UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended Commission File No. 0-16761
March 31, 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 March 31, 1997
Common Stock, par value - $5 501,898 shares
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 1997 and 1996 2
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8K 17
SIGNATURES 21
<PAGE> 2
Part I Financial Information
Item 1. Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
March 31,
1997 1996
Interest Income
Interest and fees on loans $ 2,935 $ 2,685
Interest on federal funds sold 45 89
Interest on time deposits 10 13
Interest and dividends on investment securities
Taxable 591 555
Nontaxable 49 58
Total Interest Income 3,630 3,400
Interest Expense
Interest on time deposits over $100,000 322 300
Interest on other deposits 1,436 1,451
Interest on borrowed money 12
Total Interest Expense 1,770 1,751
Net Interest Income 1,860 1,649
Provision for Loan Losses 45 30
Net Interest Income After Loan Losses 1,815 1,619
Noninterest Income
Service charges 71 53
Other 76 86
Income (loss) on security transactions 5 (4)
Total Noninterest Income 152 135
Noninterest Expense
Salaries and employee benefits 691 598
Occupancy expense 61 58
Equipment expense 113 67
Data processing 108 92
Other 284 240
Total Noninterest Expense 1,257 1,055
Income Before Income Taxes 710 699
Provision for Income Taxes 230 234
Net Income $ 480 $ 465
Per Share Data
Net Income $ .94 $ .90
Cash Dividends $ .25 $ .18
Weighted Average Common Shares Outstanding 511,633 514,066
The accompanying notes are an integral part of these statements.
<PAGE> 3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
1997 1996
ASSETS
Cash and due from banks - interest bearing $ 3,692 $ 3,195
Time deposits in other banks 757 834
Federal funds sold 3,000 2,494
Securities held to maturity (note 2) 7,856 8,559
Securities available for sale (note 3) 31,386 33,056
Other investments 715 639
Loans, net of unearned interest (note 4) 128,287 124,600
Less allowance for loan losses (note 5) (1,287) (1,257)
Net Loans 127,000 123,343
Bank premises and equipment 4,653 4,526
Interest receivable 1,520 1,362
Deferred income tax benefits 375 275
Other assets 522 564
Total Assets $181,476 $178,847
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 15,915 $ 15,416
Interest bearing
Money market and checking 13,767 14,132
Money market savings 11,832 12,975
Savings 18,751 17,994
Time deposits over $100,000 20,992 20,859
All other time deposits 77,082 75,733
Total Deposits 158,339 157,109
Borrowed money 1,637 142
Accrued expenses and other liabilities 1,588 1,367
Total Liabilities 161,564 158,618
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 16,829 16,478
Net unrealized gain (loss) on securities
available for sale (320) (151)
20,905 20,723
Treasury stock (at cost, 44,866 shares in 1997
and $32,698 shares in 1996) (993) (494)
Total Stockholders' Equity 19,912 20,229
Total Liabilities and Stockholders' Equity $181,476 $178,847
The accompanying notes are an integral part of these statements.
<PAGE> 4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Three Months Ended
March 31,
1997 1996
Cash Flows from Operating Activities:
Net income $ 480 $ 465
Adjustments to reconcile net income to net
cash provided by operating activities:
(Income) loss on sale of securities (5) 4
Depreciation 95 55
Net amortization 1 37
Provision for loan losses 45 30
Increase in interest receivable (159) (163)
Decrease in other assets 44 25
Increase in accrued expenses 220 275
Net Cash Provided by Operating Activities 721 728
Cash Flows from Investing Activities:
Proceeds from maturities of securities
available for sale 1,282 2,777
Proceeds from maturities of securities
held to maturity 827 1,002
Purchase of securities held to maturity (500)
Purchase of securities available for sale (8,314)
Purchase of other investments (76)
Net change in time deposits in other banks 77 67
Net change in loans (3,701) 146
Purchase of property and equipment (224) (97)
Net change in federal funds sold (506) 336
Net Cash Consumed by Investing Activities (2,321) (4,583)
Cash Flows from Financing Activities:
Purchase of treasury stock (499)
Net increase in deposits 1,230 3,581
Dividends paid in cash (129) (93)
Other borrowed money 1,500 7
Repayment of borrowed money (5)
Net Cash Provided by Financing Activities 2,097 3,495
Net Increase (Decrease) in Cash
and Cash Equivalents 497 (360)
Cash and Cash Equivalents, Beginning of Period 3,195 3,287
Cash and Cash Equivalents, End of Period $ 3,692 $ 2,927
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 2 $ 13
Interest 1,818 1,691
The accompanying notes are an integral part of these statements.
