UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No. 0-16761
June 30, 1996
HIGHLANDS BANKSHARES, INC.
West Virginia 55-0650793
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 929
Petersburg, West Virginia 26847
(304) 257-4111
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes ..X. No ....
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding at June 30, 1996
Common Stock, par value - $5 514,066 shares
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Six Months
Ended June 30, 1996 and 1995 2
Consolidated Statements of Income - Three Months
Ended June 30, 1996 and 1995 3
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1996 and 1995 5
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8K 18
SIGNATURES 22
Page
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Six Months Ended
June 30,
1996 1995
Interest Income
Interest and fees on loans $ 5,423 $ 4,840
Interest on federal funds sold 176 171
Interest on time deposits 26 14
Interest and dividends on investment securities
Taxable 1,188 997
Nontaxable 114 94
Total Interest Income 6,927 6,116
Interest Expense
Interest on time deposits over $100,000 587 437
Interest on other deposits 2,925 2,423
Total 3,512 2,860
Interest on borrowed money 4
Total Interest Expense 3,516 2,860
Net Interest Income 3,411 3,256
Provision for Loan Losses 60 60
Net Interest Income After Provision
for Loan Losses 3,351 3,196
Noninterest Income
Service charges 108 99
Other 177 189
Loss on security transactions (8) (3)
Total Noninterest Income 277 285
Noninterest Expense
Salaries and employee benefits 1,206 1,083
Occupancy expense 106 95
Equipment expense 136 84
FDIC insurance 3 154
Data processing 188 180
Other 497 462
Total Noninterest Expense 2,136 2,058
Income Before Income Taxes 1,492 1,423
Provision for Income Taxes 482 474
Net Income $ 1,010 $ 949
Per Share Data
Net Income $ 1.96 $ 1.85
Cash Dividends $ .36 $ .32
Weighted Average Common Shares Outstanding 514,066 514,066
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Three Months Ended
June 30,
1996 1995
Interest Income
Interest and fees on loans $ 2,738 $ 2,492
Interest on federal funds sold 87 100
Interest on time deposits 13 9
Interest and dividends on investment securities
Taxable 633 502
Nontaxable 56 46
Total Interest Income 3,527 3,149
Interest Expense
Interest on time deposits over $100,000 287 258
Interest on other deposits 1,476 1,290
Total 1,763 1,548
Interest on borrowed money 2
Total Interest Expense 1,765 1,548
Net Interest Income 1,762 1,601
Provision for Loan Losses 30 30
Net Interest Income After Provision
for Loan Losses 1,732 1,571
Noninterest Income
Service charges 55 51
Other income 91 89
Investment security gains (losses) (4) (1)
Total Noninterest Income 142 139
Noninterest Expense
Salaries and employee benefits 608 545
Occupancy expense 48 47
Equipment expense 69 30
FDIC insurance 2 77
Data processing expense 96 87
Other 258 231
Total Noninterest Expense 1,081 1,017
Income Before Income Taxes 793 693
Provision for Income Taxes 248 232
Net Income $ 545 $ 461
Per Share Data
Net Income $ 1.06 $ .90
Cash Dividends $ .18 $ .16
Weighted Average Common Shares Outstanding 514,066 514,066
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
1996 1995
ASSETS
Cash and due from banks $ 2,901 $ 3,287
Federal funds sold 6,720 6,016
Time deposits in other banks 917 995
Securities held to maturity (note 2) 8,780 9,807
Securities available for sale (note 3) 36,432 29,040
Other investments 639 552
Loans, net of unearned interest (note 4) 114,909 113,935
Less allowance for loan losses (note 5) (1,305) (1,319)
Net Loans 113,604 112,616
Bank premises and equipment 3,416 3,338
Interest receivable 1,533 1,303
Deferred income tax benefits 441 242
Other assets 610 688
Total Assets $ 175,993 $ 167,884
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 15,473 $ 14,134
Interest bearing
Money market and checking 13,804 14,819
Money market savings 13,067 14,578
Savings 18,411 16,989
Time deposits over $100,000 19,736 15,841
All other time deposits 74,589 71,352
Total Deposits 155,080 147,713
Borrowed money 215 157
Accrued expenses and other liabilities 1,349 1,152
Total Liabilities 156,644 149,022
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 1,000,000 shares
authorized, 546,764 shares issued) 2,734 2,734
Surplus 1,662 1,662
Retained earnings 15,774 14,949
Net unrealized gain (loss) on securities
available for sale (327) 11
19,843 19,356
Treasury stock (at cost, 32,698 shares) (494) (494)
Total Stockholders' Equity 19,349 18,862
Total Liabilities and Stockholders' Equity $ 175,993 $ 167,884
