SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1995 Commission file number: 0-16761
Highlands Bankshares, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0650743
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 929, Petersburg, West Virginia 26847
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (304) 257-4111
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $5 Par
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 requirements for the past 90 days.
Yes ..X. No ....
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $12,759,000
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days: As of March 1, 1996 - $19,208,172
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of March 1, 1996 -
514,066
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement of Highlands Bankshares, Inc. filed via Form DEF 14A
on March 26, 1996.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on page 43.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT YES NO X
Page
FORM 10-KSB INDEX
Page
Part I
Item 1. Description of Business 3
General
Services Offered by the Banks
Employees
Competition
Regulation and Supervision
Item 2. Description of Properties 4
Item 3. Legal Proceedings 5
Item 4. Results of Votes of Security Holders 5
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis of Plan
of Operation 6
Item 7. Financial Statements 22
Item 8. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure 43
Part III
Item 9. Directors and Executive Officers 43
Item 10. Executive Compensation 43
Item 11. Security Ownership of Certain Beneficial
Owners and Management 43
Item 12. Certain Relationships and Related Transactions 43
Part IV
Item 13. Exhibits and Reports on Form 8-K 43
Signatures 45
Page
Part I
Item 1. Description of Business
General
Highlands Bankshares, Inc. (Highlands), incorporated under the laws of
West Virginia in 1985, is a multi-bank holding company subject to the
provisions of the Bank Holding Company Act of 1956, as amended, and owns
100% of the outstanding stock of its subsidiary banks, The Grant County
Bank and Capon Valley Bank (hereinafter referred to as the banks) and its
life insurance subsidiary, HBI Life Insurance Company (HBI Life). Capon
Valley Bank became a member of Highlands effective July 1, 1987, in a
combination accounted for as a pooling of interests.
The Grant County Bank was chartered on May 20, 1902, and Capon Valley
Bank was chartered on July 1, 1918. Both are state banks chartered under
the laws of the State of West Virginia. HBI Life was chartered in April
1988 under the laws of the State of Arizona.
Services Offered by the Banks
The banks offer all services normally offered by a full service
commercial bank, including commercial and individual demand and time
deposit accounts, commercial and individual loans, and drive-in banking
services. No material portion of the banks' deposits have been obtained
from a single or small group of customers and the loss of the deposits of
any one customer or of a small group of customers would not have a material
adverse effect on the business of the banks. Credit life accident and
health insurance are sold to customers of the subsidiary banks through HBI
Life Insurance Company.
Employees
As of December 31, 1995, The Grant County Bank had 38 full time
equivalent employees and Capon Valley Bank had 34 full time equivalent
employees. No person is employed by Highlands or HBI Life on a full time
basis.
Competition
The banks' primary trade area is generally defined as Grant County,
Hardy County, and the northern part of Pendleton County. This area
includes the cities of Petersburg and Moorefield and several rural towns.
The banks compete with three state chartered banks and two national banks.
No financial institution has been chartered in the area within the last
five years although branches of state and nationally chartered banks have
located in this area within this time period. Competition for new loans
and deposits in the banks' service area is quite intense and all
competition has been forced to pay rates on deposits which exceed the
national averages.
The banks' secondary trade area includes portions of Hampshire County
in West Virginia and Frederick County in Virginia. In addition, the banks
compete with money market mutual funds and investment brokerage firms for
deposits in the tri-county area.
Regulation and Supervision
Highlands is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934. These include, but are not limited to,
the filing of annual, quarterly and other current reports with the
Securities and Exchange Commission.
Page
Regulation and Supervision (Continued)
Highlands, as a bank holding company, is subject to the provisions of
the Bank Holding Company Act of 1956, as amended (the "Act"). It is
registered as such and is supervised by the Federal Reserve Board. The Act
requires Highlands to secure the prior approval of the Federal Reserve
Board before Highlands acquires ownership or control of more than five
percent of the voting shares, or substantially all of the assets of any
institution, including another bank.
As a bank holding company, Highlands is required to file with the
Federal Reserve Board an annual report and such additional information as
it may require pursuant to the Act. The Federal Reserve Board may also
conduct examinations of Highlands and any or all of its subsidiaries.
Under Section 106 of the 1970 Amendments to the Act and the regulations of
the Federal Reserve Board, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with
an extension of credit, provision of credit, sale, or lease of property or
furnishing of services.
Federal Reserve regulations permit bank holding companies to engage in
nonbanking activities closely related to banking or to managing or
controlling banks. These activities include the making or servicing of
loans, performing certain data processing services, and certain leasing and
insurance agency activities. HBI Life acts as reinsurer of the credit life
insurance coverage sold by the banks to bank customers. Approval of the
Federal Reserve Board is necessary to engage in any of these activities or
to acquire corporations engaging in these activities.
The operations of the banks are subject to federal and state statutes
which apply to state chartered banks. Bank operations are also subject to
the regulations of the Federal Deposit Insurance Corporation (the "FDIC"),
which insures the banks' deposits. The Capon Valley Bank is a member of
the Federal Reserve Bank System and is subject to the regulations of the
Federal Reserve Bank Board.
The supervisory authorities regularly examine such areas as reserves,
loans, investments, management practices, and other aspects of the banks'
operations. These examinations are designed primarily for the protection
of depositors. In addition to these regular examinations, the banks must
furnish the various regulatory authorities quarterly reports containing a
full and accurate statement of its affairs.
The operations of the insurance subsidiary are subject to the
oversight and review of State of Arizona Department of Insurance.
Item 2. Description of Properties
The Grant County Bank's main office is located on Main Street in
Petersburg, West Virginia. In September 1995, the Bank completed its
modernization of the existing facility which included an additional 6,000
square feet of operating space and new, state-of-the-art drive-up
facilities. An automatic teller machine has been added to allow customers
greater flexibility in their banking transactions. The Bank also has a
branch in Riverton, West Virginia which provides banking services in
northwest Pendleton County. The Riverton branch building has an annual
lease while the main office facilities are owned by the Bank.
Capon Valley Bank has its main office in Wardensville, West Virginia
and a branch office located in Moorefield, West Virginia. In April 1995,
Capon completed the expansion of its Moorefield facilities which have
provided for additional drive-up capabilities and additional lobby and
operating areas. Both facilities are owned by the Bank and considered
adequate for current operations.
Page
Item 3. Legal Proceedings
Management is not aware of any material pending or threatened
litigation in which Highlands or its subsidiaries may be involved as a
defendant. In the normal course of business the banks periodically must
initiate suits against borrowers as a final course of action in collecting
past due loans.
Item 4. Results of Votes of Security Holders
Highlands has not submitted any matters to the vote of security
holders for the quarter ending December 31, 1995.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company had approximately 860 stockholders of record as of March
1, 1996. The Company's stock is not traded on any national or regional
stock exchange although brokers in Cumberland, Maryland, Winchester and
Harrisonburg, Virginia may occasionally initiate or be a participant in a
trade. Terms of an exchange between individual parties may not be known to
the Company. The following outlines the dividends paid and market prices
of the Company's stock based on prices disclosed to management. Such
prices may not include retail mark-ups, mark-downs or commissions.
Dividends Market Price Range
1995 Per Share High Low
First Quarter $ .16 $ 40.25 $ 39.00
Second Quarter .16 40.00 39.50
Third Quarter .16 41.25 37.00
Fourth Quarter .35 41.00 38.50
1994
First Quarter $ .14 $ 34.00 $ 28.50
Second Quarter .14 34.00 34.00
Third Quarter .14 39.63 33.00
Fourth Quarter .30 39.88 37.50
1993
First Quarter $ .12 $ 30.00 $ 30.00
Second Quarter .12 30.00 29.00
Third Quarter .12 29.50 29.00
Fourth Quarter .27 29.00 28.00
Page
Item 6. Management's Discussion and Analysis of Plan of Operation
Overview
The net income of the Company declined 1.20% in 1995 compared to
operations in 1994. The slight decline was reflective of significant
competition in the Company's trade area resulting in higher than average
rates paid on local deposits and increased overhead expenses. The growth
in deposits and loans was steady throughout the year with year end asset
growth of 8.96% over levels outstanding at December 31, 1994. Total
stockholders' equity increased 12.43% as a result of retained operating
income and increases in the market value of securities available for sale.
The following outlines returns on equity and average assets for the periods
of 1993-1995:
1995 1994 1993
Return on average equity 10.26% 11.44% 13.93%
Return on average assets 1.16% 1.22% 1.40%
A complete five year summary of operations appears as Table I on page
18.
The following discusses in more detail the operations of 1995, 1994
and 1993.
Net Interest Margin
1995 compared to 1994
The Company's net interest margin on a tax equivalent basis was
$6,651,000 for 1995, a decline of 1.63% when compared to 1994 results.
Increases in the rates paid on deposits were the result of an intensive
campaign to retain current and attract new certificates of deposit within
the local service area. As market rates declined in early 1995, The Grant
County Bank was forced to maintain or even increase rates paid on
certificates of deposit in order to retain local customers. The rates paid
in this locality remained high for much of 1995 and only in the last two
months of the year have they begun a decline to rates in line with national
competition. Capon has experienced some of the same competition as Grant
to a lesser extent.