<PAGE> 5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Three Months Ended
March 31,
1997 1996
Balance, beginning of period $ 20,229 $ 18,862
Net income for period 480 465
Cash dividends (129) (93)
Change in unrealized loss on securities
available for sale (169) (234)
Purchase of treasury stock (499)
Balance, end of period $ 19,912 $ 19,000
The accompanying notes are an integral part of these statements.
<PAGE> 6
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 March
31, 1997, and the results of operations for the three month
periods ended March 31, 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.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and fair value of securities held to
maturity as of March 31, 1997 and December 31, 1996, are as
follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
US Treasury securities
and obligations of
US Government
corporations
and agencies $ 4,238 $ 4,240 $ 4,741 $ 4,768
Obligations of states
and political
subdivisions 3,618 3,634 3,818 3,852
Total $ 7,856 $ 7,874 $ 8,559 $ 8,620
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for
sale as of March 31, 1997 and December 31, 1996, are as follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
US Treasury securities
and obligations
of US Government
corporations
and agencies $30,758 $30,435 $32,161 $32,110
Other investments 1,136 951 1,136 946
Total $31,894 $31,386 $33,297 $33,056
<PAGE> 7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of March 31, 1997 and
December 31, 1996, is as follows:
1997 1996
Commercial $ 27,462 $ 25,104
Real estate - construction 1,745 2,158
- mortgages 72,278 70,829
Consumer installment 29,069 28,693
Total 130,554 126,784
Unearned interest (2,267) (2,184)
Net loans outstanding $128,287 $124,600
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses
for the three months ended March 31, 1997 and 1996, follows:
1997 1996
Balance, beginning of period $ 1,257 $ 1,319
Provisions charged to operating expenses 45 30
Loan recoveries 45 43
Loan charge-offs (60) (50)
Balance, end of period $ 1,287 $ 1,342
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's net income was $480,000 in the first quarter of 1997,
an increase of 3.22% compared to the first quarter of 1996. Earnings were
$.94 per share for the first quarter of 1997 compared to $.90 per share for
the same quarter in 1996. The Company's annualized return on average
equity was 9.54% in the first quarter of 1997 compared to 9.80% for the
first quarter of 1996. Return on average assets was 1.06% for 1997 and
1.10% for 1996.
The increase in earnings per share for the first quarter was due to a
moderate increase in net interest income and a modest increase in
noninterest income. Both are reflective of growth in assets and deposits
within the last twelve months - a 6.19% increase in interest earning assets
and a 6.72% increase in deposits and other borrowed money. Net interest
income on a tax equivalent basis increased 12.44% due to increased volume
of loans outstanding and a declining cost of funds in all types of
deposits. The provision for loan losses increased slightly due to a higher
volume of loans outstanding. Other noninterest expenses increased 19.15%
as a result of the opening of a new branch of the Grant County Bank in
Keyser, West Virginia and the additional personnel and operational costs
that accompany such an expansion.
Net Interest Income
The Company's net interest income on a tax equivalent basis was 4.41%
in the first quarter of 1997 compared to 4.16% for the first quarter of
1996. Commercial rates fell due to competition for loans in existing and
expanding markets. The decline from 9.37% in 1996 to 8.97% in 1997
reflects the moderation of rates in late 1996 and the pricing concessions
needed to expand new and existing markets. The strategy appears to be
successful as average commercial loans outstanding increased 22.53% in the
first quarter of 1997 compared to the first quarter of 1996. Rates of
consumer loans increased a modest five basis points as volume increases
mirrored overall asset growth. Rates on real estate loans declined fifteen
basis points due to competition in the secondary market and changes in
overall market conditions. However, a 8.87% increase in average real
estate loans outstanding for the 1997 quarter helped increase net interest
income. The overall decline of sixteen basis points in returns on loans
outstanding was more than offset by a 27 basis point decline in rates paid
on deposits and borrowed money (see below). The increase in average loans
outstanding reflects new loans from expanded locations and modestly growing
local and national economies.
