UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended Commission File No. 0-16761
September 30, 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 September 30, 1997
Common Stock, par value - $5 501,898 shares
<PAGE> 1
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Nine Months Ended
September 30, 1997 and 1996 2
Consolidated Statements of Income - Three Months Ended
September 30, 1997 and 1996 3
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996 4
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 5
Consolidated Statements of Changes in Stockholders' Equity -
Nine Months Ended September 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. Exhibit and Reports on Form 8K 19
SIGNATURES 22
<PAGE> 2
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Nine Months Ended
September 30,
1997 1996
Interest Income
Interest and fees on loans $ 9,071 $ 8,240
Interest on federal funds sold 206 234
Interest on time deposits 26 38
Interest and dividends on investment securities
Taxable 1,771 1,856
Nontaxable 142 170
------ ------
Total Interest Income 11,216 10,538
------ ------
Interest Expense
Interest on time deposits over $100,000 1,010 905
Interest on other deposits 4,473 4,397
Interest on borrowed money 68 6
------ ------
Total Interest Expense 5,551 5,308
------ ------
Net Interest Income 5,665 5,230
Provision for Loan Losses 135 105
------ ------
Net Interest Income after Loan Losses 5,530 5,125
------ ------
Noninterest Income
Service charges 217 174
Other 288 272
Investment security gains (losses) 6 (2)
------ ------
Total Noninterest Income 511 444
------ ------
Noninterest Expense
Salaries and employee benefits 2,141 1,829
Occupancy expense 181 189
Equipment expense 330 261
Data processing expense 326 286
Other 874 765
------ ------
Total Noninterest Expense 3,852 3,330
------ ------
Income before Income Taxes 2,189 2,239
Provision for Income Taxes 742 696
------ ------
Net Income $ 1,447 $ 1,543
====== ======
Per Share Data
Net Income $ 2.86 $ 3.00
======= =======
Cash Dividends $ .75 $ .54
======= =======
Weighted Average Common Shares Outstanding 505,143 514,066
======= =======
The accompanying notes are an integral part of these statements.
<PAGE> 3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
September 30,
1997 1996
Interest Income
Interest and fees on loans $ 3,103 $ 2,817
Interest on federal funds sold 84 58
Interest on time deposits 7 12
Interest and dividends on investment securities
Taxable 585 668
Nontaxable 47 56
------ ------
Total Interest Income 3,826 3,611
------ ------
Interest Expense
Interest on time deposits over $100,000 349 318
Interest on other deposits 1,537 1,472
Interest on borrowed money 31 2
------ ------
Total Interest Expense 1,917 1,792
------ ------
Net Interest Income 1,909 1,819
Provision for Loan Losses 45 45
------ ------
Net Interest Income after Loan Losses 1,864 1,774
------ ------
Noninterest Income
Service charges 77 66
Other income 108 95
Investment security gains (losses) (1) 6
------ ------
Total Noninterest Income 184 167
------ ------
Noninterest Expense
Salaries and employee benefits 726 623
Occupancy expense 62 83
Equipment expense 111 125
Data processing 109 98
Other 295 265
------ ------
Total Noninterest Expense 1,303 1,194
------ ------
Income before Income Taxes 745 747
Provision for Income Taxes 261 214
------ ------
Net Income $ 484 $ 533
====== ======
Per Share Data
Net Income $ .96 $ 1.04
====== ======
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)
September 30, December 31,
1997 1996
ASSETS
Cash and due from banks $ 3,495 $ 3,195
Federal funds sold 7,070 2,494
