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 the quarter ended Commission File No. 0-16761
September 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 September 30, 1995
Common Stock, par value - $5 514,066 shares
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Nine Months Ended
September 30, 1995 and 1994 2
Consolidated Statements of Income - Three Months Ended
September 30, 1995 and 1994 3
Consolidated Balance Sheets - September 30, 1995 and
December 31, 1994 4
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1995 and 1994 5
Consolidated Statements of Changes in Stockholders' Equity -
Nine Months Ended September 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 2
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Nine Months Ended
September 30,
1995 1994
Interest Income
Interest and fees on loans $ 7,446 $ 6,851
Interest on federal funds sold 264 114
Interest on time deposits 19 15
Interest and dividends on investment securities
Taxable 1,509 1,530
Nontaxable 139 173
Total Interest Income 9,377 8,683
Interest Expense
Interest on time deposits over $100,000 711 462
Interest on other deposits 3,806 3,325
Total Interest Expense 4,517 3,787
Net Interest Income 4,860 4,896
Provision for Loan Losses 90 180
Net Interest Income after Loan Losses 4,770 4,716
Noninterest Income
Service charges 149 136
Other 263 242
Investment security gains (losses) (8) (3)
Total Noninterest Income 404 375
Noninterest Expense
Salaries 1,198 1,090
Employee benefits 438 432
Occupancy expense 135 115
Equipment expense 139 156
Data processing expense 273 259
FDIC expense 146 229
Other 709 734
Total Noninterest Expense 3,038 3,015
Income before Income Taxes 2,136 2,076
Provision for Income Taxes 722 715
Net Income $ 1,414 $ 1,361
Per Share Data
Net Income $ 2.75 $ 2.65
Cash Dividends $ .48 $ .42
Weighted Average Common Shares Outstanding 514,066 514,066
The accompanying notes are an integral part of these statements.
Page 3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
September 30,
1995 1994
Interest Income
Interest and fees on loans $ 2,606 $ 2,317
Interest on federal funds sold 93 39
Interest on time deposits 5 5
Interest and dividends on investment securities
Taxable 512 515
Nontaxable 45 51
Total Interest Income 3,261 2,927
Interest Expense
Interest on time deposits over $100,000 274 145
Interest on other deposits 1,383 1,130
Total Interest Expense 1,657 1,275
Net Interest Income 1,604 1,652
Provision for Loan Losses 30 60
Net Interest Income after Loan Losses 1,574 1,592
Noninterest Income
Service charges 50 49
Other income 74 72
Investment security losses (5)
Total Noninterest Income 119 121
Noninterest Expense
Salaries 385 350
Employee benefits 168 164
Occupancy expense 40 36
Equipment expense 55 53
Data processing 93 85
FDIC expense (refund) (8) 76
Other 247 249
Total Noninterest Expense 980 1,013
Income before Income Taxes 713 700
Provision for Income Taxes 248 234
Net Income $ 465 $ 466
Per Share Data
Net Income $ .90 $ .91
Cash Dividends $ .16 $ .14
Weighted Average Common Shares Outstanding 514,066 514,066
The accompanying notes are an integral part of these statements.
Page 4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
September 30, December 31,
1995 1994
ASSETS
Cash and due from banks $ 3,361 $ 3,327
Federal funds sold 5,540 4,625
Time deposits in other banks 490 384
Securities held to maturity (note 2) 9,597 9,460
Securities available for sale (note 3) 27,847 28,542
Loans, net of unearned interest (note 4) 111,897 104,043
Less allowance for loan losses (note 5) (1,347) (1,454)
Net Loans 110,550 102,589
Construction in progress 503
Bank premises and equipment, net 3,351 1,197
Interest receivable 1,337 1,303
Deferred income tax benefit 381 719
Other assets 659 713
Total Assets $ 163,113 $ 153,362
LIABILITIES
Deposits:
Noninterest bearing
Demand $ 13,387 $ 13,357
Interest bearing
Money market and interest checking 13,746 14,504
Money market savings 12,394 14,262
Savings accounts 17,033 18,327
Certificates of deposit over $100,000 16,757 13,233
Other certificates of deposit 69,829 61,881
Total Deposits 143,146 135,564
Other borrowed money 160
Accrued interest and other expenses 1,288 1,022
Total Liabilities 144,594 136,586
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 14,689 13,523
Unrealized net loss on securities
available for sale (72) (649)
19,013 17,270
Treasury stock (32,698 shares) (494) (494)
Total Stockholders' Equity 18,519 16,776
Total Liabilities and Stockholders' Equity $ 163,113 $ 153,362
The accompanying notes are an integral part of these statements.