The Company saw an overall increase of thirteen basis points in the
yields on investment securities compared to 1996 results. The increase is
reflective of higher rates on taxable investments and stems mainly from
reinvestments of prior year maturities at increased rates. Securities
available for sale declined slightly in the first quarter of 1997 as
maturities were used to fund loan increases. In addition, the Company felt
that additional purchases of investment securities should be delayed until
the Federal Reserve gives a clearer indication of what actions, if any, it
may take with respect to interest rate changes. Interest rates on federal
funds sold and interest bearing deposits changed only sparingly as rates in
the overall market hovered between 5.0% and 5.50% within the quarter. The
decline in the average balance of federal funds outstanding reflects the
funding of the increased loans outstanding.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Interest rates paid on transaction and savings amounts declined a
combined thirteen basis points due to declines in interest rates in general
and local competition. The overall rate paid on these deposits has
traditionally been higher than larger institutions within the state and is
more indicative of local competition. With market rates quite low on
transaction accounts, customers have moved additional savings to
instruments yielding higher rates, i.e. time deposits. The average balance
in time deposits grew 9.00% in 1997 compared to 1996 and was a major source
of funding for the loan growth discussed earlier. A thirty-three basis
point drop in rates paid on deposits between 1997 and 1996 reflects older
certificates maturing and renewing at rates in line with current market
conditions. The Company expects this trend to continue as thirty month
certificates issued in 1995 at relatively high rates mature and are renewed
at substantially lower rates.
A complete yield analysis is shown as Table I on page 15.
Noninterest Income
Noninterest income increased 12.59% during the first quarter of 1997
compared to the same quarter in 1996. The increase was due to greater
income from service charges on transaction accounts. Within 1996, rates on
NSF checks and service charges on accounts were increased and this has
translated into higher income in 1997. Other noninterest income declined
slightly due mainly to a gain on foreclosed property which was recognized
as income in 1996 but did not recur in 1997.
Noninterest Expenses
Overall noninterest expenses rose 19.15% for the first quarter of
1997 when compared to the first quarter of 1996. Personnel expenses
increased 15.55% in the first quarter of 1997 over the same quarter in
1996. The increase was mainly the result of Grant County Bank's new branch
at Keyser, West Virginia which opened in late 1996. This and other growth
caused the number of full time equivalent employees to increase 11.26% in
1997 from the first quarter of 1996 totals. Merit and inflationary raises
were responsible for the remaining increases. The new branch was also
responsible for much of the higher occupancy and equipment expenses which
increased a combined 39.20% in 1997 over 1996 operations and for higher
data processing expenses which increased 17.39% in the period. Increased
costs for advertising, ATM services, stationery and communication services
(mainly relating to the new branch operations) resulted in other
noninterest expenses increasing 18.33% in 1997 compared to 1996. Also
contributing to the increase in noninterest expenses were pre-opening
expenses of $35,000 relating to the Baker branch of the Capon Valley Bank
which is expected to open in May of this year.
Most branch operations take one to three years to become profitable.
Management believes the Keyser location will provide loan and deposit
growth immediately and will attain profitability within two to three years.
Costs incurred prior to profitability are viewed as a part of the
investment in this location and are accepted as part of the costs incurred
for long-term growth.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Loan Portfolio
The Company is an active residential mortgage and construction lender
and generally extends commercial loans to small and medium sized businesses
within its primary service area. The Company's commercial lending activity
extends across its primary service areas of Grant, Hardy and northern
Pendleton counties. Consistent with its focus on providing community-based
financial services, the Company does not attempt to diversify its loan
portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of
loans in the Company's portfolio is the creditworthiness of its borrowers.
Within each category, such risk is increased or decreased depending on
prevailing economic conditions. The risk associated with the real estate
mortgage loans and installment loans to individuals varies based upon
employment levels, consumer confidence, fluctuations in value of
residential real estate and other conditions that affect the ability of
consumers to repay indebtedness. The risk associated with commercial,
financial and agricultural loans varies based upon the strength and
activity of the local economies of the Company's market areas. The risk
associated with real estate construction loans varies based upon the supply
of and demand for the type of real estate under construction.