Time deposits in other banks 653 834
Securities held to maturity (note 2) 7,429 8,559
Securities available for sale (note 3) 31,902 33,056
Other investments 715 639
Loans, net of unearned interest (note 4) 133,374 124,600
Less allowance for loan losses (note 5) (1,331) (1,257)
------- -------
Net Loans 132,043 123,343
Bank premises and equipment 4,828 4,526
Interest receivable 1,545 1,362
Deferred income tax benefit 294 275
Other assets 491 564
------- -------
Total Assets $190,465 $178,847
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 15,000 $ 15,416
Interest bearing
Money market and checking 16,348 14,132
Money market savings 12,614 12,975
Savings 19,539 17,994
Time deposits over $100,000 23,411 20,859
All other time deposits 79,833 75,733
------- -------
Total Deposits 166,745 157,109
Borrowed money 1,163 142
Accrued expenses and other liabilities 1,687 1,367
------- -------
Total Liabilities 169,595 158,618
------- -------
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 17,546 16,478
Net unrealized loss on securities available for sale (80) (151)
------- -------
21,862 20,723
Treasury stock (at cost, 44,866 shares in 1997 and
32,698 shares in 1996) (992) (494)
------- -------
Total Stockholders' Equity 20,870 20,229
------- -------
Total Liabilities and Stockholders' Equity $190,465 $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)
Nine Months Ended
September 30,
1997 1996
Cash Flows from Operating Activities:
Net income $ 1,447 $ 1,543
Adjustments to reconcile net income to net
cash provided by operating activities:
Investment securities losses (gains) (6) 2
Depreciation 284 166
Net amortization (6) 65
Provision for loan losses 135 105
Increase in interest receivable (184) (175)
Decrease in other assets 11 136
Increase in accrued expenses 320 278
------ ------
Net Cash Provided by Operating Activities 2,001 2,120
------ ------
Cash Flows from Investing Activities:
Proceeds from sale of securitie
available for sale 1,260
Proceeds from maturities of securities
available for sale 6,539 10,479
Proceeds from maturities of securities
held to maturity 1,002 1,977
Net change in time deposits in other banks 181 73
Purchase of securities available for sale (5,206) (19,124)
Purchase of securities held to maturity (620)
Net change in loans to customers (8,834) (6,160)
Net change in federal funds sold (4,576) 2,423
Purchase of property and equipment (587) (315)
Construction in progress payments (280)
------ ------
Net Cash Consumed by Investing Activities (11,481) (10,287)
------- -------
Cash Flows from Financing Activities:
Net increase in deposits 9,636 8,562
Other borrowed money 1,021 (11)
Payment of dividends (380) (278)
Purchase of treasury stock (498)
------
Net Cash Provided by Financing Activities 9,779 8,273
------ ------
Net Increase in Cash and Cash Equivalents 299 106
Cash and Cash Equivalents, Beginning of Period 3,196 3,287
------ ------
Cash and Cash Equivalents, End of Period $ 3,495 $ 3,393
====== ======
Supplementary Disclosures:
Cash paid for:
Income taxes $ 679 $ 698
Interest expense 5,452 5,277
The accompanying notes are an integral part of these statements.
<PAGE> 6
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Nine Months Ended
September 30,
1997 1996
Balance, beginning of period $20,229 $18,862
Net income for period 1,447 1,543
Cash dividends (380) (278)
Change in unrealized gain (loss) on
securities available for sale 72 (302)
Purchase of treasury stock (498)
------ ______
Balance, end of period $20,870 $19,825
====== ======
The accompanying notes are an integral part of these statements.
