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, 1997
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, 1997
Common Stock, par value - $5 501,898 shares
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Six Months
Ended June 30, 1997 and 1996 2
Consolidated Statements of Income - Three Months
Ended June 30, 1997 and 1996 3
Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1997 and 1996 5
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 1997 and 1996 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 19
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8K 19
SIGNATURES 23
<PAGE> 2
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Six Months Ended
June 30,
1997 1996
Interest Income
Interest and fees on loans $ 5,968 $ 5,423
Interest on federal funds sold 122 176
Interest on time deposits 19 26
Interest and dividends on investment securities
Taxable 1,186 1,188
Nontaxable 95 114
Total Interest Income 7,390 6,927
Interest Expense
Interest on time deposits over $100,000 661 587
Interest on other deposits 2,936 2,925
Interest on borrowed money 37 4
Total Interest Expense 3,634 3,516
Net Interest Income 3,756 3,411
Provision for Loan Losses 90 60
Net Interest Income After Provision for Loan Losses 3,666 3,351
Noninterest Income
Service charges 140 108
Other 180 177
Gain (loss) on security transactions 7 (8)
Total Noninterest Income 327 277
Noninterest Expense
Salaries and employee benefits 1,415 1,206
Occupancy expense 119 106
Equipment expense 219 136
Data processing 217 188
Other 579 500
Total Noninterest Expense 2,549 2,136
Income Before Income Taxes 1,444 1,492
Provision for Income Taxes 481 482
Net Income $ 963 $ 1,010
Per Share Data
Net Income $ 1.90 $ 1.96
Cash Dividends $ .50 $ .36
Weighted Average Common Shares Outstanding 506,723 514,066
The accompanying notes are an integral part of these statements.
<PAGE> 3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Three Months Ended
June 30,
1997 1996
Interest Income
Interest and fees on loans $ 3,033 $ 2,738
Interest on federal funds sold 77 87
Interest on time deposits 9 13
Interest and dividends on investment securities
Taxable 595 633
Nontaxable 46 56
Total Interest Income 3,760 3,527
Interest Expense
Interest on time deposits over $100,000 339 287
Interest on other deposits 1,500 1,476
Interest on borrowed money 25 2
Total Interest Expense 1,864 1,765
Net Interest Income 1,896 1,762
Provision for Loan Losses 45 30
Net Interest Income After Provision for Loan Losses 1,851 1,732
Noninterest Income
Service charges 69 55
Other income 104 91
Investment security gains (losses) 2 (4)
Total Noninterest Income 175 142
Noninterest Expense
Salaries and employee benefits 724 608
Occupancy expense 58 48
Equipment expense 106 69
Data processing expense 109 96
Other 295 260
Total Noninterest Expense 1,292 1,081
Income Before Income Taxes 734 793
Provision for Income Taxes 251 248
Net Income $ 483 $ 545
Per Share Data
Net Income $ .96 $ 1.06
Cash Dividends $ .25 $ .18
Weighted Average Common Shares Outstanding 501,898 514,066
The accompanying notes are an integral part of these statements.
<PAGE> 4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
1997 1996
ASSETS
Cash and due from banks - noninterest bearing $ 4,690 $ 3,195
Time deposits in other banks 567 834
Federal funds sold 6,093 2,494
Securities held to maturity (note 2) 7,502 8,559
Securities available for sale (note 3) 32,160 33,056
Other investments 715 639
Loans, net of unearned interest (note 4) 131,103 124,600
Less allowance for loan losses (note 5) (1,290) (1,257)
Net Loans 129,813 123,343
Bank premises and equipment 4,895 4,526
Interest receivable 1,536 1,362
Deferred income tax benefits 305 275
Other assets 502 564
Total Assets $ 188,778 $ 178,847
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 15,257 $ 15,416
Interest bearing
Money market and checking 15,436 14,132
Money market savings 13,488 12,975
Savings 19,433 17,994
Time deposits over $100,000 21,362 20,859
All other time deposits 79,326 75,733
Total Deposits 164,302 157,109
Borrowed money 2,633 142
Accrued expenses and other liabilities 1,422 1,367
Total Liabilities 168,357 158,618
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 17,188 16,478
Net unrealized loss on securities
available for sale (170) (151)
21,414 20,723
Treasury stock (at cost, 44,866 shares in
1997 and 32,698 shares in 1996) (993) (494)
Total Stockholders' Equity 20,421 20,229
Total Liabilities and Stockholders' Equity $ 188,778 $ 178,847
The accompanying notes are an integral part of these statements.