The Company's yield on loans of 9.30% is a slight increase over 1994
operations of 9.12% and is in line with local competition. An increase of
7.31% in average loans outstanding was the major factor in the 9.56% growth
in loan interest income. Loan growth was constant throughout the year as
the local economy was able to support a good loan demand. The Company's
philosophy of seeking good loans without undue risk allows it to maximize
its returns and serve the local community.
Due to the excellent loan demand, the Company's average investments
in securities declined 10.93% in 1995 over 1994 levels of investment. A
higher return on investments (6.29% in 1995 compared to 5.74% in 1994) was
the result of investment decisions made in 1994 and early 1995 when market
rates were substantially higher. The majority of the Company's investments
are taxable and are held in the available for sale category. In addition,
it has been the Company's philosophy to generally limit maturities on
investments to five to seven years as this allows for better repricing
opportunities in times of changing rates. Yields on federal funds
increased substantially due to changes desired by the Federal Reserve as
part of its monetary policy. Yields were relatively stable at/around 6.00%
for the first half of 1995 and then declined to about 5.50% by year end.
Federal funds sold generally comprise three to five percent of total
interest earning assets and are used as sources of short-term liquidity in
the asset and liability management.
Page
Net Interest Margin (Continued)
1995 compared to 1994 (Continued)
Interest bearing liabilities saw a slight decline in the cost of
demand deposits and a small increase in the cost of savings deposits in
1995. Average balances in both of these deposit classifications fell
within 1995 as depositors switched to longer term certificates. This
switch and the new money which resulted from a certificate promotion helped
to increase average time deposits outstanding by 9.69% in 1995 over 1994
balances.
The Company's net interest margin improved slightly in the fourth
quarter of 1995 compared to the third quarter of 1995 and it is believed it
will continue to improve as the Company's cost of deposits is expected to
decline. With moderate growth in earning assets and a continued strong
loan demand, the dollar level of net interest earnings is expected to grow
slightly in 1996. Management believes that competition for deposit dollars
will be less intense in 1996 and that net margins will improve as a result
of rate declines and rate stability. Management believes that it has the
liquidity and flexibility available to allow it to maintain an adequate net
interest margin into the foreseeable future. Table II on page 19 gives a
complete analysis of the net interest margin for the years of 1995, 1994
and 1993.
1994 compared to 1993
The Company's net interest income on a tax equivalent basis was
$6,761,000 for 1994, a decline of .40% compared to the 1993 net interest
margin. Declines in investment income due to historically low market rates
were offset by similar declines in interest expense on deposits. An
increase in average loans outstanding of 7.39% in 1994 helped maintain the
margin at historical levels. This increased level of lending was funded by
a decline in investments and an increased level of deposits. The Company's
return on investments fell by .21% in 1994 as older securities with higher
interest rates matured and reinvestments were made at lower rates. The
fourth quarter of 1994 saw a reversal of this trend as returns rose on
investments for the first time in three years. Increases in the yield on
federal funds sold in the second half of 1994 also helped maintain the net
interest margin at acceptable levels.
Average interest bearing deposits increased 1.16% in 1994 compared to
1993. With interest rates at historically low levels throughout much of
1994, customers either placed their money in alternative investments or
maintained their bank deposits in highly liquid savings or checking
accounts. The growth in average balances of all savings and checking
accounts of 3.55% was offset by a decline of .30% in certificates of
deposit. Large certificates of deposit (those exceeding $100,000) were
virtually unchanged at $13,200,000 on December 31, 1994 as the Company did
not actively pursue large deposits.
Provision and Allowance for Loan Losses
The Company's allowance for loan losses (the allowance against which
future losses will be charged) declined $135,000 at December 31, 1995
compared to December 31, 1994 balances. At December 31, 1995, the
provision was 1.16% of loans outstanding. Net charged off loans totaled
$255,000 and included some losses that had been provided for in prior
years. The provision for loan losses of $120,000 in 1995 was substantially
lesser than the provision of $240,000 in 1994 and $390,000 in 1993. This
is a result of improvement in delinquent loans of 30 - 89 days and better
collateralization of loans. Management reviews the allowance on a monthly
basis and makes additions as appropriate. Management does not anticipate
any substantial changes in the near future in the quality of the loan
portfolio. See page 9 for a listing of loans by type and pages 11 and 12
for an analysis of the activity in the allowance for loan losses and
composition of the allowance at each year end.
Page
Noninterest Income
1995 compared to 1994
Service charge income increased by 8.32% in 1995 compared to 1994 due
to an increase in the level of deposit accounts and an increase in certain
rates. Insurance commission income was unchanged at $160,000 as sales of
new policies remained at prior levels. Other operating income increased
56.38% due primarily to a $40,000 recovery dealing with a failed investment
that had been charged to operations in 1991. Other reasons for the
increase include higher fees from loan servicing activities and larger
gains on the sale of foreclosed real estate. The losses on security
transactions declined from $26,500 in 1994 to $9,000 in 1995 due to a lower
volume of early payoffs on mortgage pools. The Company rarely sells
investment securities and gains/losses on security transactions arise
mainly from early mortgage pool paydowns.
1994 compared to 1993
Noninterest income (exclusive of security gains and losses) increased
4.32% due to higher service charge fees and higher loan servicing income.
The increases were due primarily to rate increases for service charges and
volume increases for servicing income. Declines in insurance commissions
and operating income were due to a higher claims rate in 1994.
The gains and losses on security transactions varied significantly
between 1994 and 1993 due to the sale of a large amount of taxable
municipal investments in 1993 that did not recur in 1994. The securities
had experienced substantial declines in previous years and the recovery in
1992 and 1993 was recognized in the sale of these securities in May of
1993.
Noninterest Expenses
1995 compared to 1994
Noninterest expenses rose 3.44% in 1995 when compared with 1994
operations. Salaries and benefits rose 11.35% due to merit and
inflationary raises, changes in the employees' benefit packages and an
increase in the number of full time equivalent employees. Occupancy and
equipment expenses rose 7.94% in 1995 as the Company incurred additional
costs in the expansion of facilities at Petersburg and Moorefield. FDIC
insurance expenses declined 47.80% as insurance rates were reduced to
almost zero in the second half of 1995. Since both banks are considered to
be well capitalized institutions, the Company expects only a minimal cost
of FDIC insurance in the foreseeable future. Data processing expense rose
6.15% due to expanded volume and rate increases. Other noninterest expense
increased .81% due to inflation but were limited by lower insurance costs.
The overall noninterest expense as a percentage of average assets was 2.62%
for 1995 which is approximately the same as in prior years.
1994 compared to 1993
Noninterest expenses rose 5.79% in 1994 compared to 1993 operations.
Salaries and benefits increased 8.41% due to increased staffing and
inflationary raises. Expenses for equipment and occupancy increased a
modest 1.64% due to inflation while FDIC insurance increased 2.45% due to a
similar increase in average deposits. Other noninterest expenses increased
4.11% due to higher franchise taxes, additional data processing services
and inflation. The overall increase was in line with management's
expectation.
Page
Financial Condition
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 at December 31, 1995 increased 9.51% from amounts
outstanding at December 31, 1994. The increase was spread evenly over all
types of lending and was not concentrated in any one geographical or
business sector. The loan to deposit ratio of 77.13% at December 31, 1995
was an increase over the level of 76.75% at December 31, 1994 and 73.55% at
December 31, 1993.
The following table summarizes the Company's loan portfolio, net of
unearned income:
At December 31,
1995 1994 1993
(Dollars in Thousands)
Real Estate:
Mortgage $ 65,971 $ 60,783 $ 56,055
Construction 2,622 1,182 1,195
Commercial 20,749 19,462 20,215
Installment 26,740 24,727 23,272
116,082 106,154 100,737
Less unearned discount (2,147) (2,112) (2,166)
113,935 104,042 98,571
Allowance for loan losses (1,319) (1,454) (1,734)
Loans, net $ 112,616 $ 102,588 $ 96,837
The following table shows the maturity of loans outstanding (in
thousands of dollars) as of December 31, 1995, 1994 and 1993.
Maturity Range 1995 1994 1993
Predetermined Rates:
0 - 12 months $ 57,049 $ 32,729 $ 40,101
13 - 60 months 49,973 62,496 48,816
More than 60 months 6,818 8,651 9,049
Variable Rates 469
Nonaccrual Loans 95 166 136
Total Loans $ 113,935 $ 104,042 $ 98,571
Page
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 discontinued. Loans which reach nonaccrual
status may not be restored to accrual status until all delinquent principal
and interest has been paid or the loan becomes both well secured and in the
process of collection. Restructured loans are loans with respect to which
a borrower has been granted a concession on the interest rate or the
original repayment terms because of financial difficulties.
Nonperforming loans totaled $1.176 million at December 31, 1995
compared to $1.217 million at December 31, 1994 and $1.585 million at
December 31, 1993. The decrease in nonperforming loans reflects the
increased efforts of management to reduce problem loans. Real estate
acquired through foreclosure was $269,000 at December 31, 1995, $296,000 at
December 31, 1994 and $233,000 at December 31, 1993. All foreclosed
property held at December 31, 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.
Management has continued its efforts to reduce serious delinquencies
through greater efforts in the early stages of the delinquency. The result
has been a decline in all delinquent loans of 3.29% in 1995 over 1994
amounts. Management does not anticipate any material increase in
nonperforming assets in 1996 although it may move to foreclose on borrowers
whose loans were on a nonaccrual status at December 31, 1995.