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Six Months Ended
June 30,
1996 1995
Cash Flows from Operating Activities:
Net income $ 1,010 $ 949
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of securities 8 3
Depreciation 110 77
Net amortization 66 89
Provision for loan losses 60 60
(Increase) decrease in interest receivable (230) 12
Decrease in other assets 60 36
Increase (decrease) in accrued expenses 197 64
Net Cash Provided by Operating Activities 1,281 1,290
Cash Flows from Investing Activities:
Proceeds from sale of securities
available for sale 762
Proceeds from maturities of securities
available for sale 7,637 6,934
Proceeds from maturities of securities
held to maturity 1,400 763
Purchase of securities held to maturity (500) (502)
Net change in time deposits in other banks 78 (100)
Purchase of securities available for sale (16,344) (4,618)
Net change in loans to customers (1,048) (4,802)
Purchase of property and equipment (188) (208)
Net change in federal funds sold (704) (1,503)
Construction in progress payments (1,209)
Net Cash Consumed by Investing Activities (8,907) (5,245)
Cash Flows from Financing Activities:
Net increase in deposits 7,367 5,040
Dividends paid in cash (185) (165)
Other borrowed money 58
Net Cash Provided by Financing Activities 7,240 4,875
Net Increase (Decrease) in Cash
and Cash Equivalents (386) 920
Cash and Cash Equivalents, Beginning of Period 3,287 3,327
Cash and Cash Equivalents, End of Period $ 2,901 $ 4,247
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 440 $ 516
Interest 3,535 2,776
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Six Months Ended
June 30,
1996 1995
Balance, beginning of period $ 18,862 $ 16,776
Net income for period 1,010 949
Cash dividends (185) (165)
Change in unrealized gain (loss) on
securities available for sale (338) 542
Balance, end of period $ 19,349 $ 18,102
The accompanying notes are an integral part of these statements.
Page
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally
accepted accounting principles and to general industry practices.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to
present fairly the financial position as of June 30, 1996, and
the results of operations for the six month periods ended June
30, 1996 and 1995. The notes included herein should be read in
conjunction with the notes to financial statements included in
the 1995 annual report to stockholders of Highlands Bankshares,
Inc.
The Company does not expect the anticipated adoption of any
newly issued accounting standards to have a material impact on
future operations or financial position.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and fair value of securities held to
maturity as of June 30, 1996 and December 31, 1995, are as
follows:
1996 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations
of US Government
corporations and
agencies $ 4,819 $ 4,849 $ 5,743 $ 5,836
Obligations of states
and political
subdivisions 3,961 3,951 4,064 4,144
Total $ 8,780 $ 8,800 $ 9,807 $ 9,980
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available
for sale as of June 30, 1996 and December 31, 1995, are as
follows:
1996 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations
of US Government
corporations and
agencies $ 35,343 $ 35,090 $27,405 $ 27,633
Obligations of states
and political
subdivisions 200 178 200 200
Other investments 1,408 1,164 1,417 1,207
Total $ 36,951 $ 36,432 $29,022 $ 29,040
Page
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of June 30, 1996 and
December 31, 1995, is as follows:
1996 1995
Commercial $ 21,575 $ 20,749
Real estate - construction 754 2,622
- mortgages 66,579 65,971
Consumer installment 28,136 26,740
Total 117,044 116,082
Unearned interest (2,135) (2,147)
Net loans outstanding $ 114,909 $ 113,935
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses
for the six months ended June 30, 1996 and 1995, follows:
1996 1995
Balance, beginning of period $ 1,319 $ 1,454
Provisions charged to operating
expenses 60 60
Loan recoveries 65 76
Loan charge-offs (139) (145)
Balance, end of period $ 1,305 $ 1,445
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Year to Date Operations
The Company's six month income of $1,010,000 represents a 6.43%
increase in total earnings and earnings per share compared to 1995
operations. Earnings represented an annualized return on equity of 10.44%
for the first six months of 1996 compared to 10.88% for the same period in
1995. The annualized return on average assets was 1.15% in the first six
months of 1996 compared with 1.20% in the first six months of 1995.
