UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No. 0-16761
June 30, 1995
HIGHLANDS BANKSHARES, INC.
West Virginia 55-0650793
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 929
Petersburg, West Virginia 26847
(304) 257-4111
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes ..X. No ....
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding at June 30, 1995
Common Stock, par value - $5 514,066 shares
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HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Six Months
Ended June 30, 1995 and 1994 2
Consolidated Statements of Income - Three Months
Ended June 30, 1995 and 1994 3
Consolidated Balance Sheets - June 30, 1995 and
December 31, 1994 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1995 and 1994 5
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8K 17
SIGNATURES 21
Page
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Six Months Ended
June 30,
1995 1994
Interest Income
Interest and fees on loans $ 4,840 $ 4,534
Interest on federal funds sold 171 75
Interest on time deposits 14 10
Interest and dividends on investment securities
Taxable 997 1,015
Nontaxable 94 122
Total Interest Income 6,116 5,756
Interest Expense
Interest on time deposits over $100,000 437 317
Interest on other deposits 2,423 2,195
Total Interest Expense 2,860 2,512
Net Interest Income 3,256 3,244
Provision for Loan Losses 60 120
Net Interest Income After Provision for Loan Losses 3,196 3,124
Noninterest Income
Service charges 99 87
Other 189 170
Loss on security transactions (3) (3)
Total Noninterest Income 285 254
Noninterest Expense
Salaries 813 740
Employee benefits 270 267
Occupancy expense 95 79
Equipment expense 84 103
FDIC insurance 154 153
Data processing 180 174
Other 462 486
Total Noninterest Expense 2,058 2,002
Income Before Income Taxes 1,423 1,376
Provision for Income Taxes 474 481
Net Income $ 949 $ 895
Per Share Data
Net Income $ 1.85 $ 1.74
Cash Dividends $ .32 $ .28
Weighted Average Common Shares Outstanding 514,066 514,066
The accompanying notes are an integral part of these statements.
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HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Three Months Ended
June 30,
1995 1994
Interest Income
Interest and fees on loans $ 2,492 $ 2,261
Interest on federal funds sold 100 45
Interest on time deposits 9 5
Interest and dividends on investment securities
Taxable 502 507
Nontaxable 46 60
Total Interest Income 3,149 2,878
Interest Expense
Interest on time deposits over $100,000 258 161
Interest on other deposits 1,290 1,097
Total Interest Expense 1,548 1,258
Net Interest Income 1,601 1,620
Provision for Loan Losses 30 60
Net Interest Income After Provision
for Loan Losses 1,571 1,560
Noninterest Income
Service charges 51 46
Other income 89 94
Investment security gains (losses) (1) (1)
Total Noninterest Income 139 139
Noninterest Expense
Salaries 413 375
Employee benefits 132 130
Occupancy expense 47 33
Equipment expense 30 50
FDIC insurance 77 77
Data processing expense 87 89
Other 231 258
Total Noninterest Expense 1,017 1,012
Income Before Income Taxes 693 687
Provision for Income Taxes 232 236
Net Income $ 461 $ 451
Per Share Data
Net Income $ .90 $ .88
Cash Dividends $ .16 $ .14
Weighted Average Common Shares Outstanding 514,066 514,066
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
1995 1994
ASSETS
Cash and due from banks $ 4,247 $ 3,327
Federal funds sold 6,128 4,625
Time deposits in other banks 488 384
Securities held to maturity (note 2) 9,180 9,460
Securities available for sale (note 3) 27,009 28,542
Loans, net of unearned interest (note 5) 108,776 104,043
Less allowance for loan losses (note 6) (1,445) (1,454)
Net Loans 107,331 102,589
Construction in progress 1,712 503
Bank premises and equipment 1,328 1,197
Interest receivable 1,291 1,303
Deferred income tax benefits 401 719
Other assets 677 713
Total Assets $ 159,792 $ 153,362
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 13,121 $ 13,357
Interest bearing
Money market and interest checking 13,931 14,504
Money market savings 13,027 14,262
Savings accounts 16,753 18,327
Certificates of deposit over $100,000 16,218 13,233
All other time deposits 67,554 61,881
Total Deposits 140,604 135,564
Accrued expenses and other liabilities 1,086 1,022
Total Liabilities 141,690 136,586