The following table summarizes the nonperforming loans:
At December 31,
1995 1994 1993
(Dollars in Thousands)
Loans accounted for on a
nonaccrual basis $ 95 $ 166 $ 136
Loans contractually past due 90 days
or more as to interest or principal
payments (not included in nonaccrual
loans above)
Commercial 487 378 520
Real estate 479 486 691
Installments 115 187 238
Total Delinquent Loans 1,081 1,051 1,449
Total Nonperforming Loans $ 1,176 $ 1,217 $ 1,585
Page
Allowance for Loan Losses
Management has analyzed the potential risk of loss on the Company's
loan portfolio given the loan balances and the value of the underlying
collateral and has recognized losses where appropriate. Nonperforming
loans are closely monitored on an ongoing basis as part of the Company's
loan review process. Management reviews the loan loss allowance at the end
of each month. Based primarily on the Company's loan classification
system, which classifies problem credits as substandard, doubtful or loss,
additional provisions for losses are made monthly. The ratio of the
allowance for loan losses to total loans outstanding was 1.16% at December
31, 1995 compared to 1.37% at December 31, 1994 and 1.76% at December 31,
1993. At December 31, 1995, the ratio of the allowance for loan losses to
nonperforming loans was 121.16% compared to 119.21% at December 31, 1994
and 109.41% at December 31, 1993.
The following table summarizes changes in the allowance for loan
losses:
Year Ending December 31,
1995 1994 1993
(In Thousands of Dollars)
Balance at beginning of period $ 1,454 $ 1,734 $ 1,364
Loan Losses:
Commercial and agricultural 129 394 123
Real estate - mortgage 95 131 232
Installment loans to individuals 156 187 59
Total loan losses 380 712 414
Recoveries:
Commercial, financial and agricultural 12 34 166
Real estate - mortgage 11 42 137
Installment loans to individuals 102 116 91
Total recoveries 125 192 394
Net loan losses 255 520 20
Additions charged to operations 120 240 390
Balance at end of period $ 1,319 $ 1,454 $ 1,734
Page
The Company has allocated the allowance according to the amounts
deemed to be reasonably necessary to provide for the possibility of losses
incurred within each of the above categories of loans. The allocation of
the allowance as shown in the table below should not be interpreted as an
indication that loan losses in future years will occur in the same
proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total
amount available for future losses that might occur within such categories
since the total allowance is a general allowance applicable to the entire
portfolio.
The following table shows the balance and percentage of the Company's
allowance for loan losses allocated to each major category of loans:
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993
Percent Percent Percent
of of of
Loans Loans Loans
Percent in Percent in Percent in
of Category of Category of Category
Allow- to Total Allow- to Total Allow- to Total
Amount ance Loans Amount ance Loans Amount ance Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 325 25% 18% $ 429 30% 18% $ 717 41% 21%
Real estate
mortgage 463 35 60 507 35 60 343 20 58
Installment 368 28 22 352 24 22 429 25 21
Unallocated 163 12 166 11 245 14
$ 1,319 100% 100% $ 1,454 100% 100% $1,734 100% 100%
</TABLE>
For each period presented, the provision for loan losses charged to
operations is based on management's judgment after taking into
consideration all factors connected with the collectibility of the existing
portfolio. Management evaluates the loan portfolio in light of economic
conditions, changes in the nature and value of the portfolio, industry
standards and other relevant factors. Specific factors considered by
management in determining the amounts charged to operations include
internally generated loan review reports, previous loan loss experience
with the borrower, the status of past due interest and principal payments
on the loan, the quality of financial information supplied by the borrower
and the general financial condition of the borrower.
Loan losses in 1995 were spread over all loan types with no individual
loss constituting a significant portion of the total. In contrast to 1995,
the prior year had a single credit loss that was significant and tended to
skew loss information for that year. Recoveries are quite unpredictable
and 1995 showed a lower recovery rate than prior years. The net credit
losses of $255,000 were within management expectations and management does
not believe credit losses will be a significant problem in the near future.
The provision for loan losses totaled $120,000 for the year ended
December 31, 1995, $240,000 for 1994 and $390,000 for 1993. In the opinion
of management, the provision charged to operations over this three year
period has been sufficient to absorb the net loan losses.
Page
Securities
The Company's securities portfolio serves several purposes. Portions
of the portfolio are used to secure certain public and trust deposits. The
remaining portfolio is held as investments or used to assist the Company in
liquidity and asset liability management. During 1995, total securities
increased to $39.4 million or 23.47% of total assets at December 31, 1995.
During 1994, total securities decreased to $38.0 million or 24.78% of total
assets at December 31, 1994.
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 purchases of 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 December 31,
1995, the cost of the securities available for sale exceeded their market
value by $18,000 ($11,000 after tax considerations).
The following table summarizes the carrying value of the Company's
securities at the dates indicated:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Carrying Value Carrying Value
December 31, December 31,
1995 1994 1993 1 1995 1994
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasuries, agencies
and corporations $ 5,107 $ 5,349 $ 35,038 $ 14,312 $ 21,555
Obligations of states and
political subdivisions 4,064 3,863 4,269 200
Mortgage-backed securities 636 248 2,359 13,321 5,122
Total Debt Securities 9,807 9,460 41,666 27,833 26,677
Other securities 1,497 1,207 1,322
Total $ 9,807 $ 9,460 $ 43,163 $ 29,040 $ 27,999
<F1>
<FN>
1 Prior to 1994, debt securities were classified as held to maturity only and were not
segregated between held to maturity and available for sale.
</FN>
</TABLE>
Page
The carrying amount and estimated market value of debt securities (in
thousands of dollars) at December 31, 1995 by contractual maturity are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Securities Held to Maturity Carrying Market Average
Amount Value Yield
Due in one year or less $ 2,872 $ 2,896 6.36%
Due after one year through five years 3,761 3,848 7.33
Due after five years through ten years 1,633 1,622 7.48
Due after ten years 906 966 9.84
Mortgage-backed securities 635 648 7.01
Total $ 9,807 $ 9,980 7.28%
Securities Available for Sale Amortized Market Average
Cost Value Yield
Due in one year or less $ 6,012 $ 6,019 4.89%
Due after one year through five years 7,372 7,499 7.22
Due after five years through ten years 1,006 995 5.47
Mortgage-backed securities 13,215 13,320 6.52
Total $ 27,605 $ 27,833 6.15%
Yields on tax exempt securities are stated at tax equivalent yields.
Management has generally kept the maturities of investments
relatively short providing for flexibility in investing. Such a
philosophy allows the Company to better match deposit maturities with
investment maturities and thus react more quickly to interest rate changes.
Deposits and Short-Term Borrowings
The Company's predominant source of funds is local deposits. The
Company's deposit base is comprised of demand deposits, savings and money
market accounts and other time deposits. The Company's deposits are
provided by individuals and businesses located within the communities
served.
Average interest bearing deposits grew by 3.82% in 1995 compared to
an increase of 1.16% in 1994. The average aggregate interest rate paid on
deposits was 4.89% in 1995 compared to 4.15% for 1994 and 4.43% for 1993.
The majority of the Company's deposits are higher yielding time deposits as
most of its customers are individuals who seek higher yields than the
yields on savings and demand accounts.
Page
The Company does not actively solicit large certificates of deposit
(those more than $100,000) due to the unstable nature of these deposits.
Increases in 1995 are the result of a deposit promotion in early 1995 which
attracted a large amount of high denomination deposits. A summary of the
maturity of large deposits is as follows:
December 31,
Maturity Range 1995 1994 1993
(In Thousands of Dollars)
Three months or less $ 2,567 $ 3,353 $ 3,323
Four to twelve months 6,699 7,073 7,826
One year to five years 6,575 2,807 1,901
Total $ 15,841 $ 13,233 $ 13,050
Capital Resources
The assessment of capital adequacy depends on a number of factors
such as asset quality, liquidity, earnings performance and changing
competitive conditions and economic forces. The Company seeks to maintain
a strong capital base to support its growth and expansion activities, to
provide stability to current operations and to promote public confidence.
The Company's capital position continues to exceed regulatory
minimums. The primary indicators relied on by the Federal Reserve Board
and other bank regulators in measuring strength of capital position are the
Tier 1 Capital, Total Capital and Leverage ratios. Tier 1 Capital consists
of common stockholders' equity. Total Capital consists of Tier 1 Capital
and a portion of the allowance for loan losses. Risk-based capital ratios
are calculated with reference to risk-weighted assets which consist of both
on and off-balance sheet risks.
The following table shows risk-based capital ratios and stockholders'
equity to total assets:
Regulatory December 31,
Minimum 1995 1994
Capital Ratios
Risk-based capital to risk-weighted assets
Tier 1 4.0% 18.84% 19.47%
Total 8.0% 19.96% 20.69%
Stockholders' equity to total assets 3.0% 11.24% 10.94%
Page
The capital management function is an ongoing process. Central to
this process is internal equity generation accomplished by earnings
retention. During 1995, 1994 and 1993, total stockholders' equity
increased by $2,086,000, $935,000 and $1,648,000, respectively, as a result
of earnings retention and changes in the unrealized gains (losses) on
securities available for sale. The 1993 increase is net of treasury stock
repurchased of $90,000. The return on average equity was 10.26% in 1995
compared to 11.44% for 1994 and 13.93% for 1993. Total cash dividends
declared represent 23% of net income for 1995 compared to 20% of net income
for 1994 and 16% for 1993. Book value per share was $36.69 at December 31,
1995 compared to $32.63 at December 31, 1994 and $30.82 at December 31,
1993.