The tax equivalent net interest income increased by $168,000 in 1996
to $3,472,000. A healthy increase in the level of net earning assets
offset a slight decline in the tax equivalent net interest spread which
fell from 4.42% in 1995 to 4.23% in 1996. The increase in earning assets
was divided evenly among loans, investments and federal funds sold. The
funding of the asset growth was from time deposits of local customers.
Noninterest income was virtually unchanged in the first six months of
1996 compared to 1995. Increases in noninterest expenses reflect the cost
of expanded operating facilities by both banks and general asset growth.
Noninterest expense increases were tempered by the virtual elimination of
FDIC insurance premiums effective June 1, 1995.
Quarter Ending June 30 Operations
Net income for the quarter ending June 30, 1996 increased 18.22% when
compared to the prior year operations. Healthy increases in the interest
margin more than offset increases in noninterest expenses. The substantial
reduction in FDIC insurance costs also contributed heavily to the increase
in income. Annualized asset growth of 9.56% for the quarter was the result
of a stable local economy and favorable customer response to expanded
banking services.
Net Interest Income
Year to Date Operations
The Company's net interest income on a tax equivalent basis was
$3,472,000 in the first six months of 1996 compared to $3,304,000 for 1995.
The 5.08% increase was due to a 9.06% increase in net earning assets
(earning assets less interest bearing liabilities). Loan growth of 7.51%
from 1995 to 1996 reflects good local economic conditions, moderate
interest rates and expanded banking facilities. The overall costs of funds
reflects the high level of competition for deposits in the tri-county area
which has traditionally paid higher rates on deposits than larger statewide
financial institutions. The time deposit increase represents a combination
of new money and transfers from lower yielding transaction accounts
garnered in the local community. Management does not anticipate any
substantial runoff as higher yielding certificates mature.
Loans outstanding at June 30, 1996 increased 5.64% over amounts at
June 30, 1995 and 1.71% on annualized basis since December 31, 1995. The
loan growth has slowed in the last six month period in response to higher
interest rates (the result of Federal Reserve Board actions) and a
reduction in new agricultural loans (the result of higher grain and meat
prices). Deposit growth has been primarily invested in securities
available for sale which have increased 25.45% from levels at December 31,
1995. These investments are typically made with maturities of one to five
years and in management's view represent an adequate return with an
acceptable level of risk. Management believes its liquidity and
asset/liability policies are adequate to maintain an acceptable net
interest margin into the foreseeable future. The 6.67% increase in the tax
equivalent net interest margin for the second quarter of 1996 over first
quarter amounts is the result of moderating costs of funds on all types of
deposit accounts and an annualized growth in earning assets of 13.30%.
Barring any future increases in interest rates by the Federal Reserve
Bank, the Company anticipates its net interest margin remaining stable or
increasing slightly as rates paid on deposits are expected to decline
slightly over the next twelve months and returns on and levels of earning
assets are expected to increase moderately during this period.
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Quarter Ending June 30 Operations
The Company's net interest income on a tax equivalent basis was 4.29%
($1,792,000) for the quarter ending June 30, 1996 compared to 4.29%
($1,625,000) for the same period in 1995. Increased income from loans was
the result of increases in both volume and yields as market rates rose in
the first six months of 1996. Increases in investment yields also
contributed to an overall increase in the yield on earning assets.
Offsetting this increase in interest income was an increase in rates paid
on interest bearing deposits from 4.94% in 1995 to 5.11% in 1996. The
increase was the result of higher market rates on a national level and
aggressive competition in the local marketplace in early 1995 for longer
term certificates of deposit. The Company expects future deposit rates to
decline slowly in the second half of 1996 as local rates move towards those
of state and national competition.
A complete yield analysis is shown as Table I on page 16.
Noninterest Income
Year to Date Operations
Noninterest income decreased 2.81% during the first six months of
1996 compared to the same period in 1995. The decline was due to lower
income from insurance operations and loan servicing activities. Losses on
security transactions increased from $3,000 in 1995 to $8,000 in 1996 in
this period.