Loans outstanding increased $3,687,000 or 2.96% in the first quarter
in 1997 compared to levels at December 31, 1996. A 7.13% rise in
commercial and construction loans was primarily responsible for the
increase. Modest gains in consumer and mortgage lending were also
experienced. The loan to deposit ratio was 81.02% at March 31, 1997
compared to 79.31% at December 31, 1996. Loan demand is expected to remain
satisfactory in the near future barring further credit tightening by the
Federal Reserve.
Asset Quality and Risk Elements
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. There were no loans in nonaccrual status as of March 31, 1997 or
December 31, 1996.
Real estate acquired through foreclosure was $137,000 at March 31,
1997 compared to $160,000 at December 31, 1996. All foreclosed property
held at March 31, 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 March 31, 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.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and
local economic changes, changes in the nature and value of the portfolio
and industry standards. The Company's loan classification system, which
rates existing loans, provides the basis for adjusting the allowance for
loan losses. Management reviews these classification totals, along with
internally generated loan review reports, past due reports, historical loan
loss experience and individual borrower's financial health to determine the
necessary amount to be provided in the allowance for loan losses.
Management evaluates nonperforming loans relative to their collateral value
and makes the appropriate adjustments to the allowance when needed.
The provision for credit losses and changes in the allowance for
credit losses are shown below (in thousands of dollars).
Quarter Ended
March 31,
1997 1996
Balance, beginning of period $ 1,257 $ 1,319
Net charge-offs (recoveries)
Charge-offs 60 50
Recoveries (45) (43)
Total net charge-offs * 15 7
Provision for credit losses 45 30
Balance, End of Period $ 1,287 $ 1,342
* Components of net charge-offs:
Rest estate - construction (13)
- mortgages (12) (2)
Commercial (2)
Installment 27 24
Total $ 15 $ 7
The allowance for credit losses of $1,287,000 at March 31, 1997, was
up $30,000 from its level at December 31, 1996. The allowance was equal to
1.00% and 1.01% of total loans outstanding at 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.
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 March 31, 1997,
the Company had only an insignificant amount of loans that would be
considered impaired under SFAS 114.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Securities
The Company's securities portfolio serves several purposes. Portions
of the portfolio secure certain public and trust deposits while the
remaining portions are held as investments or used to assist the Company in
liquidity and asset liability management. Total securities at March 31,
1997 were $39,957,000 compared to $42,254,000 at December 31, 1996. Total
securities as percent of total assets were 22.02% at March 31, 1997
compared to 23.63% at December 31, 1996. The decrease in securities is the
result of an increase in loans and uncertainty in the bond market as to
what actions the Federal Reserve Bank might take to temper economic growth.
The securities portfolio consists of three components, securities
held to maturity, securities available for sale and restricted securities.
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.
Restricted securities are those purchased as a requirement to be a member
of certain government chartered organizations. 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 in the
market values of securities available for sale are reflected as changes in
stockholders' equity, net of the deferred tax effect. As of March 31,
1997, the cost of the securities available for sale exceeded their market
value by $508,000 ($320,000 after tax considerations).
Deposits
The Company's main source of funds is customer 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 .78% between December 31, 1996 and March 31,
1997, primarily in the area of time deposit accounts. The cost of funds
for the first quarter of 1997 was 4.99% compared to 5.20% for the same
quarter in 1996. The yields on all types of deposits declined 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.
Borrowed Money
During the first quarter of 1997, the Company borrowed $1,500,000
from the Federal Home Loan Bank at 5.78% per annum. The monies were used
to fund a loan with a five year amortization period and allowed the Company
to lock in its cost of funds on this transaction.
<PAGE> 13
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 March 31, 1997, the Company's total risk
based capital ratio was 18.80% which is far above the regulatory minimum of
8.0%. The ratio of total capital to total assets was 10.97% at March 31,
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 liability liquidity. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that the Company maintains overall liquidity sufficient
to satisfy its depositors' requirements and meet its customers' credit
needs.
Additional sources of liquidity available to the Company include, but
are not limited to, loan repayments, the ability to obtain deposits through
the adjustment of interest rates and the purchasing of federal funds. To
further meet its liquidity needs, the Company also maintains lines of
credit with correspondent financial institutions and the Federal Reserve
Bank of Richmond. Both subsidiary banks have lines of credit with the
Federal Home Loan Bank of Pittsburgh although utilization has been quite
limited. In the past, growth in deposits and proceeds from the maturity of
investment securities have been sufficient to fund the net increase in
loans.