The Company's principal source of cash income is dividend payments
from the Banks. Certain limitations exist under applicable law and
regulation by regulatory agencies regarding dividend payments to a parent
by its subsidiaries. As of December 31, 1995, the Banks had $2,661,000 of
retained earnings available for distribution to the Company as dividends
without prior regulatory approval.
Liquidity and Interest Rate Sensitivity
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, the Federal Reserve Bank
of Richmond and the Federal Home Loan Bank of Pittsburgh. In the past,
growth in deposits and proceeds from the maturity of investment securities
have been sufficient to fund the net increase in loans.
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 December 31, 1995, the Company had a negative gap position. This
liability sensitive position typically produces a favorable contribution to
earnings during periods of decreasing rates and an unfavorable contribution
to earnings during a period of increasing rates. Although the financial
markets were in a decreasing rate environment for the second half of 1995,
certificates of deposit entered into in early 1995 caused an increase in
overall interest expense. The Company expects a decline in the overall
cost of money in 1996 unless market conditions change substantially.
Page
With the largest amount of interest sensitive assets and liabilities
repricing within three years, the Company monitors these areas 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
periodically review its cumulative position of interest sensitive assets
and liabilities.
The majority of the Company's commercial and real estate loans are
made with repricing frequencies of three months to three years. For this
reason, 88% of all loans will reprice within three years of December 31,
1995. Installment loans generally have a fixed rate of interest but have
limited amortization periods. These loans have an average life to maturity
of less than two years. Management believes that its philosophy of
generally requiring loan repricing within a three year period to be the
most prudent approach to asset/liability management.
In the area of investments, the Company employs a management
technique known as "laddering" to minimize interest rate exposures and
provide a constant flow of maturities subject to repricing at current
market rates. To assist in the management of investments, the Company
employs an independent investment counsel that assists in planning and risk
diversification. The Company utilizes many forms of investment with a
significant use of mortgage-backed securities issued by federally chartered
institutions. The Company does not employ the use of derivatives in its
approach to controlling market risk. Although the majority of its
investments are classified as available for sale, the Company rarely sells
securities except in unusual circumstances.
Table IV (page 21) shows the maturity of liabilities and assets in
future periods. Table III (page 20) shows the effects of rate and volume
changes on the net interest margin for the past three year period.
Effects of Inflation
Inflation significantly affects industries having high proportions of
fixed assets 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 IV, page 21) 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>
SUMMARY OF OPERATIONS
(Dollar amounts in thousands)
<CAPTION>
-- -- -- -Years EndingDecember 31,- -- -- --
(In Thousands Except for Share Amounts)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total Interest Income $ 12,758 $ 11,726 $ 12,038 $ 12,605 $ 13,238
Total Interest Expense (6,219) (5,082) 5,360 6,483 7,397
Net Interest Income 6,539 6,644 6,678 6,122 5,841
Provision for Loan Losses 120 240 390 780 1,490
Net Interest Income after
Provision for Loan Losses 6,419 6,404 6,288 5,342 4,351
Other Income 581 467 700 505 279
Other Expenses 4,191 4,052 3,830 3,511 3,689
Income before Income Taxes 2,809 2,819 3,158 2,336 941
Income Tax Expense 956 944 1,068 751 208
Net Income $ 1,853 $ 1,875 $ 2,090 $ 1,585 $ 733
Net Income Per Share $ 3.60 $ 3.65 $ 4.06 $ 3.07 $ 1.42
Dividends Per Share $ .83 $ .72 $ .63 $ .55 $ .50
Total Assets at Year End $ 167,884 $ 153,361 $ 150,964 $ 146,371 $ 136,123
Return on Average Assets 1.16% 1.22% 1.40% 1.11% .55%
Return on Average Equity 10.26% 11.44% 13.93% 11.79% 5.71%
Dividend Payout Ratio 23.05% 19.74% 15.50% 17.94% 35.30%
Year End Equity to Assets Ratio 11.24% 10.94% 10.49% 9.70% 9.49%
</TABLE>
Page
TABLE II
NET INTEREST MARGIN AND AVERAGE BALANCE ANALYSIS
(Dollar amounts in thousands)
1995
Income/ Yield/
EARNING ASSETS Average Expense Rate
Loans 3 $ 108,659 $ 10,115 9.30
Investment securities:
Taxable 33,875 2,047 6.04
Nontaxable 1 3,475 302 8.69
Total Investment
Securities 37,350 2,349 6.29
Interest bearing deposits
in banks 587 29 4.94
Federal funds sold 6,524 377 5.78
Total Earning Assets 153,120 12,870 8.40
Allowance for loan losses (1,384)
Nonearnings assets 7,986
Total Assets $ 159,722
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 27,913 $ 870 3.12
Savings 16,674 642 3.85
Time deposits 82,477 4,704 5.70
Other borrowed money 49 3 6.12
Total Interest Bearing
Liabilities 127,113 6,219 4.89
Noninterest bearing deposits 13,356
Other liabilities 1,187
Total Liabilities 141,656
Stockholders' Equity 18,066
Total Liabilities and Equity $ 159,722
Net Interest Earnings $ 6,651
Net Yield on Interest Earning Assets 4.34%
1 Yields are computed on a taxable equivalent basis using a 37% income
tax rate.
2 Average balances are based on daily balances.
3 Includes loans in nonaccrual status.
Page
TABLE II (CONTINUED)
NET INTEREST MARGIN AND AVERAGE BALANCE ANALYSIS
(Dollar amounts in thousands)
1994
Income/ Yield/
EARNING ASSETS Average Expense Rate
Loans 3 $ 101,253 $ 9,232 9.12%
Investment securities:
Taxable 38,078 2,089 5.49
Nontaxable 1 3,854 319 8.27
Total Investment
Securities 41,932 2,408 5.74
Interest bearing deposits
in banks 431 19 4.40
Federal funds sold 4,339 184 4.24
Total Earning Assets 147,955 11,843 8.00
Allowance for loan losses (1,651)
Nonearnings assets 6,988
Total Assets $ 153,292
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 29,871 $ 942 3.15
Savings 17,374 640 3.68
Time deposits 75,190 3,500 4.65
Other borrowed money
Total Interest Bearing
Liabilities 122,435 5,082 4.15
Noninterest bearing deposits 12,886
Other liabilities 1,582
Total Liabilities 136,903
Stockholders' Equity 16,389
Total Liabilities and Equity $ 153,292
Net Interest Earnings $ 6,761
4.57%
1 Yields are computed on a taxable equivalent basis using a 37% income
tax rate.
2 Average balances are based on daily balances.
3 Includes loans in nonaccrual status.<PAGE>
Page
TABLE II (CONTINUED)
NET INTEREST MARGIN AND AVERAGE BALANCE ANALYSIS
(Dollar amounts in thousands)
1993
Income/ Yield/
EARNING ASSETS Average Expense Rate
Loans 3 $ 94,285 $ 9,270 9.83%
Investment securities:
Taxable 41,339 2,382 5.76
Nontaxable 1 4,157 324 7.79
Total Investment
Securities 45,496 2,706 5.95
Interest bearing deposits
in banks 461 32 6.94
Federal funds sold 4,655 140 3.01
Total Earning Assets 144,897 12,148 8.38
Allowance for loan losses (1,600)
Nonearnings assets 6,331
Total Assets $ 149,628
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 29,914 $ 1,013 3.39
Savings 15,694 575 3.66
Time deposits 75,419 3,772 5.00
Other borrowed money
Total Interest Bearing
Liabilities 121,027 5,360 4.43
Noninterest bearing deposits 12,464
Other liabilities 1,132
Total Liabilities 134,623
Stockholders' Equity 15,005
Total Liabilities and Equity $ 149,628
Net Interest Earnings $ 6,788
4.69%
1 Yields are computed on a taxable equivalent basis using a 37% income
tax rate.
2 Average balances are based on daily balances.
3 Includes loans in nonaccrual status.
Page
TABLE III
<TABLE>
EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
(On a fully taxable equivalent basis)
(In thousands of dollars)
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) Increase (Decrease)
Due to Change in: Total Due to Change in: Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans 2 $ 687 $ 196 $ 883 $ 685 $ (723) $ (38)
Investment Securities:
Taxable (231) 189 (42) (188) (105) (293)
Nontaxable (32) 15 (17) (17) 12 (5)
Total Investment Securities (263) 204 (59) (205) (93) (298)
Interest bearing deposits
in banks 7 3 10 2 (15) (13)
Federal funds sold 93 100 193 (9) 53 44
Total Interest Income 524 503 1,027 473 (778) (305)
Interest Expense:
Deposits:
Demand (62) (10) (72) (2) (69) (71)
Savings (26) 28 2 61 4 65
All other time deposits 339 865 1,204 (11) (261) (272)
Other borrowed money 3 3
Total Interest Expense 254 883 1,137 48 (326) (278)
Net Interest Income $ 270 $ (380) $ (110) $ 425 $ (452) $ (27)
<FN>
<F2>
1 Changes in volume are calculated based on difference in average balance multiplied by the prior
year average rate. Rate change differences are the difference in the volume changes and the
actual dollar amount of interest income or expense changes.