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 1,000,000 shares
authorized, 546,764 shares issued) 2,734 2,734
Surplus 1,662 1,662
Retained earnings 14,307 13,523
Net unrealized loss on securities available
for sale (107) (649)
18,596 17,270
Treasury stock (at cost, 32,698 shares) (494) (494)
Total Stockholders' Equity 18,102 16,776
Total Liabilities and Stockholders' Equity $ 159,792 $ 153,362
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Six Months Ended
June 30,
1995 1994
Cash Flows from Operating Activities:
Net income $ 949 $ 895
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of securities 3 3
Depreciation 77 67
Net amortization 89 126
Provision for loan losses 60 120
(Increase) decrease in interest receivable 12 (47)
Decrease in other assets 36 26
Increase (decrease) in accrued expenses 64 (129)
Net Cash Provided by Operating Activities 1,290 1,061
Cash Flows from Investing Activities:
Proceeds from maturities of securities
available for sale 6,934 1,424
Proceeds from maturities of securities
held to maturity 763 8,783
Purchase of securities held to maturity (502) (2,047)
Purchase of time deposits in other banks (100)
Purchase of securities available for sale (4,618) (7,486)
Net change in loans to customers (4,802) (1,945)
Purchase of property and equipment (208) (110)
Net change in federal funds sold (1,503) (2,303)
Construction in progress payments (1,209)
Net Cash Consumed by Investing Activities (5,245) (3,684)
Cash Flows from Financing Activities:
Net increase in deposits 5,040 2,113
Dividends paid in cash (165) (144)
Net Cash Provided by Financing Activities 4,875 1,969
Net Increase (Decrease) in Cash
and Cash Equivalents 920 (654)
Cash and Cash Equivalents, Beginning of Period 3,327 3,841
Cash and Cash Equivalents, End of Period $ 4,247 $ 3,187
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 516 $ 631
Interest 2,776 2,551
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Six Months Ended
June 30,
1995 1994
Balance, beginning of period $ 16,776 $ 15,842
Net income for period 949 895
Cash dividends (165) (144)
Cumulative effect of change in accounting for
securities available for sale 122
Change in unrealized gain (loss) on securities
available for sale 542 (341)
Balance, end of period $ 18,102 $ 16,374
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally
accepted accounting principles and to general industry
practices. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of June
30, 1995, and the results of operations for the six month
periods ended June 30, 1995 and 1994. The notes included herein
should be read in conjunction with the notes to financial
statements included in the 1994 annual report to stockholders of
Highlands Bankshares, Inc.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and fair value of securities held to
maturity as of June 30, 1995 and December 31, 1994, are as
follows:
1995 1994
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of US
Government corporations
and agencies $ 5,819 $ 5,863 $ 5,597 $ 5,487
Obligations of states
and political
subdivisions 3,361 3,398 3,863 3,764
Total $ 9,180 $ 9,261 $ 9,460 $ 9,251
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for
sale as of June 30, 1995 and December 31, 1994, are as follows:
1995 1994
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of US
Government corporations
and agencies $ 25,209 $ 25,205 $ 27,504 $ 26,677
Other 1,968 1,804 2,068 1,865
Total $ 27,177 $ 27,009 $ 29,572 $ 28,542
Page
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of June 30, 1995 and
December 31, 1994, is as follows:
1995 1994
Commercial $ 19,137 $ 19,462
Real estate - construction 1,686 1,182
- mortgages 63,995 60,783
Consumer installment 26,223 24,728
Total 111,041 106,155
Unearned interest (2,265) (2,112)
Net loans outstanding $ 108,776 $ 104,043
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses
for the six months ended June 30, 1995 and 1994, follows:
1995 1994
Balance, beginning of period $ 1,454 $ 1,734
Provisions charged to operating expenses 60 120
Loan recoveries 76 112
Loan charge-offs (145) (180)
Balance, end of period $ 1,445 $ 1,786
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Year to Date Operations
The Company's six month income of $949,000 represents a 6.03% increase
in total earnings and earnings per share compared to 1994 operations.