Quarter Ending June 30 Operations
Noninterest income for the quarter ending June 30, 1996 increased
2.16% from amounts at June 30, 1995. Minor increases in service charge
insurance income offset minor increases in losses on investment securities.
Noninterest Expenses
Year to Date Operations
Overall, noninterest expenses rose 3.79% for the first six months of
1996 when compared to the same period of 1995. Personnel expenses
increased 11.36% due to merit and inflationary raises and a larger number
of full time equivalent employees. Occupancy and equipment expenses
increased 35.19% (16.91% after exclusion of a credit recognized in 1995 for
overbillings in prior years on maintenance contracts). The 1996 increase
reflects the costs of expanded facilities and equipment in Moorefield and
Petersburg which went in service in the third quarter of 1995. The cost of
FDIC insurance coverage was virtually eliminated in 1996 due to changes in
FDIC rates for highly capitalized institutions. The cost of data
processing and other noninterest expenses increased 6.70% in 1996 over 1995
amounts due to asset growth and moderate inflation. Excluding the
nonrecurring differences for FDIC rate changes and maintenance contract
overbillings, noninterest expenses rose 10.40% from 1995 to 1996 while
total assets grew by 10.14% in this time period. The overall increase was
anticipated by management and is in line with their expectations.
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest Expenses (Continued)
Quarter Ending June 30 Operations
Overall, noninterest expenses rose 6.29% for the quarter ending June
30, 1996 compared to 1995. Increases in personnel, occupancy expense and
other noninterest expenses were offset by a decline in FDIC insurance
costs. Exclusive of the refund of maintenance overcharges and the
discontinuance of FDIC costs cited earlier, noninterest expenses rose by
11.47% for 1996 compared to 1995. The majority of the increase in
attributable to the costs of expanded operating facilities which were not
in service in the second quarter of 1995. Noninterest expenses have been
consistent throughout the four most recent quarters and should remain so in
future periods.
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 and southeastern Hampshire counties. Consistent with its focus
on providing community-based financial services, the Company does not
attempt to diversify its loan portfolio geographically by making
significant amounts of loans to borrowers outside of its primary service
area.
The principal economic risk associated with each of the categories of
loans in the Company's portfolio is the creditworthiness of its borrowers.
Within each category, such risk is increased or decreased depending on
prevailing economic conditions. The risk associated with the real estate
mortgage loans and installment loans to individuals varies based upon
employment levels, consumer confidence, fluctuations in value of
residential real estate and other conditions that affect the ability of
consumers to repay indebtedness. The risk associated with commercial,
financial and agricultural loans varies based upon the strength and
activity of the local economies of the Company's market areas. The risk
associated with real estate construction loans varies based upon the supply
of and demand for the type of real estate under construction.
Loans outstanding increased $974,000 or .85% in the first six months
in 1996. The bulk of this increase was in commercial and consumer loans
while real estate construction lending saw a significant decline. The loan
to deposit ratio was 74.10% at June 30, 1996 compared to 77.13% at December
31, 1995. Management believes this level of lending activity is
satisfactory to generate adequate earnings without undue credit risk. Loan
demand is expected to remain satisfactory in the near future with any
growth a function of local and national economic conditions.
Asset Quality
Nonperforming loans include nonaccrual loans, loans 90 days or more
past due and restructured loans. Nonaccrual loans are loans on which
interest accruals have been suspended or discontinued permanently.
Restructured loans are loans on which the original interest rate or
repayment terms have been changed due to financial hardship of the
borrower. The loans on nonaccrual status consist of real estate mortgages
and commercial loans. The total of nonaccrual loans was $95,000 at June
30, 1996, March 31, 1996 and December 31, 1995. Foregone interest on
nonaccrual loans was insignificant in all periods reported.
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Asset Quality (Continued)
Real estate acquired through foreclosure was $180,000 at June 30,
1996 compared to $260,000 at December 31, 1995. All foreclosed property
held at June 30, 1996 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.
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and
local economic changes, changes in the nature and value of the portfolio
and industry standards. The Company's loan classification system, which
rates existing loans, provides the basis for adjusting the allowance for
loan losses. Management reviews these classification totals, along with
internally generated loan review reports, past due reports, historical loan
loss experience and individual borrower's financial health to determine the
necessary amount to be provided in the allowance for loan losses.