2 Nonaccrual loans have been included in average asset balances.
</FN>
</TABLE>
Page
TABLE IV
<TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
(In thousands of dollars)
DECEMBER 31, 1995
<CAPTION>
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or Without
Days Days Years Years Maturity Total
<S> <C> <C> <C> <C> <C> <C>
EARNINGS ASSETS
Loans $ 18,038 $ 39,106 $ 42,964 $ 7,009 $ 6,818 $ 113,935
Fed funds sold 6,016 6,016
Securities 7,856 5,947 9,956 5,908 9,733 39,400
Interest bearing time
deposits 203 700 92 995
Total 32,113 45,753 53,012 12,917 16,551 160,346
INTEREST BEARING LIABILITIES
Transaction accounts 14,819 14,819
Money market accounts 14,578 14,578
Savings accounts 16,989 16,989
Time deposits more than
$100,000 2,934 6,332 4,679 1,585 311 15,841
Time deposits less than
$100,000 17,900 29,274 19,702 4,473 3 71,352
Other borrowed money 3 13 35 39 67 157
Total 67,223 35,619 24,416 6,097 381 133,736
Discrete interest
sensitivity GAP (35,110) 10,134 28,596 6,820 16,170 26,610
Cumulative interest
sensitivity GAP (35,110) (24,976) 3,620 10,440 26,610
Ratio of cumulative
interest sensitive assets
to cumulative interest
sensitive liabilities 47.77% 75.71% 102.84% 107.83% 119.90%
</TABLE>
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
Page
Item 7. Financial Statements
Index to Financial Statements
Page
Consolidated Balance Sheets as of December 31, 1995 and 1994 23
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993 24
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1995, 1994 and 1993 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 26
Notes to Consolidated Financial Statements 27 - 41
Independent Auditors' Report 42
Page
CONSOLIDATED BALANCE SHEETS
HIGHLANDS BANKSHARES, INC.
December 31,
ASSETS 1995 1994
Cash and due from banks
(notes 2, 3 and 13) $ 3,286,864 $ 3,326,908
Federal funds sold 6,016,352 4,625,345
Interest bearing deposits in banks 994,583 384,028
Securities held to maturity (fair value
in 1995, $9,980,008; $9,250,988 in 1994)
(note 4) 9,807,434 9,459,951
Securities available for sale (note 4) 29,040,278 27,998,879
Other investments 552,450 542,850
Loans (notes 5, 11, 12 and 13) 113,935,453 104,042,702
Less allowance for loan losses (note 6) (1,319,099) (1,454,307)
Net Loans 112,616,354 102,588,395
Construction in progress 502,773
Bank premises and equipment (note 7) 3,338,007 1,196,857
Interest receivable 1,302,613 1,302,999
Deferred income tax benefits (note 8) 241,983 719,207
Other assets 687,564 712,987
Total Assets $167,884,482 $153,361,179
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 14,133,641 $ 13,356,971
Interest bearing
Money market and interest checking 14,819,063 14,503,859
Money market savings 14,577,754 14,262,192
Savings accounts 16,988,718 18,327,095
Certificates of deposit over $100,000 15,841,254 13,232,918
All other time deposits 71,352,282 61,880,049
Total Deposits 147,712,712 135,563,084
Borrowed money 157,460
Accrued expenses and other liabilities 1,152,279 1,022,023
Total Liabilities 149,022,451 136,585,107
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 1,000,000
shares authorized, 546,764 shares
issued in 1995 and 1994 2,733,820 2,733,820
Surplus 1,661,987 1,661,987
Retained earnings (note 10) 14,948,757 13,522,947
Net unrealized gains (losses) on securities
available for sale 11,280 (648,869)
19,355,844 17,269,885
Treasury stock (at cost, 32,698 shares) (493,813) (493,813)
Total Stockholders' Equity 18,862,031 16,776,072
Total Liabilities and
Stockholders' Equity $167,884,482 $153,361,179
The accompanying notes are an integral part of this statement.
Page
CONSOLIDATED STATEMENTS OF INCOME
HIGHLANDS BANKSHARES, INC.
Years Ended December 31,
1995 1994 1993
INTEREST INCOME:
Loans, including fees $ 10,115,016 $ 9,231,928 $ 9,270,395
Federal funds sold 377,367 183,777 139,670
Interest bearing deposits 29,131 19,962 31,749
Investment securities
- taxable 2,047,061 2,088,759 2,381,089
Investment securities
- nontaxable 189,953 201,364 214,705
Total Interest Income 12,758,528 11,725,790 12,037,608
INTEREST EXPENSE:
Time deposits over $100,000 975,298 640,412 633,903
Other deposits 5,240,768 4,441,272 4,725,629
Borrowed money 3,176
Total Interest Expense 6,219,242 5,081,684 5,359,532
NET INTEREST INCOME 6,539,286 6,644,106 6,678,076
PROVISION FOR LOAN LOSSES
(note 6) 120,000 240,000 390,000
Net Interest Income after
Provision for Loan Losses 6,419,286 6,404,106 6,288,076
NONINTEREST INCOME:
Service charges 204,614 188,890 169,486
Insurance commissions
and sales 160,316 160,519 185,225
Other operating income 224,583 143,613 117,888
Gain (loss) on security
transactions (note 4) (9,185) (26,502) 226,949
Total Noninterest Income 580,328 466,520 699,548
NONINTEREST EXPENSES:
Salaries and benefits (note 8) 2,212,677 1,987,215 1,833,018
Occupancy expense 172,406 149,093 160,338
Equipment expense 244,554 237,213 219,741
FDIC insurance 159,729 305,998 298,685
Data processing expense 368,101 346,770 320,945
Other operating expenses 1,033,581 1,025,230 996,916
Total Noninterest Expenses 4,191,048 4,051,519 3,829,643
Income before Income
Tax Expense 2,808,566 2,819,107 3,157,981
INCOME TAX EXPENSE (note 8) 956,085 944,101 1,067,961
NET INCOME $ 1,852,481 $ 1,875,006 $ 2,090,020
Net Income Per Share $ 3.60 $ 3.65 $ 4.06
Cash Dividends Paid Per Share $ .83 $ .72 $ .63
Weighted Average Shares
Outstanding 514,066 514,066 514,518
The accompanying notes are an integral part of this statement.
Page
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
HIGHLANDS BANKSHARES, INC.
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Securities
Capital Retained Available Treasury
Stock Surplus Earnings for Sale Stock Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1992 $2,733,820 $ 1,661,987 $10,251,911 $ (49,947) $ (403,819) $14,193,952
Net income 2,090,020 2,090,020
Cash dividends (323,862) (323,862)
Treasury stock
purchases
(3,000 shares) (89,994) (89,994)
Valuation allowance
for marketable
equities (28,583) (28,583)
BALANCE
DECEMBER 31, 1993 2,733,820 1,661,987 12,018,069 (78,530) (493,813) 15,841,533
Net income 1,875,006 1,875,006
Cash dividends (370,128) (370,128)
Cumulative effect
of change in
accounting for
securities available
for sale 122,000 122,000
Change in unrealized
loss on securities
available for sale (692,339) (692,339)
BALANCE
DECEMBER 31, 1994 2,733,820 1,661,987 13,522,947 (648,869) (493,813) 16,776,072
Net income 1,852,481 1,852,481
Cash dividends (426,671) (426,671)
Change in unrealized
gain on securities
available for sale 660,149 660,149
BALANCE
DECEMBER 31, 1995 $2,733,820 $ 1,661,987 $14,948,757 $ 11,280 $ (493,813) $18,862,031
</TABLE>
The accompanying notes are an integral part of this statement.
Page
CONSOLIDATED STATEMENTS OF CASH FLOWS
HIGHLANDS BANKSHARES, INC.
Years Ended December 31,
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,852,481 $ 1,875,006 $ 2,090,020
Adjustments to reconcile net
income to net cash provided
by operating activities:
(Gain) loss on sale of
securities 9,185 26,502 (226,949)
Depreciation 198,517 160,855 150,852
Amortization of security
premiums 167,260 232,076 133,323
Provision for loan losses 120,000 240,000 390,000
Deferred income taxes 89,518 66,699 (123,467)
Change in other assets and
liabilities:
Interest receivable 386 29,608 116,653
Other assets (12,921) 56,243 (85,180)
Accrued expenses 130,256 (84,444) (59,302)
Net Cash Provided by Operating
Activities 2,554,682 2,602,545 2,385,950
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of
securities held to maturity 2,018,760 13,296,750 14,763,601
Proceeds from sales of securities
held to maturity 2,503,251
Purchases of securities held
to maturity (2,859,702) (4,368,004) (13,902,622)
Proceeds from maturities of
securities available for sale 12,612,466 6,736,161
Proceeds from sales of securities
available for sale 800,500
Purchases of securities
available for sale (12,307,206) (12,521,979)
Net change in deposits in
other banks (601,942) 99,000
Net increase in loans (10,308,759) (6,218,672) (9,121,845)
Change in federal funds sold (1,391,007) (1,655,345) 850,000
Purchase of property and
equipment (1,836,894) (120,311) (145,025)
Construction in progress
payments (502,773)
Proceeds from sale of foreclosed
real estate 199,141 164,000 12,500
Net Cash Used in Investing
Activities (14,475,143) (4,290,673) (5,040,140)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in time deposits 12,080,569 (537,098) (1,043,513)
Net change in other deposit
accounts 69,059 2,081,331 4,048,209
Increase in borrowed money 157,460
Treasury stock purchased (89,994)
Dividends paid in cash (426,671) (370,128) (323,862)
Net Cash Provided by Financing
Activities 11,880,417 1,174,105 2,590,840
CASH AND CASH EQUIVALENTS:
Net decrease in cash and due
from banks (40,044) (514,023) (63,350)
Cash and due from banks,
beginning of year 3,326,908 3,840,931 3,904,281
Cash and Due from Banks,
End of Year $ 3,286,864 $ 3,326,908 $ 3,840,931
Supplemental Disclosures:
Cash paid for:
Interest expense $ 6,040,215 $ 5,125,310 $ 5,466,005
Income taxes 908,608 939,280 1,153,471
The accompanying notes are an integral part of this statement.