Earnings represented an annualized return on equity of 10.88% for the first
six months of 1995 compared to 11.11% for the same period in 1994. The
annualized return on average assets was 1.20% in the first six months of
1995 compared with 1.16% in the first six months of 1994.
The tax equivalent net interest income declined by $3,000 in 1995 to
$3,304,000. Increases in the level of net earning assets were offset by a
decline in the tax equivalent net interest margin as the net interest
margin fell slightly from 4.50% in 1994 to 4.42% in 1995. The decline was
a result of increasing market rates in 1994 and early 1995 which caused
rates paid on deposits to increase at a quicker pace than returns on
earning assets.
Although the net interest margin was virtually unchanged in the first
six months compared to 1994, declines in the provision for loan losses and
increases in other noninterest income more than offset minor increases in
other noninterest expenses. The result was an overall increase in net
income of 6.03% for the period.
Quarter Ending June 30 Operations
Net income for the quarter ending June 30, 1995 increased 2.22% when
compared to the prior year operations. Although the net interest margin
declined slightly in 1995, declines in the provision for loan losses more
than offset these declines to result in a modest profitability gain for the
period.
Net Interest Income
Year to Date Operations
The Company's net interest income on a tax equivalent basis was 4.42%
($3,304,000) in the first six months of 1995 compared to 4.50% ($3,307,000)
in the first six months of 1994. The modest decline was due primarily to
increasing costs of deposits, particularly long-term certificates. Real
estate loan yields continued to fall while commercial and consumer loan
yields rose slightly when compared to the prior year. Time deposit and
savings account rates increased due to changes in overall market rates in
the Company's service area. Competition for deposits was quite intense on
the local level in the first quarter of 1995 resulting in many programs
favorable to depositors. Deposit contracts entered into in 1993 and early
1994 at historically low rates have now matured and must be renewed at
rates in line with historical averages. The interaction of these changes
resulted in little movement in the net interest margin during the first
quarter of 1995.
Loans outstanding at June 30, 1995 increased 8.29% from the amounts as
of June 30, 1994. The loan demand is expected to continue to be good
through the remainder of 1995 as the local economy shows no signs of
weakness. The increase in volume of interest earning assets and increases
on investment yields have virtually offset higher rates paid on deposits.
The result has been the Company has been able to maintain a satisfactory
level of interest income within 1995. Management believes its liquidity
and asset/liability management policies are adequate to maintain an
acceptable net interest margin into the foreseeable future. Recent actions
by the Federal Reserve Bank give the impression that future rate changes
will be minimal and thus rate stability or modest declines can be expected
in the near future. This should allow the net interest margin in future
periods to remain stable or increase slightly as rates paid on deposits
remain at current levels and investments and loans mature and are
reinvested at higher yields.
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Quarter Ending June 30 Operations
The Company's net interest income on a tax equivalent basis was 4.29%
($1,625,000) for the quarter ending June 30, 1995 compared to 4.47%
($1,651,000) for the same period in 1994. Increased income from loans was
the result of increases in both volume and yields as market rates rose
throughout 1994 and early 1995. Increases in investment yields also
contributed heavily to an overall increase in the yield on earning assets.
Offsetting this increase in interest income was an increase in rates paid
on interest bearing deposits from 4.08% in 1994 to 4.94% in 1995. The
increase was the result of higher market rates on contracts made in 1994
and aggressive competition in the local marketplace for longer term
certificates of deposit. As stated earlier, the Company expects future
investment and loan yields to catch up with increases in the cost of
deposits later in 1995 and early 1996.
A complete yield analysis is shown as Table I on page 15.
Noninterest Income
Year to Date Operations
Noninterest income increased 12.20% during the first six months of 1995
compared to the same period in 1994. The increase was due to higher income
from insurance operations, greater income from loan servicing activities
and increased service charges. Gains and losses on security transactions
were negligible in both periods.
Quarter Ending June 30 Operations
Noninterest income for the quarters was unchanged at $139,000. Minor
increases in service charge income were offset by minor declines in
insurance income. Again, gains and losses on investment security activity
was negligible.