Management evaluates nonperforming loans relative to their collateral value
and makes the appropriate adjustments to the allowance when needed.
The provision for credit losses and changes in the allowance for
credit losses are shown below (in thousands of dollars).
Quarter Ended Six Months Ended
June 30, June 30,
Allowance for credit losses 1996 1995 1996 1995
Balance, beginning
of period $1,342 $1,454 $1,319 $1,454
Net charge-offs (recoveries)
Charge-offs 89 76 139 145
Recoveries (22) (37) (65) (76)
Total net charge-offs * 67 39 74 69
Provision for credit losses 30 30 60 60
Balance, End of Period $1,305 $1,445 $1,305 $1,445
* Components of net charge-offs:
Rest estate - construction 5 (1) (7) 17
- mortgages 22 15 20 18
Commercial 8 33 5 33
Installment 32 (8) 56 1
Total $ 67 $ 39 $ 74 $ 69
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
The allowance for credit losses, of $1,305,000 at June 30, 1996, was
down $37,000 from its level at March 31, 1996, and down $14,000 from
December 31, 1995 levels. The allowance was equal to 1.14%, 1.18% and
1.16% of total loans at June 30, 1996, March 31, 1996 and December 31,
1995, respectively. The Company believes that its allowance must be viewed
in its entirety and, therefore, is available for potential credit losses in
its entire portfolio, including loans, credit-related commitments and other
financial instruments. In the opinion of management, the allowance, when
taken as a whole, is adequate to absorb reasonably estimated credit losses
inherent in the Company's portfolio.
On January 1, 1995, the Company adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure."
SFAS 114 requires the creation of a valuation allowance for impaired loans.
Under SFAS 114, a loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the loan's contractual terms. At June 30, 1996,
the Company had only an insignificant amount of loans that would be
considered impaired under SFAS 114.
Securities
The Company's securities portfolio serves numerous purposes. Portions
of the portfolio may secure certain public and trust deposits. The
remaining portions are held as investments or used to assist the Company in
liquidity and asset/liability management. Total securities at June 30,
1996 were $45,851,000 compared to $39,399,000 at December 31, 1995.
Securities as percent of total assets were 26.05% at June 30, 1996 compared
to 23.47% at December 31, 1995. The increase in securities is a result of
limited loan growth, good deposit growth and increased yields offered on
low risk investments.
The securities portfolio consists of two components, securities held
to maturity and securities available for sale. Securities are classified
as held to maturity when management has the intent and the Company has the
ability at the time of purchase to hold the securities to maturity. Held
to maturity securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts. Securities to be held for indefinite
periods of time are classified as available for sale and accounted for at
market value. Securities available for sale include securities that may be
sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity
needs and other similar factors. The Company's recent purchases of all
securities have generally been limited to securities of high credit quality
with short to medium term maturities. Changes within the year in market
values are reflected as changes in stockholders' equity, net of the
deferred tax effect. As of June 30, 1996, the cost of the securities
available for sale exceeded their market value by $519,000 ($327,000 after
tax considerations).
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Deposits
The Company's main source of funds remains deposits received from
individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings,
money market and certificates of deposit.
Total deposits increased 4.99% between December 31, 1995 and June 30,
1996, primarily in the area of time deposit accounts. The cost of funds
for the first six months of 1996 was 5.15% compared to 4.61% for the same
period in 1995. The yields on demand and savings deposits declined
moderately within the period while yields on time deposits increased. The
majority of the Company's deposits are time deposits which are attractive
to persons seeking high yields on their deposits but without the need for
liquidity. The Company has not actively pursued deposits in excess of
$100,000 due to the volatile nature of these relationships although it did
see a substantial increase in large certificates in the early months of
1996.
Capital
The Company seeks to maintain a strong capital base to expand
facilities, promote public confidence, support current operations and grow
at a manageable level. As of June 30, 1996, the Company's total risk based
capital ratio was 20.33% which is far above the regulatory minimum of 8.0%.
The ratio of total capital to total assets was 10.99% at June 30, 1996
which exceeds that of the Company's peers. Earnings have been satisfactory
to allow an increase in dividends in 1996 over those levels experienced in
1995.
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 liquidity exposure. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that the Company maintains overall liquidity sufficient
to satisfy its depositors' requirements and meet its customers' credit
needs.