<PAGE> 5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Six Months Ended
June 30,
1997 1996
Cash Flows from Operating Activities:
Net income $ 963 $ 1,010
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) loss on securities transactions (7) 8
Depreciation 191 110
Net securities amortization (accretion) (5) 66
Provision for loan losses 90 60
Increase in interest receivable (175) (230)
Decrease in other assets 44 60
Increase in accrued expenses 55 197
Net Cash Provided by Operating Activities 1,156 1,281
Cash Flows from Investing Activities:
Proceeds from sale of securities
available for sale 762
Proceeds from maturities of securities
available for sale 4,484 7,637
Proceeds from maturities of securities
held to maturity 932 1,400
Purchase of securities held to maturity (500)
Purchase of other investments (76)
Net change in time deposits in other banks 267 78
Purchase of securities available for sale (3,481) (16,344)
Net change in loans (6,559) (1,048)
Purchase of property and equipment (561) (188)
Net change in federal funds sold (3,599) (704)
Net Cash Consumed by Investing Activities (8,593) (8,907)
Cash Flows from Financing Activities:
Net increase in deposits 7,193 7,367
Dividends paid in cash (253) (185)
Purchase of treasury stock (499)
Other borrowed money 2,491 58
Net Cash Provided by Financing Activities 8,932 7,240
Net Increase (Decrease) in Cash
and Cash Equivalents 1,495 (386)
Cash and Cash Equivalents, Beginning of Period 3,195 3,287
Cash and Cash Equivalents, End of Period $ 4,690 $ 2,901
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 421 $ 440
Interest 3,695 3,535
The accompanying notes are an integral part of these statements.
<PAGE> 6
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Six Months Ended
June 30,
1997 1996
Balance, beginning of period $ 20,723 $ 18,862
Net income for period 963 1,010
Cash dividends (253) (185)
Change in unrealized loss on securities
available for sale (19) (338)
Balance, end of period $ 21,414 $ 19,349
The accompanying notes are an integral part of these statements.
<PAGE> 7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally
accepted accounting principles and to general industry
practices. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of June
30, 1997, and the results of operations for the six month
periods ended June 30, 1997 and 1996. The notes included herein
should be read in conjunction with the notes to financial
statements included in the 1996 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, 1997 and December 31, 1996, are as
follows:
1997 1996
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of
US Government
corporations and
agencies $ 3,985 $ 3,997 $ 4,741 $ 4,768
Obligations of states
and political
subdivisions 3,517 3,560 3,818 3,852
Total $ 7,502 $ 7,557 $ 8,559 $ 8,620
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available
for sale as of June 30, 1997 and December 31, 1996, are as
follows:
1997 1996
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of
US Government
corporations and
agencies $ 31,294 $ 31,203 $ 32,161 $ 32,110
Obligations of states
and political
subdivisions
Other investments 1,137 957 1,136 946
Total $ 32,431 $ 32,160 $ 33,297 $ 33,056
<PAGE> 8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of June 30, 1997 and
December 31, 1996, is as follows:
1997 1996
Commercial $ 25,961 $ 25,104
Real estate - construction 2,331 2,158
- mortgages 75,675 70,829
Consumer installment 29,532 28,693
Total 133,499 126,784
Unearned interest (2,396) (2,184)
Net loans outstanding $ 131,103 $ 124,600
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses
for the six months ended June 30, 1997 and 1996, follows:
1997 1996
Balance, beginning of period $ 1,257 $ 1,319
Provisions charged to operating expenses 90 60
Loan recoveries 93 65
Loan charge-offs (150) (139)
Balance, end of period $ 1,290 $ 1,305
<PAGE> 9
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 $963,000 represents a 4.65% decline
in total earnings and a 3.04% decline in earnings per share compared to
1996 operations. Earnings represented an annualized return on equity of
9.56% for the first six months of 1997 compared to 10.44% for the same
period in 1996. The annualized return on average assets was 1.05% in the
first six months of 1997 compared with 1.15% in the first six months of
1996.