Page 5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Nine Months Ended
September 30,
1995 1994
Cash Flows from Operating Activities:
Net income $ 1,414 $ 1,361
Adjustments to reconcile net income to net
cash provided by operating activities:
Investment securities losses 8 3
Depreciation 115 100
Amortization of security premiums 135 185
Provision for loan losses 90 180
(Increase) decrease in interest receivable (34) 67
(Increase) decrease in other assets 54 (79)
Increase in accrued expenses 266 16
Net Cash Provided by Operating Activities 2,048 1,833
Cash Flows from Investing Activities:
Net change in federal funds sold (915) (759)
Proceeds from maturity of time deposit 99
Proceeds from maturities of securities
available for sale 10,375 4,562
Proceeds from maturities of securities
held to maturity 886 10,632
Purchase of time deposits in other banks (100)
Purchase of securities available for sale (8,435) (10,919)
Purchase of securities held to maturity (1,502) (2,344)
Net change in loans (8,051) (5,500)
Purchase of property and equipment (1,766) (240)
Net Cash Consumed by Investing Activities (9,508) (4,469)
Cash Flows from Financing Activities:
Net increase in deposits 7,582 2,733
Increase in other borrowed money 160 100
Dividends paid in cash (248) (216)
Net Cash Provided by Financing Activities 7,494 2,617
Net Increase (Decrease) in Cash and
Cash Equivalents 34 (19)
Cash and Cash Equivalents, Beginning of Period 3,327 3,841
Cash and Cash Equivalents, End of Period $ 3,361 $ 3,822
Supplementary Disclosures:
Cash paid for:
Income taxes $ 760 $ 802
Interest expense 4,330 3,783
The accompanying notes are an integral part of these statements.
Page 6
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Nine Months Ended
September 30,
1995 1994
Balance, beginning of period $ 16,776 $ 15,842
Net income for period 1,414 1,361
Cash dividends (248) (216)
Cumulative effect of change in accounting for
securities available for sale (note 2) 122
Change in unrealized gain (loss) on
securities available for sale (note 2) 577 (454)
Balance, end of period $ 18,519 $ 16,655
The accompanying notes are an integral part of these statements.
Page 7
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 September 30, 1995,
and the results of operations for the nine and three month
periods ended September 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 market value of securities held to
maturity as of September 30, 1995 and December 31, 1994, are as
follows:
1995 1994
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities
and obligations
of US Government
corporations
and agencies $ 6,288 $ 6,352 $ 5,597 $ 5,487
Obligations of
states and
political
subdivisions 3,309 3,373 3,863 3,764
Total $ 9,597 $ 9,725 $ 9,460 $ 9,251
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and market value of securities available
for sale as of September 30, 1995 and December 31, 1994, are as
follows:
1995 1994
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities
and obligations
of US Government
corporations and
agencies $ 25,994 $ 26,052 $ 27,504 $ 26,677
Other 1,968 1,795 2,068 1,865
Total $ 27,962 $ 27,847 $ 29,572 $ 28,542
Page 8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of September 30, 1995 and
December 31, 1994, is as follows:
1995 1994
Commercial $ 19,899 $ 19,462
Real estate - construction 2,626 1,182
- mortgages 64,908 60,783
Consumer installment 26,682 24,728
Total 114,115 106,155
Unearned interest (2,218) (2,112)
Net loans outstanding $ 111,897 $ 104,043
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses
for the nine months ended September 30, 1995 and 1994, follows:
1995 1994
Balance at beginning of period $ 1,454 $ 1,734
Provisions charged to operating expenses 90 180
Loan recoveries 104 166
Loan charge-offs (301) (540)
Balance at end of period $ 1,347 $ 1,540
Page 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Year to Date Operations
The Company's nine month income of $1,414,000 represents a 3.89%
increase in total earnings and earnings per share compared to 1994
operations. Earnings represented an annualized return on equity of 10.68%
for the first nine months of 1995 compared to 11.17% for the same period in
1994. The annualized return on average assets was 1.20% in the first nine
months of 1995 compared with 1.19% in the first nine months of 1994.