<PAGE> 7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally accepted
accounting principles and to general industry practices. In the
opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of September 30, 1997, and the results of operations for
the nine and three month periods ended September 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.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and market value of securities held to maturity
as of September 30, 1997 and December 31, 1996, are as follows:
1997 1996
--------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US government
corporations and agencies $ 3,982 $ 3,994 $4,741 $ 4,768
Obligations of states and
political subdivisions 3,447 3,529 3,818 3,852
------ ------ ----- ------
Total $ 7,429 $ 7,523 $8,559 $ 8,620
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and market value of securities available for
sale as of September 30, 1997 and December 31, 1996, are as follows:
1997 1996
--------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US government
corporations and agencies $30,792 $30,845 $32,161 $32,110
Obligations of states and
political subdivisions 100 99
Other investments 1,136 958 1,136 946
------ ------ ----- ------
Total $32,028 $31,902 $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 September 30, 1997 and
December 31, 1996, is as follows:
1997 1996
Commercial $26,728 $ 25,104
Real estate-construction 2,083 2,158
- mortgages 75,945 70,829
Consumer installment 31,154 28,693
------ -------
Total 135,910 126,784
Unearned interest (2,536) (2,184)
------ -------
Net loans outstanding $133,374 $124,600
======= =======
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
nine months ended September 30, 1997 and 1996, follows:
1997 1996
Balance, beginning of period $ 1,257 $ 1,319
Provisions charged to operating expenses 135 105
Loan recoveries 121 101
Loan charge-offs (182) (260)
------ -------
Balance, end of period $ 1,331 $ 1,265
====== =======
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Year to Date Operations
The Company's nine month income of $1,447,000 represents a 6.22% decline in
total earnings and a decline of 4.67% in earnings per share compared to 1996.
Earnings represented a return of 9.38% on average equity for the first nine
months of 1997 compared to 10.64% for the same period in 1996. Returns on
average assets outstanding for the nine month period ending September 30, 1997
and 1996 were 1.04% and 1.19%, respectively. The decline in earnings was due to
the costs associated with the opening of two new branch locations and a state
refund which was received in 1996 but did recur in 1997.
The tax equivalent net interest income increased by $426,000 in 1997 to
$5,748,000 as compared to 1996. A healthy increase in the level of net earning
assets and a slight increase in the net interest spread were responsible for the
improvement. The increase in earning assets is attributable to a 12.43% 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 15.09% in 1997 compared to 1996 due mainly to
an increase in service charge income. Noninterest expenses increased 15.68% in
1997 due mainly to the additions of new branches in Keyser and Baker and the
costs associated with their start up.
Quarter Ending September 30 Operations
Net income for the quarter ending September 30, 1997 declined 7.32% when
compared to 1996 operations. Increases in personnel and other expenses resulting
from new branch operations were the primary reason for the increase. Income tax
expense increased due to a refund received in 1996 that did not recur in 1997.
Offsetting these cost increases were a 10.18% increase in nonoperating income
and a 4.65% 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 $5,748,000
in the first nine months of 1997 compared to $5,322,000 for 1996. The 8.00%
increase was due to an increase in net average earning assets (earning assets
less interest bearing liabilities) and an increased spread (the difference in
rates earned on assets and paid on liabilities) from 3.40% in 1996 to 3.53% in
1997. Average loans outstanding grew by 12.43% from 1996 to 1997. This growth
reflects good local and national 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 September 30, 1997 increased 11.02% over amounts at
September 30, 1996 and 9.39% 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 increase in the tax equivalent
net interest margin for 1997 over the 1996 amounts is the result of slight
declines in the costs of funds on all types of deposit accounts and an
annualized growth in earning assets of 8.59%. 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
slightly during this period.
Quarter Ending September 30 Operations
The Company's net interest income on a tax equivalent basis of $1,936,000
was 4.31% of earning assets for the quarter ending September 30, 1997 compared
to $1,850,000 (4.38% of earning assets) 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 dropped. Yields on
investment securities and short term investments fluctuated little from 1996
operations. A decrease in rates paid on interest bearing liabilities was offset
by a decline in the yields on loans. The result was a slight drop in the net
interest margin percentage from 4.38% to 4.31%. The Company expects future
deposit rates to remain stable or decline slightly in the last quarter of 1997
as local rates on deposits move towards those of state and national competition.
Rates on loans will be heavily influenced by the local economy and to a lesser
degree by national policy changes.
A complete yield analysis is shown as Table I on page 17.
Noninterest Income
Year to Date Operations
Noninterest income for the year to date ending September 30, 1997 increased
15.09% from year to date amounts at September 30, 1996. An increase in service
charge income of 24.71% was the result of a new fee structure on deposit
accounts. Additionally, the prior year saw a small loss of $2,000 on security
transactions while the current year saw a gain of $6,000 on such transactions.