The tax equivalent net interest income increased by $340,000 in 1997
to $3,812,000 as compared to 1996. A healthy increase in the level of net
earning assets and a modest increase in the net interest spread were
responsible for the improvement. The increase in earning assets is
attributable to a 12.26% increase in average loans outstanding, primary
commercial and real estate. The funding of the asset growth was from
deposits of local customers and funds borrowed from the Federal Home Loan
Bank.
Noninterest income increased 18.05% in 1997 compared to 1996 due
mainly to an increase in service charge income. Noninterest expenses
increased 19.34% in 1997 due mainly to the additions of new branches in
Keyser and Baker and the costs associated with their start up.
Quarter Ending June 30 Operations
Net income for the quarter ending June 30, 1997 declined 11.38% when
compared to 1996 operations. Increases in personnel and occupancy expenses
resulting from new branch operations were the primary reason for the
increase. Offsetting these cost increases were a 23.24% increase in
nonoperating income and a 7.31% increase in the tax equivalent net interest
margin.
Net Interest Income
Year to Date Operations
The Company's net interest margin on a tax equivalent basis was
$3,812,000 in the first six months of 1997 compared to $3,472,000 for 1996.
The 9.79% increase was due to a 6.16% increase in net average earning
assets (earning assets less interest bearing liabilities) between the
periods. Average loans outstanding grew by 12.26% from 1996 to 1997. This
growth 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 deposit increase represents growth in all types of
accounts (except noninterest bearing accounts) and has been obtained from
customers in the immediate service areas.
<PAGE> 10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Year to Date Operations (Continued)
Loans outstanding at June 30, 1997 increased 14.09% over amounts at
June 30, 1996 and 10.44% on annualized basis since December 31, 1996. The
loan increase has been the result of opening branches in new market areas
and a concerted effort to increase lending in existing markets. Loan
growth has been funded primarily by deposit growth with a slight decline in
the level of security investments since December 31, 1996. The 1.80%
increase in the tax equivalent net interest margin for the second quarter
of 1997 over the first quarter of 1997 is the result of stable costs of
funds on all types of deposit accounts and an annualized growth in earning
assets of 13.07%. 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 remain stable or decline slightly over the next twelve months
and returns on and the levels of earning assets are expected to increase
modestly during this period.
Quarter Ending June 30 Operations
The Company's net interest income on a tax equivalent basis was 4.34%
of earning assets ($1,923,000) for the quarter ending June 30, 1997
compared to 4.29% ($1,792,000) for the same period in 1996. Increased
income from loans was the result of increases in volume as the level of
average loans outstanding rose in the period and market rates stayed
relatively stable. Yields on investment securities and short term
investments fluctuated only slightly from 1996 operations. Helping improve
the net interest margin was a decrease in rates paid on interest bearing
liabilities from 5.11% in 1996 to 5.00% in 1997. The decline was the
result of stable rates on a national level and historically low rates on
savings and transaction accounts. The Company expects future deposit rates
to remain stable or decline slightly in the second half of 1997 as local
rates move towards those of state and national competition.
A complete yield analysis is shown as Table I on page 17.