The tax equivalent net interest income declined by $53,000 in 1995 to
$4,932,000. Increases in the level of net earning assets were offset by a
decline in the tax equivalent net interest margin. 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. The effect of these higher certificate rates will be reflected in
the cost of deposits for the next 12 - 18 months.
Although the net interest margin declined slightly in the first nine
months compared to 1994, declines in the provision for loan losses,
increases in other noninterest income and a dramatic decline in the cost of
FDIC insurance more than offset minor increases in other noninterest
expenses. The result was an overall increase in net income of 3.89% for
the period.
Quarter Ending September 30 Operations
Net income for the quarter ending September 30, 1995 declined .21% when
compared to the prior year operations. Although the net interest margin
declined in 1995, declines in the provision for loan losses and reductions
in the cost of FDIC insurance more than offset these declines. The result
was income for the third quarter was virtually unchanged at $465,000
compared to $466,000 in 1994.
Net Interest Income
Year to Date Operations
The Company's net interest income on a tax equivalent basis was 4.35%
($4,932,000) in the first nine months of 1995 compared to 4.51%
($4,985,000) in the first nine months of 1994. The modest decline was due
primarily to increasing costs of deposits, particularly long-term
certificates. Real estate loan yields fell slightly while commercial and
consumer loan yields rose 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 a decline in the net interest margin during the first nine
months of 1995.
Average loans outstanding through September 30, 1995 increased 6.94%
from the amounts through September 30, 1994. The loan demand is expected
to continue to be good through the remainder of 1995 as the local economy
does not show any signs of weakness. The increase in volume of interest
earning assets and increases on investment yields kept pace with rising
deposit rates until June 30, 1995. In the third quarter, higher rates on
deposits outpaced revenue growth to result in a drop in net interest
margins. High rates paid on certificate contracts entered into in the spring
will continue to keep the overall cost of deposits high and temper
margin growth. Recent actions by the Federal Reserve Bank give the
impression that future rate changes will be minimal and thus rate stability
or modest declines may be expected in the near future. Management believes
its liquidity and asset/liability management policies are adequate to
maintain an acceptable net interest margin into the foreseeable future.
Page 10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Quarter Ending September 30 Operations
The Company's net interest income on a tax equivalent basis was 4.22%
($1,628,000) for the quarter ending September 30, 1995 compared to 4.51%
($1,678,000) 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 average
rates paid on interest bearing deposits from 4.13% in 1994 to 5.16% in
1995. The increase was the result of higher market rates on contracts made
in 1994 and aggressive competition in early 1995 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 and allow for stability in the net interest margin.
A complete yield analysis is shown as Table I on page 15.
Noninterest Income
Year to Date Operations
Noninterest income increased 7.73% during the first nine 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 September 30 Operations
Noninterest income declined 1.65% for the quarter. Minor increases in
service charge and insurance income were offset by losses on securities of
$5,000 in 1995 versus no such losses in 1994.
Noninterest Expenses
Year to Date Operations
Overall, noninterest expenses rose .76% for the first nine months of
1995 when compared to the same period of 1994. Personnel expenses
increased 7.49% due to merit and inflationary raises. Equipment, occupancy
and data processing expenses increased 3.21% during the nine month period
due to expanding business. 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. In September, it was determined that the FDIC insurance reserve
levels mandated by Congress had been met as of June 1, 1995. The FDIC
reduced its rate on insured deposits by approximately 83% and refunded June
overcharges previously assessed. The result was a decline of 36.24% in the
FDIC insurance expense for the nine month period. Other noninterest
expenses declined 3.54% due to lower fees for examinations and lower other
operating expenses. Exclusive of FDIC insurance, noninterest operating
expenses rose 3.81% compared with growth in total assets of 6.36% for the
year. The overall increase in noninterest expenses was in line with
management's expectations and budget.