Additional sources of liquidity available to the Company include, but
are not limited to, loan repayments, the ability to obtain deposits through
the adjustment of interest rates and the purchasing of federal funds. To
further meet its liquidity needs, the Company also maintains lines of
credit with correspondent financial institutions and the Federal Reserve
Bank of Richmond. Both subsidiary banks have lines of credit with the
Federal Home Loan Bank of Pittsburgh although utilization has been
insignificant. In the past, growth in deposits and proceeds from the
maturity of investment securities have been sufficient to fund the net
increase in loans and investment securities.
Page
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on
the balance sheet. Managing this risk involves regular monitoring of the
interest sensitive assets relative to interest sensitive liabilities over
specific time intervals.
At June 30, 1996 the Company had a negative gap position. This
liability sensitive position typically produces an unfavorable contribution
to earnings during a period of increasing rates. Even though the spread on
earning assets compared to interest bearing liabilities declined in the
first six months of 1996, increases in the volume of earning assets
provided an increase in overall interest income.
With the largest amount of interest sensitive assets and liabilities
repricing within three years, the Company monitors these areas very
closely. Early withdrawal of deposits, prepayments of loans and loan
delinquencies are some of the factors that could affect actual versus
expected cash flows. In addition, changes in rates on interest sensitive
assets and liabilities may not be equal, which could result in a change in
net interest margin. While the Company does not match each of its interest
sensitive assets against specific interest sensitive liabilities, it does
monitor closely the maturities of loans, investments and time deposits to
limit interest rate risk and the financial effect of market rate changes.
Effects of Inflation
Inflation significantly affects industries having high proportions of
property, plant and equipment or high levels of inventories. Although the
Company is not significantly affected in these areas, inflation does have
an impact on the growth of assets. As assets grow rapidly, it becomes
necessary to increase equity capital at proportionate levels to maintain
the appropriate equity to asset ratios. Traditionally, the Company's
earnings and high capital retention levels have enabled the Company to meet
these needs.
The Company's reported earnings results have been affected by
inflation, but isolating the effect is difficult. The different types of
income and expense are affected in various ways. Interest rates are
affected by inflation, but the timing and magnitude of the changes may not
coincide with changes in the consumer price index. Management actively
monitors interest rate sensitivity, as illustrated by the Gap Analysis
(Table II, page 16) in order to minimize the effects of inflationary trends
on interest rates. Other areas of noninterest expenses may be more
directly affected by inflation.
Page
Table 1
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 21,565 $ 1,009 9.36% $ 19,426 $ 860 8.85%