Noninterest Income
Year to Date Operations
Noninterest income for the quarter ending June 30, 1997 increased
18.05% from amounts at June 30, 1996. An increase in service charge income
of 29.63% was the result of a new fee structure on deposit accounts.
Additionally, the prior year saw a small loss of $8,000 on security
transactions while the current year saw a gain of $7,000 on such
transactions.
Quarter Ending June 30 Operations
Noninterest interest income for the quarter ending June 30, 1997
increased 23.24% as the result of higher service charges (explained above)
and a small gain (compared to a small loss in the prior year) on the sale
of investments.
<PAGE> 11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest Expenses
Year to Date Operations
Overall, noninterest expense increased 19.34% in the first six months
of 1997 when compared to the same period in 1996. Personnel expenses
increased 17.33% as the result of an increase in the equivalent number of
employees. Occupancy and equipment expenses increased 39.67% as the result
of new branch locations and expanded facilities in other areas. Data
processing expenses increased by 15.43% as a result of asset growth,
additional phone lines at branch locations and a higher fee agreement with
the service provider. Other noninterest expenses increased by 15.80% due
to asset growth and expansion. While the increase in noninterest expenses
of 19.34% is higher than the 7.40% increase in assets, the increase
reflects management's willingness to invest in new site locations and
expand its geographical area of operations. Most new branch locations take
one to three years to attain profitability and management feels this
timetable will be true for the two locations that have been added within
the last eight months.
Quarter Ending June 30 Operations
Overall, noninterest expenses increased 19.52% for the quarter ending
June 30, 1997 compared to the quarter ending June 30, 1996. The reasons
for the quarterly increase are the same as for the year-to-date increases
and the percentage increases for the quarters are relatively the same as
the year-to-date increases.
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, Mineral, 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 $6,503,000 or 5.22% in the first six
months in 1997. The bulk of this increase was in real estate mortgage
loans with smaller increases in other types of loans. The loan to deposit
ratio was 79.79% at June 30, 1997 compared to 79.31% at December 31, 1996.
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.
<PAGE> 12
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 Company had no nonperforming loans at June 30, 1997, March
31, 1997 or December 31, 1996.
Real estate acquired through foreclosure was $95,000 at June 30, 1997
compared to $160,000 at December 31, 1996. All foreclosed property held at
June 30, 1997 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.
An inherent risk in the lending of money is that the borrower will
not be able to repay the loan under the terms of the original agreement.
The allowance for loan losses (see subsequent section) provides for this
risk and is reviewed periodically for adequacy. This review also considers
concentrations of loans in terms of geography, business type or level of
risk. While lending is geographically diversified within the service area,
the Company does have some concentration of loans in the area of
agriculture (primarily poultry farming), timber and related industries.
Management recognizes these concentrations and considers them when
structuring its loan portfolio. As of June 30, 1997, management is not
aware of any significant potential problem loans in which the debtor is
currently meeting their obligations as stated in the loan agreement but
which may change in future periods.
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.
<PAGE> 13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
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 1997 1996 1997 1996
Balance, beginning of period $ 1,287 $ 1,342 $ 1,257 $ 1,319
Net charge-offs (recoveries)
Charge-offs 90 89 150 139
Recoveries (48) (22) (93) (65)
Total net charge-offs * 42 67 57 74
Provision for credit losses 45 30 90 60
Balance, End of Period $ 1,290 $ 1,305 $ 1,290 $ 1,305
* Components of net charge-offs:
Rest estate - construction $ $ 5 $ $ (7)
- mortgages 19 22 7 20
Commercial 16 8 16 5
Installment 7 32 34 56
Total $ 42 $ 67 $ 57 $ 74
The allowance for credit losses, of $1,290,000 at June 30, 1997, was
up $3,000 from its level at March 31, 1997, and up $33,000 from December
31, 1996 levels. The allowance was equal to .98%, 1.00% and 1.01% of total
loans at June 30, 1997, March 31, 1997 and December 31, 1996, 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.