Noninterest Expenses
Year to Date Operations
Overall, noninterest expenses rose 2.80% for the first six months of
1995 when compared to the same period of 1994. Personnel expenses
increased 7.55% due to merit and inflationary raises and a larger number of
full time equivalent employees. In the second quarter, the Company
determined it had been overbilled in previous years for certain equipment
maintenance contracts and the refunds of this overbilling reduced equipment
expense by $28,000. Equipment, occupancy, data processing and FDIC
insurance costs increased only .79% during the period due to the refund
noted above, relative stability in the level of services required and
minimal increases in the cost of FDIC insurance. Other noninterest
expenses declined 4.94% due to lower fees for examinations and lower other
operating expenses. The overall increase in noninterest expenses was in
line with management's expectations and budget.
Within the second quarter of 1995, the FDIC insurance fund met its
mandated reserve requirements established by Congress. The attainment of
this goal will allow the FDIC to reduce the rates charged on insured
deposits by 75% to 83%. This rate reduction should save the Company
approximately $250,000 per year and should be effective by July 1, 1995 at
the latest. This savings will more than offset costs associated with the
expanded operating facilities and should contribute to noninterest expense
stability in future periods.
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Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest Expenses (Continued)
Quarter Ending June 30 Operations
Overall, noninterest expenses rose only .49% for the quarter ending
June 30, 1995 compared to 1994. Increases in personnel and occupancy
expense were offset by declines in the equipment expenses (discussed above)
and miscellaneous other operating expenses. Exclusive of the refund cited
above, noninterest expenses rose by 3.26% for 1995 compared to 1994.
Noninterest expenses have been consistent throughout the four most recent
quarters and should remain so based on the anticipated decline in FDIC
insurance expense.
Loan Portfolio
The Company is an active residential mortgage and construction lender
and generally extends commercial loans to small and medium sized businesses
within its primary service area. The Company's commercial lending activity
extends across its primary service areas of Grant, Hardy and northern
Pendleton counties. Consistent with its focus on providing community-based
financial services, the Company does not attempt to diversify its loan
portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of
loans in the Company's portfolio is the creditworthiness of its borrowers.
Within each category, such risk is increased or decreased depending on
prevailing economic conditions. The risk associated with the real estate
mortgage loans and installment loans to individuals varies based upon
employment levels, consumer confidence, fluctuations in value of
residential real estate and other conditions that affect the ability of
consumers to repay indebtedness. The risk associated with commercial,
financial and agricultural loans varies based upon the strength and
activity of the local economies of the Company's market areas. The risk
associated with real estate construction loans varies based upon the supply
of and demand for the type of real estate under construction.
Loans outstanding increased $4,733,000 or 4.55% in the first six months
in 1995. The bulk of this increase was in new real estate mortgages and
consumer loans. The loan to deposit ratio was 77.36% at June 30, 1995
compared to 76.75% at December 31, 1994. Management believes this level of
lending activity will result in the greatest amount of earnings without
undue credit risk. Loan demand is expected to remain satisfactory in the
near future.
Asset Quality
Nonperforming loans include nonaccrual loans, loans 90 days or more
past due and restructured loans. Nonaccrual loans are loans on which
interest accruals have been suspended or discontinued permanently.
Restructured loans are loans on which the original interest rate or
repayment terms have been changed due to financial hardship of the
borrower. The loans on nonaccrual status consist of real estate mortgages
and commercial loans. The total of nonaccrual loans as of June 30, 1995
was $203,000 compared to $166,000 at December 31, 1994. Real estate
acquired through foreclosure was $193,000 at June 30, 1995 compared to
$296,000 at December 31, 1994. All foreclosed property held at June 30,
1995 was in the Company's primary service area. The Company's practice is
to value real estate acquired through foreclosure at the lower of (i) an
independent current appraisal or market analysis less anticipated costs of
disposal, or (ii) the existing loan balance. The Company is actively
marketing all foreclosed real estate and does not anticipate material
write-downs in value before disposition.
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and local
economic changes, changes in the nature and value of the portfolio and
industry standards. The Company's loan classification system, which rates
existing loans, provides the basis for adjusting the allowance for loan
losses. Management reviews these classification totals, along with
internally generated loan review reports, past due reports, historical loan
loss experience and individual borrower's financial health to determine the
necessary amount to be provided in the allowance for loan losses.