Quarter Ending September 30 Operations
Noninterest income for the quarter ending September 30, 1997 increased
10.18% compared to 1996 operations as the result of higher service charges
(explained above) and increased income from insurance operations.
<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 15.68% in the first nine months of
1997 when compared to the same period in 1996. Personnel expenses increased
17.06% as the result of an increase in the equivalent number of employees.
Occupancy and equipment expenses increased 13.56% as the result of new branch
locations and expanded facilities in other areas. Data processing expenses
increased by 13.99% 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 14.25% due to asset growth and expansion.
While the increase in noninterest expenses of 15.68% is higher than the 7.20%
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 year.
Quarter Ending September 30 Operations
Overall, noninterest expenses increased 9.13% for the quarter ending
September 30, 1997 compared to the quarter ending September 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 $8,774,000 or 7.04% in the first nine 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 79.99% at
September 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 $92,000 of nonperforming
loans at September 30, 1997 compared to zero at June 30, 1997 and December 31,
1996.
Real estate acquired through foreclosure was $95,000 at September 30, 1997
compared to $160,000 at December 31, 1996. All foreclosed property held at
September 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 September 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Balance, beginning of period $ 1,290 $ 1,305 $ 1,257 $ 1,319
Net charge-offs (recoveries)
Charge-offs 32 121 182 260
Recoveries (28) (36) (121) (101)
------ ------ ------ ------
Total net charge-offs * 4 85 61 159
Provision for credit losses 45 45 135 105
------ ------ ------ ------
Balance, End of Period $ 1,331 $ 1,265 $ 1,331 $ 1,265
====== ====== ====== ======
* Components of net charge-offs:
Rest estate - construction 6 (1)
- mortgages 1 8 20
Commercial (3) 39 13 44
Installment 6 40 40 96
--- ------ ---- ----
Total $ 4 $ 85 $ 61 $ 159
====== ====== ====== ======
The allowance for credit losses, of $1,331,000 at September 30, 1997, was up
$41,000 from its level at June 30, 1997, and up $74,000 from December 31, 1996
levels. The allowance was equal to 1.00%, .98% and 1.01% of total loans at
September 30, 1997, June 30, 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 September 30, 1997 were
$40,046,000 compared to $42,254,000 at December 31, 1996. Securities as percent
of total assets were 21.03% at September 30, 1997 compared to 23.63% at December
31, 1996. The decline in securities is a result of controlled loan growth,
increases in short term investments and moderate deposit growth 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 September 30, 1997, the cost of the securities
available for sale exceeded their market value by $126,000 ($80,000 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 6.13% between December 31, 1996 and September 30,
1997, generally in all areas, except noninterest bearing accounts. The cost of
funds for the first nine months of 1997 was 5.02% 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 nine months 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. This amount was repaid in the
third quarter of 1997. In addition, short term borrowings of $1,000,000 (which
remain outstanding at September 30, 1997) 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 September 30, 1997, the Company's total risk based capital ratio
was 18.59% which is far above the regulatory minimum of 8.0%. The ratio of total
capital to total assets was 10.96% at September 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 a large 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 September 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>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 26,549 $ 1,781 8.94% $ 21,843 $ 1,528 9.33%
Consumer 27,035 2,314 11.41% 25,503 2,188 11.44%
Real Estate 75,822 4,976 8.75% 67,749 4,524 8.90%
------- ------- ------ ------- ------- ------
Total 129,406 9,071 9.35% 115,095 8,240 9.54%
Federal funds sold 4,906 206 5.60% 5,764 234 5.41%
Interest bearing deposits 715 26 4.85% 927 38 5.47%
Investments
Taxable 37,372 1,771 6.32% 39,747 1,856 6.23%
Tax exempt (1) 3,592 225 8.35% 4,174 262 8.37%
------- ------- ------ ------- ------- ------
Total Earning Assets (1) 175,991 11,299 8.55% 165,707 10,630 8.55%
------- ------- ------ ------- ------- ------
Interest Expense
Demand deposits 27,706 587 2.82% 26,764 583 2.90%
Savings 18,541 489 3.52% 17,487 464 3.54%
Time deposits 99,722 4,407 5.89% 93,102 4,255 6.09%
Other borrowed money 1,517 68 5.98% 150 6 5.33%
------- ------- ------ ------- ------- ------
Total Interest Bearing
Liabilities 147,486 5,551 5.02% 137,503 5,308 5.15%
------- ------- ------ ------- ------- ------
Net Interest Margin $ 5,748 $ 5,322
======= ======
Net Yield on Interest
Earning Assets (1) 4.35% 4.28%
====== ======
(1) Yields are on a taxable equivalent basis using an assumed tax rate of 34%.