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 1 NATURE OF OPERATIONS:
Highlands Bankshares, Inc. (the "Company") is a bank holding
company and operates under a charter issued by the state of West
Virginia. The Company owns all of the outstanding stock of The
Grant County Bank, the Capon Valley Bank and HBI Life Insurance
Company, Inc. which operate under charters issued in West
Virginia and Arizona. State chartered banks are subject to
regulation by the West Virginia Division of Banking and the
Federal Deposit Insurance Corporation while the insurance
company is regulated by the Arizona Department of Insurance.
The Banks provide services to customers located mainly in Grant,
Hardy and Pendleton counties of West Virginia, including the
towns of Petersburg and Moorefield and through four branch
offices. The insurance company sells life and accident coverage
exclusively through the Company's subsidiary banks.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Highlands Bankshares,
Inc. ("Company") and its subsidiaries conform to generally
accepted accounting principles and to accepted practice within
the banking industry.
(a) Principles of Consolidation
The consolidated financial statements include the accounts
of The Grant County Bank, the Capon Valley Bank and HBI Life
Insurance Company. All significant intercompany accounts and
transactions have been eliminated.
(b) Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is
required to make estimates and assumptions that affect the
reported amounts in those statements; actual results could
differ significantly from those estimates. A material
estimate that is particularly susceptible to significant
changes is the determination of the allowance for loan
losses, which is sensitive to changes in local economic
conditions.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and
noninterest bearing funds at correspondent institutions.
(d) Securities
Prior to December 31, 1993, all securities were carried at
historical cost, adjusted for amortization of premiums and
accretion of discounts. Marketable equity securities were
stated at lower of aggregate cost or market value. The
excess of aggregate cost over aggregate market value of
marketable equity securities was included as a reduction in
stockholders' equity in the years of such depreciation.
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Securities (Continued)
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Management reviewed the securities portfolio and classified
all securities as either held to maturity or available for
sale. Additions subsequent to January 1, 1994 are
identified as held to maturity or available for sale when
acquired. Securities that the Company has both the positive
intent and ability to hold to maturity (at time of purchase)
are classified as held to maturity securities. All other
securities are classified as available for sale. Securities
held to maturity are carried at historical cost and adjusted
for amortization of premiums and accretion of discounts,
using the effective interest method. Securities available
for sale are carried at fair value with any valuation
adjustments reported, net of deferred taxes, as a separate
component of stockholders' equity. Also included in
securities available for sale are marketable equity
securities. The adoption of this statement as of January 1,
1994, increased stockholders' equity by $122,000 (net of
income tax effect of $71,000). Changes subsequent to the
adoption of this statement are shown as a separate item on
the statement of stockholders' equity.
Other investments consist of investments in the Federal Home
Loan Bank of Pittsburgh and the Federal Reserve Bank of
Richmond. Such investments are required as members of these
institutions and these investments cannot be sold without a
change in the members' borrowing or service levels.
Interest and dividends on securities and amortization of
premiums and discounts on securities are reported as
interest income using the effective interest method. Gains
(losses) realized on sales and calls of securities are
determined using the specific identification method.
(e) Loans
Loans are carried on the balance sheet net of any unearned
interest and the allowance for loan losses. Interest income
on loans is determined using the effective interest method
on the daily amount of principal outstanding except where
serious doubt exists as to collectibility of the loan, in
which case the accrual of income is discontinued.
(f) Allowance For Loan Losses
The allowance for loan losses is based upon management's
knowledge and review of the loan portfolio. Estimation of
an adequate allowance for loan losses involves the exercise
of judgement, the use of assumptions with respect to present
economic conditions and knowledge of the environment in
which the Banks operate. Among the factors considered in
determining the level of the allowance are the changes in
composition of the loan portfolio, the amount of delinquent
and nonaccrual loans, past loan loss experience and the
value of collateral securing the loans.
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to income
over the estimated useful lives of the assets using a
combination of the straight-line and accelerated methods.
The ranges of the useful lives of bank premises and
equipment are as follows:
Buildings and Improvements 15 - 40 years
Furniture and fixtures 6 - 15 years
Maintenance, repairs, renewals, and minor improvements are
charged to operations as incurred. Gains and losses on
routine dispositions are reflected in other income or
expense.
(h) Income Taxes
Amounts provided for income tax expense are based on income
reported for financial statement purposes rather than
amounts currently payable under federal and state tax laws.
Deferred taxes, which arise principally from differences
between the period in which certain income and expenses are
recognized for financial accounting purposes and the period
in which they affect taxable income, are included in the
amounts provided for income taxes.
(i) Earnings Per Share
Earnings per share are based on the weighted average number
of shares outstanding.
(j) Foreclosed Real Estate
The components of foreclosed real estate are adjusted to the
lower of cost or fair value less estimated costs of
disposal. The current year provision for a valuation
allowance has been recorded as an expense to current
operations.
(k) Reclassifications
Certain amounts in the 1993 and 1994 financial statements
have been reclassified to conform to the 1995 presentation.
NOTE 3 CASH AND DUE FROM BANKS:
The Banks are required to maintain average reserve balances based
on a percentage of deposits. The Banks have generally met this
requirement through average cash on hand and balances with their
correspondent institutions.
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 4 SECURITIES:
The carrying amount and estimated fair value of securities held
to maturity are as follows:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995
U. S. Treasuries
and Agencies $5,107,789 $ 81,015 $ 1,173 $ 5,187,631
Mortgage-backed 635,866 12,561 96 648,331
State and municipals 4,063,779 103,113 22,846 4,144,046
Total Securities
Held to Maturity $9,807,434 $ 196,689 $ 24,115 $ 9,980,008
December 31, 1994
U. S. Treasuries
and Agencies $5,349,485 $ $ 102,885 $ 5,246,600
Mortgage-backed 247,727 7,078 240,649
State and municipals 3,862,739 34,543 133,543 3,763,739
Total Securities
Held to Maturity $9,459,951 $ 34,543 $ 243,506 $ 9,250,988
</TABLE>
The carrying amount and estimated fair value of securities
available for sale are as follows:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995
U. S. Treasuries
and Agencies $14,190,987 $ 145,182 $ 23,819 $14,312,350
Mortgage-backed 13,214,572 124,129 17,904 13,320,797
State and municipals 200,000 200,000
Marketable equities 1,416,816 209,685 1,207,131
Total Securities
Available for Sale $29,022,375 $ 269,311 $ 251,408 $29,040,278
December 31, 1994
U. S. Treasuries
and Agencies $22,168,870 $ 3,476 $ 617,673 $21,554,673
Mortgage-backed 5,334,654 212,492 5,122,162
Marketable equities 1,525,308 203,264 1,322,044
Total Securities
Available for Sale $29,028,832 $ 3,476 $1,033,429 $27,998,879
</TABLE>
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 4 SECURITIES (CONTINUED):
The carrying amount and fair value of debt securities at
December 31, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities Available for Sale Amortized Fair
Cost Value
Due in one year or less $ 6,012,056 $ 6,018,819
Due after one year through
five years 7,372,026 7,498,976
Due after five years through
ten years 1,006,907 994,556
Mortgage-backed securities 13,214,570 13,320,796
Total $27,605,559 $27,833,147
Securities Held to Maturity Carrying Fair
Amount Value
Due in one year or less $ 2,871,527 $ 2,896,010
Due after one year through
five years 3,761,073 3,848,379
Due after five years through
ten years 1,632,873 1,621,737
Due after ten years 906,095 965,551
Mortgage-backed securities 635,866 648,331
Total $ 9,807,434 $ 9,980,008
The carrying amount (which approximates market value) of
securities pledged by the banks to secure deposits and for other
purposes amounted to $5,913,000 at December 31, 1995 and
$3,741,425 at December 31, 1994.
There were no holdings totaling more than 10% of stockholders'
equity with any issuer as of December 31, 1995 and 1994.