Consumer 25,109 1,432 11.41% 23,067 1,264 10.96%
Real estate 67,195 2,982 8.88% 63,423 2,716 8.57%
Total 113,869 5,423 9.52% 105,916 4,840 9.14%
Federal funds sold 6,642 176 5.30% 5,859 171 5.84%
Interest bearing deposits 937 26 5.55% 443 14 6.32%
Investments
Taxable 38,504 1,188 6.17% 33,839 997 5.89%
Tax exempt 1 4,180 175 8.37% 3,415 142 8.32%
Total Earning Assets 1 164,132 6,988 8.52% 149,472 6,164 8.25%
Interest Expense
Demand deposits 27,059 390 2.88% 28,501 441 3.09%
Savings 17,426 308 3.53% 16,862 314 3.72%
Time deposits 91,781 2,814 6.13% 78,698 2,105 5.35%
Other borrowed money 152 4 5.26% .00%
Total Interest Bearing
Liabilities 136,418 3,516 5.15% 124,061 2,860 4.61%
Net Interest Margin $ 3,472 $ 3,304
Net Yield on Interest Earning
Assets 1 4.23% 4.42%
<F1>
1 On a taxable equivalent basis based on a tax rate of 34%.
</TABLE>
Page
Table I (Continued)
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 21,904 $ 512 9.34% $ 19,286 $ 433 8.98%
Consumer 25,740 735 11.42% 23,386 651 11.13%
Real estate 66,963 1,491 8.91% 64,944 1,408 8.67%
Total 114,607 2,738 9.56% 107,616 2,492 9.26%
Federal funds sold 6,606 87 5.27% 6,694 100 5.98%
Interest bearing deposits 906 13 5.74% 488 9 7.38%
Investments
Taxable 40,535 633 6.25% 33,271 502 6.04%
Tax exempt 1 4,162 86 8.27% 3,275 70 8.55%
Total Earning Assets 1 166,816 3,557 8.53% 151,344 3,173 8.39%
Interest Expense
Demand deposits 27,008 192 2.84% 26,876 209 3.11%
Savings 17,772 155 3.49% 16,349 151 3.69%
Time deposits 93,341 1,416 6.07% 82,178 1,188 5.78%
Other borrowed money 150 2 5.33% .00%
Total Interest Bearing
Liabilities 138,271 1,765 5.11% 125,403 1,548 4.94%
Net Interest Margin $ 1,792 $ 1,625
Net Yield on Interest Earning
Assets 1 4.29% 4.29%
<F2>
1 On a taxable equivalent basis based on a tax rate of 34%.
</TABLE>
Page
TABLE II
<TABLE>
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 1996
(In Thousands of Dollars)
<CAPTION>
1 - 90 91 - 365 1 to 3 3 to 5 More than
Days Days Years Years 5 Years Total
<S> <C> <C> <C> <C> <C> <C>
EARNINGS ASSETS
Loans $ 15,917 $ 32,542 $ 46,664 $ 7,470 $ 12,316 $ 114,909
Fed funds sold 6,720 6,720
Securities 5,671 5,842 14,551 9,125 10,662 45,851
Time deposits in
other banks 417 200 300 917
Total 28,725 38,584 61,515 16,595 22,978 168,397
INTEREST BEARING LIABILITIES
Transaction accounts 13,804 13,804
Money market savings 13,067 13,067
Savings accounts 18,411 18,411
Time deposits more
than $100,000 911 11,548 5,210 1,757 310 19,736
Time deposits less
than $100,000 13,374 36,104 19,838 5,273 74,589
Other borrowed money 78 13 24 36 64 215
Total 59,645 47,665 25,072 7,066 374 139,822
Discrete interest
sensitivity GAP (30,920) (9,081) 36,443 9,529 22,604 28,575
Cumulative interest
sensitivity GAP (30,920) (40,001) (3,558) 5,971 28,575
Ratio of cumulative
interest sensitive
assets to cumulative
interest sensitive
liabilities 48.16% 62.72% 97.31% 104.28% 120.43%
<F3>
Assumes all transaction, money market and savings deposit accounts reprice within 90 days.
</TABLE>
Page
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - On April 9, 1996, the
stockholders held their annual
meeting. The following item
was approved by the
shareholders by the required
majority:
1) Election of the Board of
Directors as proposed in
the proxy material
without any additions or
exceptions.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a) Exhibits
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.
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.
27 Financial Data
Schedule attached
(b) Reports on Form
8-K filed during
the six months
ended June 30,
1996.
None
Page
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
June 30, 1996 20
Page
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
LESLIE A. BARR
Leslie A. Barr
President
JOHN A. VANMETER
John A. VanMeter
Chairman
Date
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Highlands
Bankshares, Inc. Form 10QSB and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,901
<INT-BEARING-DEPOSITS> 917
<FED-FUNDS-SOLD> 6,720
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,432
<INVESTMENTS-CARRYING> 8,780
<INVESTMENTS-MARKET> 8,800
<LOANS> 114,909
<ALLOWANCE> (1,305)
<TOTAL-ASSETS> 175,993
<DEPOSITS> 155,080
<SHORT-TERM> 91
<LIABILITIES-OTHER> 1,349
<LONG-TERM> 124
0
0
<COMMON> 2,734
<OTHER-SE> 16,615
<TOTAL-LIABILITIES-AND-EQUITY> 175,993
<INTEREST-LOAN> 5,423
<INTEREST-INVEST> 1,302
<INTEREST-OTHER> 202
<INTEREST-TOTAL> 6,927
<INTEREST-DEPOSIT> 3,512
<INTEREST-EXPENSE> 3,516
<INTEREST-INCOME-NET> 3,411
<LOAN-LOSSES> 60
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 2,136
<INCOME-PRETAX> 1,492
<INCOME-PRE-EXTRAORDINARY> 1,010
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,010
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 4.23
<LOANS-NON> 95
<LOANS-PAST> 970
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,319
<CHARGE-OFFS> 139
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 1,305
<ALLOWANCE-DOMESTIC> 1,305
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