<PAGE> 14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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, 1997 were $40,377,000 compared to $42,254,000 at December 31,
1996. Securities as percent of total assets were 21.39% at June 30, 1997
compared to 23.63% at December 31, 1996. The decline in securities is a
result of controlled loan growth, moderate deposit growth and level 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, 1997, the cost of the securities
available for sale exceeded their market value by $271,000 ($170,000 after
tax considerations).
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 4.58% between December 31, 1996 and June 30,
1997, generally in all areas, except noninterest bearing accounts. The
cost of funds for the first six months of 1997 was 5.00% compared to 5.15%
for the same period in 1996. The yields on all deposits declined
moderately within the period. 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 and saw only moderate increases in these deposits in the
first half of 1997.
Borrowed Money
During the first quarter of 1997, the Company borrowed $1,500,000
from the Federal Home Loan Bank (FHLB) at 5.78% per annum. In addition,
short term borrowings of $1,000,000 were made in late June of 1997 from the
FHLB to help manage short term liquidity requirements.
<PAGE> 15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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, 1997, the Company's total risk based
capital ratio was 18.84% which is far above the regulatory minimum of 8.0%.
The ratio of total capital to total assets was 10.82% at June 30, 1997
which exceeds that of the Company's peers.
For 1997, the Company has adopted a policy of paying uniform
dividends on a quarterly basis. In prior years, the Company paid a larger
dividend in the fourth quarter of each year than the first three quarters
of the year if profits were adequate. The Company believes the new policy
will allow shareholders to better anticipate dividends paid and will
eliminate the past practice of delaying any stock sales until after the end
of the year.
In March of 1997, the Company repurchased 12,168 shares of common
stock from the estate of the Company's largest shareholder. The shares
will be held as treasury stock and used to fund contributions to an
employee stock ownership plan or for other corporate purposes. The total
purchase price of this stock was $498,888.
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> 16
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, 1997 the Company had a negative gap position. This
liability sensitive position typically produces an unfavorable contribution
to earnings during a period of increasing rates. 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 review its positions
regularly and takes actions to reposition itself when necessary.
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 18) in order to minimize the effects of inflationary trends
on interest rates. Other areas of noninterest expenses may be more
directly affected by inflation.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission,
including Highlands Bankshares, Inc., and the address is
(http://www.sec.gov).
<PAGE> 17
TABLE I
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 26,454 $ 1,179 8.91% $ 21,565 $ 1,009 9.36%