Page 11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest Expenses (Continued)
Quarter Ending September 30 Operations
Overall, noninterest expenses declined 3.26% for the quarter ending
September 30, 1995 compared to 1994. Increases in personnel, occupancy and
data processing expenses were offset by the decline in the FDIC insurance
expenses discussed earlier. Exclusive of the FDIC expense cited above,
noninterest expenses rose by 5.44% for 1995 compared to 1994. Noninterest
expenses have been consistent throughout the four most recent quarters and
should remain so based on future declines in FDIC insurance expense and
moderate increases in other operating expenses.
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 $7,854,000 or 7.55% in the first nine
months in 1995. The bulk of this increase was in new real estate mortgages
and consumer loans. The loan to deposit ratio was 78.17% at September 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 September 30,
1995 was $202,000 compared to $166,000 at December 31, 1994. Restructured
loans totaled $198,000 as of September 30, 1995 compared to $210,000 at
December 31, 1994. Real estate acquired through foreclosure was $221,000
at September 30, 1995 compared to $296,000 at December 31, 1994. All
foreclosed property held at September 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 12
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 nine months ended September
30, 1995 was $197,000 compared to net charge-offs of $374,000 for the first
nine months of 1994. The 1994 charge-offs were heavily influenced by a
single loss totaling $287,000. The allowance for loan losses was
$1,347,000 at September 30, 1995 compared to $1,454,000 at December 31,
1994. The allowance as a percent of loans outstanding was 1.20% at
September 30, 1995 compared to 1.40% at December 31, 1994. The provision
for loan losses for the first nine months of 1995 was $90,000 compared to
$180,000 for the comparable period in 1994. The lower provision was
possible due to continued improvement in the quality of the loan portfolio.
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 September
30, 1995 were $37,444,000 compared to $38,002,000 at December 31, 1994.
Securities as percent of total assets were 22.96% at September 30, 1995
compared to 24.78% at December 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 September 30,
1995, the cost of the securities available for sale exceeded their market
value by $115,000 ($72,000 after tax considerations).
Page 13
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 5.59% between December 31, 1994 and September
30, 1995, primarily in the area of time deposit accounts. The cost of
funds for the first nine months of 1995 was 4.80% compared to 4.11% for the
same period in 1994. The yields on demand and savings deposits remained
stable within the period while yields on time deposits increased sharply
due to market increases and deposit promotions. 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 some
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 September 30, 1995 the Company's total risk
based capital ratio was 19.99% which is far above the regulatory minimum of
8.0%. The ratio of total capital to total assets was 11.35% at September
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 utilization has been limited.
In past years, growth in deposits has been sufficient to fund the increases
in loans and there is no reason to believe this will not be true in future
years.
Page 14
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 September 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 third quarter of 1995.
With the rate declines the markets have witnessed in the last six months,
the Company does not anticipate significant declines in the net interest
margin in future periods.
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.
A complete interest sensitivity analysis is shown as Table II on Page
16.
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 15
Table 1
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 19,385 $ 1,311 9.02% $ 20,513 $ 1,323 8.60%
Consumer 23,448 1,944 11.05% 21,409 1,705 10.62%
Real Estate 64,577 4,191 8.65% 58,518 3,823 8.71%
Total 107,410 7,446 9.24% 100,440 6,851 9.09%
Federal funds sold 6,110 264 5.76% 4,001 114 3.80%
Interest bearing
deposits 459 19 5.52% 446 15 4.48%
Investments
Taxable 33,784 1,509 5.96% 38,709 1,530 5.27%
Tax exempt (1) 3,337 211 8.43% 3,915 262 8.92%
Total Earning Assets (1) 151,100 9,449 8.34% 147,511 8,772 7.92%
Interest Expense
Demand deposits 27,791 648 3.11% 30,309 703 3.09%
Savings 16,687 472 3.77% 17,155 455 3.53%
Time deposits 81,032 3,397 5.59% 75,329 2,629 4.65%
Total Interest Bearing
Liabilities 125,510 4,517 4.80% 122,793 3,787 4.11%
Net Interest Margin $ 4,932 $ 4,985
Net Yield on Interest
Earning Assets (1) 4.35% 4.51%
(1) Yields are on a taxable equivalent basis using an assumed tax rate of 34%.