All gains or losses in 1995 and 1994 are from calls or early
payoffs of securities designated as held to maturity. Realized
gains or losses for the years ending December 31 are as follows:
1995 1994 1993
Gains $ 813 $ 2,000 $ 231,424
Losses (9,998) (28,502) (4,475)
Total $ (9,185) $ (26,502) $ 226,949
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 5 LOANS:
Loans outstanding as of December 31 are summarized as follows:
1995 1994
Commercial $ 20,749,203 $ 19,462,035
Real estate construction 2,622,000 1,182,000
Real estate mortgages 65,970,630 60,783,181
Consumer installment 26,740,410 24,726,944
Total Loans 116,082,243 106,154,160
Unearned interest (2,146,790) (2,111,458)
Net Loans $113,935,453 $104,042,702
The Company had loans which were classified as nonaccrual
totaling $95,000 at December 31, 1995 and $169,000 at December
31, 1994. The amount of interest income foregone due to the
nonaccrual status of these loans was not significant in either
year.
Loans 90 days or more past due as of December 31 are as follows:
1995 1994 1993
Commercial $ 487,000 $ 378,000 $ 150,167
Real estate 479,000 486,000 691,190
Installments 115,000 187,000 237,507
Total $ 1,081,000 $ 1,051,000 $ 1,078,864
Above as a percentage
of net loans .95% 1.01% 1.09%
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses for the
years ended December 31 is shown in the following schedule:
1995 1994 1993
Balance at beginning
of year $ 1,454,307 $ 1,734,041 $ 1,363,753
Provision charged
to operating
expenses 120,000 240,000 390,000
Loan recoveries 124,501 192,222 394,600
Loans charged
off (379,709) (711,956) (414,312)
Balance at end
of year $ 1,319,099 $ 1,454,307 $ 1,734,041
Percentage of
outstanding
loans 1.16% 1.37% 1.76%
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment as of December 31 are summarized as
follows:
1995 1994
Land $ 359,826 $ 359,826
Buildings and improvements 3,560,558 1,733,000
Furniture and equipment 1,866,452 1,366,933
Total cost 5,786,836 3,459,759
Less - accumulated depreciation (2,448,829) (2,262,902)
Net Book Value $ 3,338,007 $ 1,196,857
Provisions for depreciation of $198,517 in 1995, $160,855 in
1994 and $150,852 in 1993, were charged to operations.
NOTE 8 INCOME TAX EXPENSE:
The components of income tax expense for the years ended
December 31 are summarized as follows:
1995 1994 1993
Current expense
Federal $ 751,593 $ 770,254 $ 1,054,981
State 114,974 107,148 136,447
Total current
expense 866,567 877,402 1,191,428
Deferred expense (benefit)
Federal 82,260 60,474 (113,077)
State 7,258 6,225 (10,390)
Total deferred
expense (benefit) 89,518 66,699 (123,467)
Income tax expense $ 956,085 $ 944,101 $ 1,067,961
Income taxes (benefits)
relating to gains
or losses on
security transactions
are as follows: $ (3,398) $ (9,944) $ 83,903
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 8 INCOME TAX EXPENSE (CONTINUED):
The deferred tax effects of temporary differences for the years
ended December 31 are as follows:
1995 1994 1993
Tax effect of temporary differences:
Provision for loan
losses $ 60,187 $ 103,687 $ (115,378)
Sale of loans 12,128 (32,622) (13,930)
Pension expense (2,053) 10,966 2,736
Insurance commissions 2,104 (5,596) 12,361
Other real estate
charges 818 3,482 (10,450)
Depreciation 14,363
Miscellaneous 1,971 (13,218) 1,194
Net (increase) decrease
in deferred income
tax benefit $ 89,518 $ 66,699 $ (123,467)
The net deferred tax assets arising from temporary differences
as of December 31 are summarized as follows:
1995 1994
Deferred Tax Assets:
Provision for loan losses $ 234,022 $ 294,209
Insurance commissions 37,968 40,072
Sale of loans 49,746 61,874
Unrealized loss on securities
available for sale 381,083
Other 22,067 18,778
Total Assets 343,803 796,016
Deferred Tax Liabilities:
Pension prepaids 67,060 69,113
Unrealized gain on securities
available for sale 6,623
Accretion income 13,774 7,696
Accelerated depreciation 14,363
Total Liabilities 101,820 76,809
Net Tax Asset $ 241,983 $ 719,207
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 8 INCOME TAX EXPENSE (CONTINUED):
The following table summarizes the difference between income tax
expense and the amount computed by applying the federal statutory
income tax rate of 34 percent for the years ended December 31:
1995 1994 1993
Amounts at federal statutory
rates $ 954,912 $ 958,497 $1,073,714
(Reductions) additions
resulting from:
Tax-exempt income (54,343) (59,428) (73,317)
Partially exempt income (35,739) (29,771) (29,098)
State income taxes, net 86,179 72,451 89,995
Other 5,076 2,352 6,667
Income tax expense $ 956,085 $ 944,101 $1,067,961
NOTE 9 EMPLOYEE BENEFITS:
The Company's two subsidiary banks each have separate retirement
and profit sharing plans which cover substantially all full time
employees at each bank. The Capon Valley Bank has a defined
contribution pension plan that is funded with insurance contracts
and various investments. Required contributions to the plan,
equal to ten percent of employee salaries, were $72,145, $66,857
and $62,036 for 1995, 1994 and 1993, respectively.
Effective October 1, 1995, the Capon Valley Bank changed its
defined contribution plan to a plan which includes 401(k)
features. In future years, the Company will make matching
contributions up to specified limits and may make discretionary
contributions based on Board determinations. The amount of the
expense recognized under this amendment in 1995 was not
significant.
The Grant County Bank is a member of the West Virginia Bankers'
Association Retirement Plan. Benefits under the plan are based
on compensation and years of service with 100% vesting after
seven years. The Plan's assets are significantly in excess of
the projected benefit obligations and thus the Bank has been
unable to make contributions to the Plan in 1995, 1994 or 1993.
The amounts of the prepaid expense and the net pension expense
(benefit) reflected in operations are insignificant.
In addition, The Grant County Bank also maintains a profit
sharing plan covering substantially all employees to which
contributions are made at the discretion of the Board of
Directors. Contributions to the plan were $50,000 in 1995 and
$40,000 for 1994 and 1993.
NOTE 10 RESTRICTIONS ON DIVIDENDS OF SUBSIDIARY BANKS:
The principal source of funds of Highlands Bankshares, Inc. is
dividends paid by subsidiary banks. The various regulatory
authorities impose restrictions on dividends paid by a state
bank. A state bank cannot pay dividends (without the consent of
state banking authorities) in excess of the total net profits of
the current year and the combined retained profits of the
previous two years. As of January 1, 1996, the banks could pay
dividends to the Company of approximately $2,661,000 without
permission of the regulatory authorities.
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 11 TRANSACTIONS WITH RELATED PARTIES:
During the year, officers and directors (and companies controlled
by them) were customers of and had transactions with the
subsidiary Banks in the normal course of business. These
transactions were made on substantially the same terms as those
prevailing for other customers and did not involve any abnormal
risk. The aggregate amount of loans to related parties of
$1,401,588 at December 31, 1994, was increased $675,009 by new
loans and reduced $630,686 by payments, resulting in an ending
balance of $1,445,911 at December 31, 1995.
NOTE 12 COMMITMENTS AND GUARANTEES:
The Banks make commitments to extend credit in the normal course
of business and issues standby letters of credit to meet the
financing needs of its customers. The amount of the commitments
represents the Banks' exposure to credit loss that is not
included in the balance sheet. As of the balance sheet dates,
the Banks had outstanding the following commitments:
1995 1994
Commitments to extend credit $ 4,131,000 $ 3,891,000
Standby letters of credit 658,000 640,000
The Banks use the same credit policies in making commitments and
issuing letters of credit as it does for the loans reflected in
the balance sheet.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Banks
evaluate each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary
by the Banks upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and
equipment.
NOTE 13 CONCENTRATIONS OF CREDIT:
The Banks grant commercial, residential real estate and consumer
loans to customers located primarily in the eastern portion of
the State of West Virginia. Although the Banks have a
diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the
agribusiness economic sector. Collateral required by the Banks
is determined on an individual basis depending on the purpose of
the loan and the financial condition of the borrower. The
ultimate collectibility of the loan portfolios is susceptible to
changes in local economic conditions. Approximately 59% of the
loan portfolio is secured by real estate. See note 5 for a
complete breakdown of loans by type.
The Bank has cash deposited in and federal funds sold to other
commercial banks totaling $7,200,000 and $6,617,000 at December
31, 1995 and 1994, respectively.
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 14 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's assets and liabilities is
influenced heavily by market conditions. Fair value applies to
both assets and liabilities, either on or off the balance sheet.
Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value:
Cash, Due from Banks and Money Market Investments
The carrying amount of cash, due from bank balances and federal
funds sold is a reasonable estimate of fair value.
Securities
Fair values of securities are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
Loans
The fair value of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the
same remaining maturities, taking into consideration the credit
risk in various loan categories.
Deposits
The fair value of demand, interest checking, regular savings and
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates
of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
Interest Payable and Receivable
The carrying value of amounts of interest receivable and payable
is a reasonable estimate of fair value.
Off-Balance-Sheet Items
The carrying amount and estimated fair value of off-balance-
sheet items were not material at December 31, 1995.