Management evaluates nonperforming loans relative to their collateral value
and makes the appropriate adjustments to the allowance when needed.
Management believes, based on its review, that the Company has an adequate
allowance to absorb any losses in the loan portfolio.
The net amount of charge-offs for the first six months ended June 30,
1995 was $69,000 compared to net chargeoffs of $68,000 for the first six
months of 1994. The allowance for loan losses was $1,445,000 at June 30,
1995 compared to $1,454,000 at December 31, 1994. The allowance as a
percent of loans outstanding was 1.33% at June 30, 1995 compared to 1.40%
at December 31, 1994. The provision for loan losses for the first six
months of 1995 was $60,000 compared to $120,000 for the comparable period
in 1994. The lower provision was possible due to continued improvement in
the quality of the loan portfolio as evidenced by declines in the volume of
delinquent loans.
Securities
The Company's securities portfolio serves numerous purposes. Portions
of the portfolio may secure certain public and trust deposits. The
remaining portions are held as investments or used to assist the Company in
liquidity and asset/liability management. Total securities at June 30,
1995 were $36,189,000 compared to $38,002,000 at December 31, 1994.
Securities as percent of total assets were 22.65% at June 30, 1995 compared
to 24.78% at March 31, 1994. The decrease in securities is a result of
good loan demand which has absorbed funds previously invested in
securities, an increase in federal funds sold and the funding of recent
expansions in bank premises.
The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as
held to maturity when management has the intent and the Company has the
ability at the time of purchase to hold the securities to maturity. Held
to maturity securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts. Securities to be held for indefinite
periods of time are classified as available for sale and accounted for at
market value. Securities available for sale include securities that may be
sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity
needs and other similar factors. The Company's recent purchases of all
securities have generally been limited to securities of high credit quality
with short to medium term maturities.
With the adoption of Statement of Financial Accounting Standards No.
115 (SFAS No. 115) on January 1, 1994, the Company now segregates those
securities available for sale from those held to maturity. These
securities are valued at their market value with any difference in market
value and amortized cost shown as an adjustment in stockholders' equity.
Changes within the year in market values are reflected as changes in
stockholders' equity, net of the deferred tax effect. As of June 30, 1995,
the cost of the securities available for sale exceeded their market value
by $168,000 ($107,000 after tax considerations).
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Deposits
The Company's main source of funds remains deposits received from
individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings,
money market and certificates of deposit.
Total deposits increased 3.72% between December 31, 1994 and June 30,
1995, primarily in the area of time deposit accounts. The cost of funds
for the first six months of 1995 was 4.61% compared to 4.10% for the same
period in 1994. The yields on demand deposits remained stable within the
period while yields on savings and time deposits increased sharply. The
majority of the Company's deposits are time deposits which are attractive
to persons seeking high yields on their deposits but without the need for
liquidity. The Company has not actively pursued deposits in excess of
$100,000 due to the volatile nature of these relationships although it did
see a substantial increase in large certificates as part of an overall
deposit promotion in early 1995.
Capital
The Company seeks to maintain a strong capital base to expand
facilities, promote public confidence, support current operations and grow
at a manageable level. As of June 30, 1995 the Company's total risk based
capital ratio was 20.29% which is far above the regulatory minimum of 8.0%.
The ratio of total capital to total assets was 11.33% at June 30, 1995
which exceeds that of the Company's peers. Earnings have been satisfactory
to allow an increase in dividends in 1995 over those levels experienced in
1994.
Liquidity
Liquidity is the ability to meet present and future financial
obligations through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid
assets include cash, interest bearing deposits with banks, federal funds
sold, investments and loans maturing within one year. The Company's
ability to obtain deposits and purchase funds at favorable rates determines
its liability liquidity. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that the Company maintains overall liquidity sufficient
to satisfy its depositors' requirements and meet its customers' credit
needs.
Additional sources of liquidity available to the Company include, but
are not limited to, loan repayments, the ability to obtain deposits through
the adjustment of interest rates and the purchasing of federal funds. To
further meet its liquidity needs, the Company also maintains lines of
credit with correspondent financial institutions and the Federal Reserve
Bank of Richmond. Both subsidiary banks have lines of credit with the
Federal Home Loan Bank of Pittsburgh although neither has utilized such
lines in 1995. In the past, growth in deposits and proceeds from the
maturity of investment securities have been sufficient to fund the net
increase in loans.
