:
Tax exempt interest (126) (14)
Other, net 7 (2)
------- ------
Provision for income taxes $ 963 $ 797
------- ------
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
<PAGE>
that are experiencing or anticipating significant growth. The following table
contains the capital ratios for the Corporation and it's subsidiary as of
September 30, 2000.
Entity Tier 1 Combined Capital Leverage
------ ------ ---------------- --------
Highlands Bankshares, Inc. 11.24% 12.30% 7.41%
Highlands Union Bank 9.21% 10.29% 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.
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,
specifically Rogersville, Tennessee. The definitive agreement included the
purchase of the building, real estate, certain furniture, fixtures and equipment
as well as all of the deposits and overdraft loans of this branch location. On
September 23, 2000 the purchase of this branch was completed and all deposit
accounts of the branch and the overdraft protection loans as of September 23,
2000 were converted to Highlands Union Bank accounts. The
<PAGE>
preceding financial statements reflect the effect of the purchase of this branch
office.
Highlands Union Bank has purchased a building site and is currently constructing
a branch bank office in Boone, North Carolina. The construction of this branch
bank is expected to be completed by the end of 2000 with a tentative opening
date set for January of 2001. The cost of the construction of this branch is
estimated to be approximately $651,000.
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 that 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 September 30, 2000 reflected net
income of $2.220 million, an increase of 39.71% 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 11.21% for the nine-month period in 1999 to 13.95% for the corresponding
period in 2000.
Return on average assets at 0.79% reflects an increase from 0.64% for the same
period in 1999.
Net interest income for the nine months ended September 30, 2000 increased
11.12% approximately $942 thousand over the comparable 1999 period. Average
interest-earning assets increased approximately $44.10 million from September
30, 1999 to the current period while average interest-bearing liabilities
increased $38.60 million during the same comparative period. The yield on
average interest-earning assets was 8.45% in 2000 compared to the rate of 8.20%
in 1999. The yield on average interest-bearing liabilities increased 41 basis
points to 5.55% in 2000 as compared to 5.14% in 1999. Non-interest income for
the nine months ended September 30, 2000 increased $704 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.
<PAGE>
The first nine months provision for possible loan losses totaled $973 thousand,
a $138 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 nine months of 2000 were $575 thousand compared with $772 thousand
in 1999. Net charge-offs were .20% and .30% of total loans for the quarters
ended September 30, 2000 and September 30, 1999. Loan loss reserves increased
23.21% to $2.9 million at September 30, 2000 from the comparable 1999 period.
Reserves as of September 30, 2000 represent 1.0% of total loans versus 0.92% for
the 1999 period.
Financial Position
Total loans have increased from $254.6 million at September 30, 1999 to $286.7
million at September 30, 2000. The loan to deposit ratio has increased from
83.18% at September 30, 1999 to 84.72% at September 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 September 30, 2000 or 0.63% of total
loans, compared with $1.3 million at September 30, 1999.
Securities totaling approximately $82.0 million (market value) at September 30,
2000 reflect an increase of $12.5 million or 18.02% from the September 30, 1999
total of $69.5 million. Securities, as of September 30, 2000 are comprised of
obligations of the U.S. Government, approximately 82.65% of the securities
portfolio, municipal issues, approximately 15.05% 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
2000 and 1999.
Total stockholders' equity of the Company was $22.6 million at September 30,
2000, representing an increase of $3.2 million or 16.34% over September 30,
1999. The Company maintains a significant level of liquidity in the form of cash
and cash equivalents ($11.7 million at September 30, 2000) and investment
securities available for sale ($82.0 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.
<PAGE>
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 its behalf by the
undersigned thereunto duly authorized.
Highlands Bankshares, Inc.
Date: November 10, 2000 /S/ Samuel L. Neese
------------------------------------------------------------------
Samuel L. Neese
Executive Vice President &
Chief Executive Officer
(Duly Authorized Officer)
Date: November 10, 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 September 30, 2000, and for the nine 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 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
November 7, 2000