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 14 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED):
Off-Balance-Sheet Items (Continued)
The estimated fair values of financial instruments as of December
31 are as follows:
<TABLE>
<CAPTION>
1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 3,286,864 $ 3,286,864 $ 3,326,908 $ 3,326,908
Interest bearing deposits 994,583 994,942 384,028 384,090
Federal funds sold 6,016,352 6,016,352 4,625,345 4,625,345
Securities held to
maturity 9,807,434 9,980,008 9,459,951 9,250,988
Securities available
for sale 29,040,278 29,040,278 27,998,879 27,998,879
Other investments 552,450 552,450 542,850 542,850
Loans, net 112,616,354 112,266,874 102,588,395 101,160,044
Interest receivable 1,302,613 1,302,613 1,302,999 1,302,999
Financial Liabilities:
Demand deposits 60,519,176 60,519,176 60,450,117 60,450,117
Term deposits 87,193,536 87,165,364 75,112,967 74,531,500
Borrowed money 157,460 157,460
Interest payable 684,520 684,250 505,493 505,493
</TABLE>
NOTE 15 REGULATORY MATTERS:
The banks are required to maintain minimum amounts of capital to
total "risk weighted" assets, as defined by the banking
regulators. Noncompliance with the requirements could subject
the banks to a variety of enforcement remedies, including
limitations on the ability to pay dividends, directives to
increase capital and termination of FDIC deposit insurance.
As of December 31, 1995, the Company's consolidated capital
exceeded minimum requirements as shown in the following table:
Regulatory
Requirements 1995
Capital Ratios
Risk based capital to risk-weighted assets
Tier 1 4.0% 18.84%
Total 8.0% 19.96%
Stockholders equity to total assets 4.0% 11.24%
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
Assets December 31,
1995 1994
Cash $ 89,117 $ 109,099
Investment in subsidiaries 18,682,887 16,590,828
Other investments 100,000 100,000
Other assets 589 986
Income taxes receivable 31,176
Total Assets $ 18,903,769 $ 16,800,913
Liabilities
Due to subsidiaries $ 41,738 $
Income taxes payable 24,841
Total Liabilities 41,738 24,841
Stockholders' Equity
Common stock, par value $5
per share authorized
1,000,000 shares; 546,764
shares issued in 1995 and
1994 2,733,820 2,733,820
Surplus 1,661,987 1,661,987
Retained earnings 14,948,757 13,522,947
Net unrealized gains (losses)
on securities available
for sale 11,280 (648,869)
19,355,844 17,269,885
Less treasury stock (32,698
shares, at cost) (493,813) (493,813)
Total Stockholders' Equity 18,862,031 16,776,072
Total Liabilities and
Stockholders' Equity $ 18,903,769 $ 16,800,913
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31,
1995 1994 1993
Income
Dividends from
subsidiaries $ 451,675 $ 395,128 $ 555,307
Other dividends 630 630 630
Total 452,305 395,758 555,937
Expenses
Professional fees 22,203 22,449 26,024
Advertising 3,452 1,588 16,163
Other expenses 26,189 26,734 24,508
Total 51,844 50,771 66,695
Net income before income
tax benefit and
undistributed income
of subsidiaries 400,461 344,987 489,242
Income tax benefit (20,112) (19,791) (22,561)
Income before
undistributed income
of subsidiaries 420,573 364,778 511,803
Undistributed income
of subsidiaries 1,431,908 1,510,228 1,578,217
Net Income 1,852,481 1,875,006 2,090,020
Retained earnings,
Beginning of period 13,522,947 12,018,069 10,251,911
Dividends paid (426,671) (370,128) (323,862)
Retained Earnings,
End of Period $14,948,757 $13,522,947 $12,018,069
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1995 1994 1993
Cash Flows from Operating Activities:
Net income $ 1,852,481 $ 1,875,006 $ 2,090,020
Adjustments
Undistributed
subsidiary income (1,431,908) (1,510,228) (1,578,217)
Depreciation 391 663 416
Increase (decrease)
in payables 16,901 (55,877) 15,322
(Increase) decrease
in receivables (31,176) 1,171 7,500
Net Cash Provided by
Operating Activities 406,689 310,735 535,041
Cash Flows from Investing
Activities:
Purchase of equipment (2,064)
Cash Flows from Financing
Activities:
Dividends paid (426,671) (370,128) (323,862)
Purchase of treasury
stock (89,994)
Net Cash Used in
Financing Activities (426,671) (370,128) (413,856)
Net Increase (Decrease)
in Cash (19,982) (59,393) 119,121
Cash, Beginning of Year 109,099 168,492 49,371
Cash, End of Year $ 89,117 $ 109,099 $ 168,492
Page
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Highlands Bankshares, Inc.
Petersburg, West Virginia
We have audited the accompanying consolidated balance sheets of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three year period ended
December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of
the years in the three year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
S. B. HOOVER & COMPANY, L.L.P.
January 23, 1996
Harrisonburg, Virginia
Page
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 9. Directors and Executive Officers
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 26, 1996.
Item 10. Executive Compensation
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 26, 1996.
Item 11. Security Ownership of Certain Beneficial Owners and Management
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 26, 1996.
Item 12. Certain Relationships and Related Transactions
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 26, 1996.
Most of the directors, partnerships of which they may be general
partners and corporations of which they are officers or directors, maintain
normal banking relationships with the Bank. Loans made by the Bank to such
persons or other entities were made only in the ordinary course of
business, were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risk
of collectibility or present other unfavorable features. See Note 11 of
the consolidated financial statements.
John VanMeter is a partner with the law firm of VanMeter and VanMeter,
which has been retained by the Company as legal counsel and it is
anticipated that the relationship will continue. Jack H. Walters is a
partner with the law firm of Walters & Krauskopf, which provides legal
counsel to the Company and it is anticipated that the relationship will
continue.
Part IV
Item 13. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
2 Not applicable
3 (i) Articles of Incorporation of Highlands Bankshares,
Inc. are incorporated by reference to Appendix C to
Highlands Bankshares, Inc.'s Form S-4 filed October
20, 1986.
Page
Item 13. Exhibits and Reports on Form 8-K (Continued)
a) Exhibits (Continued)
Exhibit No. Description
3 (ii) Bylaws of Highlands Bankshares, Inc. are
incorporated by reference to Appendix D to Highland
Bankshares, Inc.'s Form S-4 filed October 20, 1986.
4 Not applicable
9 Not applicable
10 Not applicable
11 Not applicable
12 Not applicable
16 Not applicable
18 Not applicable
21 Subsidiaries of the Small Business Issuer is
attached
22 Not applicable
23 Consent of Certified Public Accountant attached
24 Not applicable
27 Financial Data Schedule attached
28 Not applicable
b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1995.
Page
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By LESLIE A. BARR
Leslie A. Barr
President, Chief Executive Officer
Date March 26, 1996
By CLARENCE E. PORTER
Clarence E. Porter
Secretary/Treasurer,
Chief Financial Officer
and Chief Accounting Officer
Date March 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
Signature Title Date
LESLIE A. BARR President March 26, 1996
Leslie A. Barr & Chief Executive Officer
Director
Director
Courtney R. Tusing
GEORGE B. MOOMAU Director March 26, 1996
George B. Moomau
CLARENCE E. PORTER Secretary/Treasurer March 26, 1996
Clarence E. Porter Chief Financial
and Accounting Officer
Director
Director
Harold B. Roby
JOHN G. VANMETER Chairman of the Board March 26, 1996
John G. VanMeter Director
Director
Jack H. Walters
L. KEITH WOLFE Director March 26, 1996
L. Keith Wolfe
Exhibit 21 - List of Subsidiaries of the Registrant
The following is a list of subsidiaries meeting the requirements of
Exhibit 21.
a) The Grant County Bank (incorporated in West Virginia) doing
business as The Grant County Bank.
b) Capon Valley Bank (incorporated in West Virginia) doing business
as the Capon Valley Bank.
c) HBI Life Insurance Company, Inc. (incorporated in the state of
Arizona) doing business as HBI Life.
Exhibit 23 - Consent of Certified Public Accountant
Board of Directors
Highlands Bankshares, Inc.
We consent to the use of our report, dated January 23, 1996, relating
to the consolidated balance sheets of Highlands Bankshares, Inc. as of
December 31, 1995 and 1994, and the related statements of income, changes
in stockholders' equity, and cash flows for each of the years in the three
year period ended December 31, 1995, which report appears on page 22 in the
December 31, 1995 Annual Report to Shareholders of Highlands Bankshares,
Inc. and page 42 of this 10KSB.
S. B. HOOVER & COMPANY, L.L.P.
Harrisonburg, VA
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Highlands
Bankshares, Inc. Form 10KSB and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
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<ALLOWANCE> (1,319)
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<LONG-TERM> 157
2,734
0
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<TOTAL-LIABILITIES-AND-EQUITY> 167,884
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<INTEREST-OTHER> 406
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<EXPENSE-OTHER> 4,191
<INCOME-PRETAX> 2,809
<INCOME-PRE-EXTRAORDINARY> 1,852
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,852
<EPS-PRIMARY> 3.60
<EPS-DILUTED> 3.60
<YIELD-ACTUAL> 4.34
<LOANS-NON> 95
<LOANS-PAST> 1,081
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,454
<CHARGE-OFFS> 380
<RECOVERIES> 125
<ALLOWANCE-CLOSE> 1,319
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</TABLE>