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on
the balance sheet. Managing this risk involves regular monitoring of the
interest sensitive assets relative to interest sensitive liabilities over
specific time intervals.
At June 30, 1995 the Company had a negative gap position. This
liability sensitive position typically produces an unfavorable contribution
to earnings during a period of increasing rates. Because the financial
markets were in an increasing rate environment for most of 1994 and the
Company had a negative gap position, the Company saw a decline in its net
interest margin on a tax equivalent basis in the second quarter of 1995.
With the rate declines the markets have witnessed in the last six months,
the Company does not foresee further declines in the net interest margin.
With the largest amount of interest sensitive assets and liabilities
repricing within three years, the Company monitors these areas very
closely. Early withdrawal of deposits, prepayments of loans and loan
delinquencies are some of the factors that could affect actual versus
expected cash flows. In addition, changes in rates on interest sensitive
assets and liabilities may not be equal, which could result in a change in
net interest margin. While the Company does not match each of its interest
sensitive assets against specific interest sensitive liabilities, it does
seek to enhance the net interest margin while minimizing exposure to
interest rate fluctuations.
Effects of Inflation
Inflation significantly affects industries having high proportions of
property, plant and equipment or high levels of inventories. Although the
Company is not significantly affected in these areas, inflation does have
an impact on the growth of assets. As assets grow rapidly, it becomes
necessary to increase equity capital at proportionate levels to maintain
the appropriate equity to asset ratios. Traditionally, the Company's
earnings and high capital retention levels have enabled the Company to meet
these needs.
The Company's reported earnings results have been affected by
inflation, but isolating the effect is difficult. The different types of
income and expense are affected in various ways. Interest rates are
affected by inflation, but the timing and magnitude of the changes may not
coincide with changes in the consumer price index. Management actively
monitors interest rate sensitivity, as illustrated by the Gap Analysis
(Table II, page 16) in order to minimize the effects of inflationary trends
on interest rates. Other areas of noninterest expenses may be more
directly affected by inflation.
Page
TABLE I
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1995 June 30, 1994
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 19,426 $ 860 8.85% $ 21,005 $ 907 8.64%