</TABLE>
Page 15 (Continued)
Table 1 (Continued)
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1995 September 30, 1994
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 19,303 $ 451 9.35% $ 19,529 $ 416 8.52%
Consumer 24,210 680 11.24% 21,921 579 10.56%
Real Estate 66,885 1,475 8.82% 61,712 1,322 8.57%
Total 110,398 2,606 9.44% 103,162 2,317 8.98%
Federal funds sold 6,612 93 5.62% 3,385 39 4.61%
Interest bearing
deposits 491 5 4.07% 382 5 5.24%
Investments
Taxable 33,674 512 6.08% 38,333 515 5.37%
Tax exempt (1) 3,181 69 8.67% 3,421 77 9.00%
Total Earning Assets (1) 154,356 3,285 8.51% 148,683 2,953 7.94%
Interest Expense
Demand deposits 26,371 207 3.14% 30,939 242 3.13%
Savings 16,337 158 3.87% 17,547 160 3.65%
Time deposits 85,700 1,292 6.03% 75,015 873 4.65%
Total Interest Bearing
Liabilities 128,408 1,657 5.16% 123,501 1,275 4.13%
Net Interest Margin $ 1,628 $ 1,678
Net Yield on Interest
Earning Assets (1) 4.22% 4.51%
(1) Yields are on a taxable equivalent basis using an assumed tax rate of 34%.
</TABLE>
Page 16
TABLE II
<TABLE>
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
SEPTEMBER 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 $ 16,745 $ 38,149 $ 43,826 $ 6,569 $ 6,608 $111,897
Fed funds sold 5,540 5,540
Securities 6,904 6,973 11,428 4,549 7,590 37,444
Interest bearing time
deposits 400 90 490
Total 29,189 45,522 55,344 11,118 14,198 155,371
INTEREST BEARING LIABILITIES
Transaction accounts 13,746 13,746
Money market accounts 12,394 12,394
Savings accounts 17,033 17,033
Time deposits more
than $100,000 3,466 6,664 4,890 1,427 310 16,757
Time deposits less
than $100,000 16,817 29,222 19,750 4,037 3 69,829
Other borrowed money 3 14 34 39 70 160
Total 63,459 35,900 24,674 5,503 383 129,919
Discrete interest
sensitivity gap (34,270) 9,622 30,670 5,615 13,815 25,452
Cumulative interest
sensitivity gap (34,270) (24,648) 6,022 11,637 25,452
Ratio of cumulative interest
sensitive assets to
cumulative interest
sensitive liabilities 46.00% 75.19% 104.86% 108.98% 119.59%
Assumes all transaction and money market deposit accounts reprice within 90 days.
</TABLE>
Page 17
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 - Not Applicable
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 September 30, 1995.
(b) Reports on Form 8-K filed
during the nine months
ended September 30, 1995.
A Form 8-K was filed on
September 5, 1995
disclosing the death of
James E. Frye, Sr., a
director of Highlands
Bankshares, Inc. and
Chairman of the Board of
Capon Valley Bank.
Page 18
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
September 30, 1995 19
Page 21
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
C. E. Porter
Secretary/Treasurer
Date November 6, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 3,361
<INT-BEARING-DEPOSITS> 490
<FED-FUNDS-SOLD> 5,540
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,847
<INVESTMENTS-CARRYING> 9,597
<INVESTMENTS-MARKET> 9,725
<LOANS> 111,897
<ALLOWANCE> (1,347)
<TOTAL-ASSETS> 163,113
<DEPOSITS> 143,146
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,288
<LONG-TERM> 160
<COMMON> 2,734
0
0
<OTHER-SE> 15,785
<TOTAL-LIABILITIES-AND-EQUITY> 163,113
<INTEREST-LOAN> 7,446
<INTEREST-INVEST> 1,648
<INTEREST-OTHER> 283
<INTEREST-TOTAL> 9,377
<INTEREST-DEPOSIT> 4,517
<INTEREST-EXPENSE> 4,517
<INTEREST-INCOME-NET> 4,860
<LOAN-LOSSES> 90
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 3,038
<INCOME-PRETAX> 2,136
<INCOME-PRE-EXTRAORDINARY> 1,414
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,414
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.75
<YIELD-ACTUAL> 4.35
<LOANS-NON> 202
<LOANS-PAST> 1,291
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,454
<CHARGE-OFFS> 301
<RECOVERIES> 104
<ALLOWANCE-CLOSE> 1,347
<ALLOWANCE-DOMESTIC> 1,347
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