Consumer 26,631 1,521 11.42% 25,109 1,432 11.41%
Real estate 74,743 3,268 8.74% 67,195 2,982 8.88%
Total 127,828 5,968 9.34% 113,869 5,423 9.52%
Federal funds sold 4,432 122 5.51% 6,642 176 5.30%
Interest bearing deposits 808 19 4.70% 937 26 5.55%
Investments
Taxable 37,571 1,186 6.31% 38,504 1,188 6.17%
Tax exempt 1 3,608 151 8.37% 4,180 175 8.37%
Total Earning Assets 1 174,247 7,446 8.55% 164,132 6,988 8.52%
Interest Expense
Demand deposits 27,622 377 2.73% 27,059 390 2.88%
Savings 18,370 322 3.51% 17,426 308 3.53%
Time deposits 98,158 2,898 5.90% 91,781 2,814 6.13%
Other borrowed money 1,274 37 5.81% 152 4 5.26%
Total Interest Bearing
Liabilities 145,424 3,634 5.00% 136,418 3,516 5.15%
Net Interest Margin $ 3,812 $ 3,472
Net Yield on Interest Earning
Assets 1 4.38% 4.23%
1 On a taxable equivalent basis based on a tax rate of 34%.
</TABLE>
TABLE I (Continued)
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 26,899 $ 596 8.86% $ 21,904 $ 512 9.34%
Consumer 26,839 765 11.40% 25,740 735 11.42%
Real estate 76,082 1,672 8.79% 66,963 1,491 8.91%
Total 129,820 3,033 9.35% 114,607 2,738 9.56%
Federal funds sold 5,480 77 5.62% 6,606 87 5.27%
Interest bearing deposits 810 9 4.44% 906 13 5.74%
Investments
Taxable 37,414 595 6.36% 40,535 633 6.25%
Tax exempt 1 3,525 73 8.28% 4,162 86 8.27%
Total Earning Assets 1 177,049 3,787 8.56% 166,816 3,557 8.53%
Interest Expense
Demand deposits 28,845 195 2.70% 27,008 192 2.84%
Savings 18,599 164 3.53% 17,772 155 3.49%
Time deposits 99,700 1,480 5.94% 93,341 1,416 6.07%
Other borrowed money 1,726 25 5.79% 150 2 5.33%
Total Interest Bearing
Liabilities 148,870 1,864 5.00% 138,271 1,765 5.11%
Net Interest Margin $ 1,923 $ 1,792
Net Yield on Interest Earning
Assets 1 4.34% 4.29%
1 On a taxable equivalent basis based on a tax rate of 34%.
</TABLE>
<PAGE> 18
TABLE II
<TABLE>
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 1997
(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 $ 17,527 $ 39,551 $ 47,286 $ 9,914 $ 16,825 $ 131,103
Fed funds sold 6,093 6,093
Securities 4,469 8,361 15,284 6,586 5,677 40,377
Time deposits in other
banks 267 200 100 567
Total 28,356 48,112 62,670 16,500 22,502 178,140
INTEREST BEARING LIABILITIES
Transaction accounts 15,436 15,436
Money market savings 13,488 13,488
Savings accounts 19,433 19,433
Time deposits more
than $100,000 4,694 11,979 3,440 1,149 100 21,362
Time deposits less
than $100,000 18,874 37,237 18,775 4,440 79,326
Other borrowed money 2,504 13 39 44 33 2,633
Total 74,429 49,229 22,254 5,633 133 151,678
Rate sensitivity GAP (46,073) (1,117) 40,416 10,867 22,369 26,462
Cumulative GAP (46,073) (47,190) (6,774) 4,093 26,462
Gap as a % of rate
sensitive assets (25.86%) (26.49%) (3.80%) 2.30% 14.85%
Assumes all transaction, money market and savings deposit accounts reprice within 90 days.
</TABLE>
<PAGE> 19
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 8, 1997, 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, 1997.
None
<PAGE> 20
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
June 30, 1997 21
<PAGE> 23
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 August 12, 1997
<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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,690
<INT-BEARING-DEPOSITS> 567
<FED-FUNDS-SOLD> 6,093
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,875
<INVESTMENTS-CARRYING> 7,502
<INVESTMENTS-MARKET> 7,557
<LOANS> 131,103
<ALLOWANCE> (1,290)
<TOTAL-ASSETS> 188,778
<DEPOSITS> 164,302
<SHORT-TERM> 2,517
<LIABILITIES-OTHER> 1,422
<LONG-TERM> 116
0
0
<COMMON> 2,734
<OTHER-SE> 17,687
<TOTAL-LIABILITIES-AND-EQUITY> 188,778
<INTEREST-LOAN> 5,968
<INTEREST-INVEST> 1,281
<INTEREST-OTHER> 141
<INTEREST-TOTAL> 7,390
<INTEREST-DEPOSIT> 3,597
<INTEREST-EXPENSE> 3,634
<INTEREST-INCOME-NET> 3,756
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 2,549
<INCOME-PRETAX> 1,444
<INCOME-PRE-EXTRAORDINARY> 963
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 963
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
<YIELD-ACTUAL> 4.38
<LOANS-NON> 0
<LOANS-PAST> 683
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,257
<CHARGE-OFFS> 150
<RECOVERIES> 93
<ALLOWANCE-CLOSE> 1,290
<ALLOWANCE-DOMESTIC> 1,290
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