Consumer 23,067 1,264 10.96% 21,153 1,126 10.65%
Real estate 63,423 2,716 8.57% 56,921 2,501 8.79%
Total 105,916 4,840 9.14% 99,079 4,534 9.15%
Federal funds sold 5,859 171 5.84% 4,309 75 3.48%
Interest bearing
deposits 443 14 6.32% 478 10 4.18%
Investments
Taxable 33,839 997 5.89% 38,897 1,015 5.22%
Tax exempt 1 3,415 142 8.32% 4,162 185 8.88%
Total Earning Assets 1 149,472 6,164 8.25% 146,925 5,819 7.92%
Interest Expense
Demand deposits 28,501 441 3.09% 29,994 461 3.07%
Savings 16,862 314 3.72% 16,959 295 3.48%
Time deposits 78,698 2,105 5.35% 75,486 1,756 4.65%
Total Interest Bearing
Liabilities 124,061 2,860 4.61% 122,439 2,512 4.10%
Net Interest Margin $ 3,304 $ 3,307
Net Yield on Interest Earning
Assets 1 4.42% 4.50%
1 On a taxable equivalent basis based on a tax rate of 34%.
</TABLE>
Page
TABLE I (Continued)
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1995 June 30, 1994
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
<C> <S> <S> <S> <S> <S> <S>
Rate Related Income
Loans
Commercial $ 19,286 $ 433 8.98% $ 21,125 $ 453 8.58%
Consumer 23,386 651 11.13% 21,302 565 10.61%
Real estate 64,944 1,408 8.67% 57,209 1,243 8.69%
Total 107,616 2,492 9.26% 99,636 2,261 9.08%
Federal funds sold 6,694 100 5.98% 4,716 45 3.82%
Interest bearing
deposits 488 9 7.38% 479 5 4.18%
Investments
Taxable 33,271 502 6.04% 38,905 507 5.21%
Tax exempt 1 3,275 70 8.55% 3,961 91 9.19%
Total Earning Assets 1 151,344 3,173 8.39% 147,697 2,909 7.88%
Interest Expense
Demand deposits 26,876 209 3.11% 30,434 231 3.04%
Savings 16,349 151 3.69% 17,420 153 3.51%
Time deposits 82,178 1,188 5.78% 75,420 874 4.64%
Total Interest Bearing
Liabilities 125,403 1,548 4.94% 123,274 1,258 4.08%
Net Interest Margin $ 1,625 $ 1,651
Net Yield on Interest Earning
Assets 1 4.29% 4.47%
1 On a taxable equivalent basis based on a tax rate of 34%.
</TABLE>
Page
TABLE II
<TABLE>
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 1995
(In Thousands of Dollars)
<CAPTION>
1 - 90 91 - 365 1 to 3 3 to 5 More than
Days Days Years Years 5 Years Total
<S> <C> <C> <C> <C> <C> <C>
EARNINGS ASSETS
Loans $ 14,878 $ 35,558 $ 44,417 $ 7,108 $ 6,815 $ 108,776
Fed funds sold 6,128 6,128
Securities and
bank deposits 4,652 6,094 14,385 3,402 8,144 36,677
Total 25,658 41,652 58,802 10,510 14,959 151,581
INTEREST BEARING LIABILITIES
Transaction
accounts 13,931 13,931
Money market
savings 13,027 13,027
Savings accounts 16,753 16,753
Time deposits less
than $100,000 13,704 30,192 20,064 3,591 3 67,554
Time deposits more
than $100,000 1,361 8,548 4,594 1,405 310 16,218
Total 58,776 38,740 24,658 4,996 313 127,483
Discrete interest
sensitivity GAP (33,118) 2,912 34,144 5,514 14,646 24,098
Cumulative interest
sensitivity GAP (33,118) (30,206) 3,938 9,452 24,098
Ratio of cumulative
interest sensitive
assets to cumulative
interest sensitive
liabilities 43.65% 69.02% 103.22% 107.43% 118.90%
Assumes all transaction, money market and savings deposit accounts reprice within 90 days.
</TABLE>
Page
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - On April 11, 1995, the
stockholders held their annual
meeting. The following item
was approved by the
shareholders by the required
majority:
1) Election of the Board of
Directors as proposed in
the proxy material without
any additions or
exceptions.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a) Exhibits
Exhibit 27 Financial Data
Schedule for the quarter
ending June 30, 1995.
(b) Reports on Form 8-K filed
during the six months
ended June 30, 1995.
None
Page
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending June 30, 1995 19
Page
Signature
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.
LESLIE A. BARR
Leslie A. Barr
President
CLARENCE E. PORTER
Clarence E. Porter
Secretary/Treasurer
Date August 9, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Highlands
Bankshares, Inc. Form 10QSB and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,247
<INT-BEARING-DEPOSITS> 488
<FED-FUNDS-SOLD> 6,128
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,009
<INVESTMENTS-CARRYING> 9,180
<INVESTMENTS-MARKET> 9,261
<LOANS> 108,776
<ALLOWANCE> (1,445)
<TOTAL-ASSETS> 159,792
<DEPOSITS> 140,604
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,086
<LONG-TERM> 0
<COMMON> 2,734
0
0
<OTHER-SE> 15,368
<TOTAL-LIABILITIES-AND-EQUITY> 159,792
<INTEREST-LOAN> 4,840
<INTEREST-INVEST> 1,091
<INTEREST-OTHER> 185
<INTEREST-TOTAL> 6,116
<INTEREST-DEPOSIT> 2,860
<INTEREST-EXPENSE> 2,860
<INTEREST-INCOME-NET> 3,256
<LOAN-LOSSES> 60
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 2,058
<INCOME-PRETAX> 1,423
<INCOME-PRE-EXTRAORDINARY> 949
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 949
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
<YIELD-ACTUAL> 4.42
<LOANS-NON> 203
<LOANS-PAST> 882
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,454
<CHARGE-OFFS> 145
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 1,445
<ALLOWANCE-DOMESTIC> 1,445
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