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on
the balance sheet. Managing this risk involves regular monitoring of the
interest sensitive assets relative to interest sensitive liabilities over
specific time intervals.
At March 31, 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 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.
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> 15
TABLE 1
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans
Commercial $ 26,009 $ 583 8.97% $ 21,226 $ 497 9.37%
Consumer 26,423 756 11.44 24,478 697 11.39
Real estate 73,404 1,596 8.70 67,427 1,491 8.85
Total Loans 125,836 2,935 9.33 113,131 2,685 9.49
Federal funds sold 3,384 45 5.32 6,678 89 5.33
Interest bearing
deposits 806 10 4.96 968 13 5.37
Investments
Taxable 37,728 591 6.27 36,473 555 6.09
Tax exempt 1 3,691 78 8.45 4,198 89 8.48
Total Earning Assets 1 171,445 3,659 8.54 161,448 3,431 8.50
Interest Expense
Demand deposits 26,399 182 2.76 27,110 198 2.92
Savings 18,141 158 3.48 17,080 153 3.58
Time deposits 96,616 1,418 5.87 90,221 1,398 6.20
Other borrowed money 822 12 5.84 154 2 5.19
Total Interest
Bearing Liabilities $ 141,978 1,770 4.99 $ 134,565 1,751 5.20
Net Interest Margin $ 1,889 $ 1,680
Net Yield on Interest Earning Assets 1 4.41% 4.16%
<F1>
1 Yields are on a taxable equivalent basis.
2 Includes loans in nonaccrual status.
</TABLE>
Page 16
TABLE II
<TABLE>
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31, 1997
(In Thousands of Dollars)
<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 $ 17,307 $ 36,893 $ 51,189 $ 9,462 $ 13,436 $128,287
Fed funds sold 3,000 3,000
Securities 5,122 7,584 12,592 8,416 6,243 39,957
Interest bearing time
deposits 57 400 300 757
Total 25,486 44,877 64,081 17,878 19,679 172,001
INTEREST BEARING LIABILITIES
Transaction accounts 13,767 13,767
Money market savings 11,832 11,832
Savings accounts 18,751 18,751
Time deposits more
than $100,000 5,790 11,574 2,176 1,352 100 20,992
Time deposits less
than $100,000 14,254 41,375 16,490 4,863 100 77,082
Other borrowed money 4 1,513 37 43 40 1,637
Total 64,398 54,462 18,703 6,258 240 144,061
Rate sensitivity GAP (38,912) (9,585) 45,378 11,620 19,439 27,940
Cumulative GAP (38,912) (48,497) (3,119) 8,501 27,940
GAP as a % of rate
sensitive assets (22.62%) (28.20%) (1.81%) 4.94% 16.24%
<F2>
Assumes all transaction, money market and savings deposit accounts reprice within 90 days.
</TABLE>
<PAGE> 17
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a) Exhibits
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 three months
ended March 31, 1997
None
<PAGE> 18
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
March 31, 1997 19
<PAGE> 21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
LESLIE A. BARR
Leslie A. Barr
President
CLARENCE E. PORTER
Clarence E. Porter
Secretary/Treasurer
May 13, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,692
<INT-BEARING-DEPOSITS> 757
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,386
<INVESTMENTS-CARRYING> 7,856
<INVESTMENTS-MARKET> 7,874
<LOANS> 128,287
<ALLOWANCE> (1,287)
<TOTAL-ASSETS> 181,476
<DEPOSITS> 158,339
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,588
<LONG-TERM> 1,637
0
0
<COMMON> 2,734
<OTHER-SE> 17,178
<TOTAL-LIABILITIES-AND-EQUITY> 181,476
<INTEREST-LOAN> 2,935
<INTEREST-INVEST> 640
<INTEREST-OTHER> 55
<INTEREST-TOTAL> 3,630
<INTEREST-DEPOSIT> 1,758
<INTEREST-EXPENSE> 1,770
<INTEREST-INCOME-NET> 1,860
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,257
<INCOME-PRETAX> 710
<INCOME-PRE-EXTRAORDINARY> 480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 480
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
<YIELD-ACTUAL> 4.41
<LOANS-NON> 0
<LOANS-PAST> 348
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,257
<CHARGE-OFFS> 60
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 1,287
<ALLOWANCE-DOMESTIC> 1,287
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