</TABLE>
<PAGE> 17
Table I (Continued)
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Rate Related Income
Loans
Commercial $ 26,739 $ 602 9.00% $22,399 $ 519 9.27%
Consumer 27,843 793 11.39% 26,291 756 11.50%
Real Estate 77,980 1,708 8.76% 68,857 1,542 8.96%
------- ------- ------ ------ ------- ------
Total 132,562 3,103 9.36% 117,547 2,817 9.59%
Federal funds sold 5,854 84 5.74% 4,008 58 5.79%
Interest bearing deposits 529 7 5.29% 907 12 5.29%
Investments
Taxable 36,974 585 6.33% 42,233 668 6.33%
Tax exempt (1) 3,560 74 8.31% 4,162 87 8.36%
------- ------- ------ ------- ------- ------
Total Earning Assets (1) 179,479 3,853 8.59% 168,857 3,642 8.63%
------- ------- ------ ------- ------- ------
Interest Expense
Demand deposits 27,874 210 3.01% 26,174 193 2.95%
Savings 18,883 167 3.54% 17,609 156 3.54%
Time deposits 102,850 1,509 5.87% 95,744 1,441 6.02%
Other borrowed money 2,003 31 6.19% 146 2 5.48%
------- ------- ------ ------- ------- ------
Total Interest Bearing
Liabilities 151,610 1,917 5.06% 139,673 1,792 5.13%
------- ------- ------ ------- ------- ------
Net Interest Margin $ 1,936 $ 1,850
======= =======
Net Yield on Interest
Earning Assets (1) 4.31% 4.38%
====== ======
(1) Yields are on a taxable equivalent basis using an assumed tax rate of 34%.
</TABLE>
<PAGE> 18
TABLE II
<TABLE>
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
SEPTEMBER 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 $19,259 $ 40,896 $ 44,732 $ 10,774 $17,713 $133,374
Fed funds sold 7,070 7,070
Securities 6,983 6,645 16,375 5,098 4,945 40,046
Time deposits in
other banks 153 400 100 653
------ ------- ------- ------- ------ ------
Total 33,465 47,941 61,207 15,872 22,658 181,143
------- ------- ------- ------- -------- ----------
INTEREST BEARING LIABILITIES
Transaction accounts 16,348 16,348
Money market accounts 12,614 12,614
Savings accounts 19,539 19,539
Time deposits more
than $100,000 2,387 12,384 6,751 1,889 23,411
Time deposits less
than $100,000 12,444 37,329 25,176 4,544 340 79,833
Other borrowed money 1,005 14 42 48 54 1,163
------ ------- ------- ------- ------ ------
Total 64,337 49,727 31,969 6,481 394 152,908
------- ------- ------- ------ ----- ----------
Rate sensitivity GAP (30,872) (1,786) 29,238 9,391 22,264 28,235
Cumulative GAP (30,872) (32,658) (3,420) 5,971 28,235
GAP as a percentage
of rate sensitive assets (17.04%) (18.03%) (1.89%) 3.29% 15.58%
Assumes all transaction and money market 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 - 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 Bank-
shares, Inc. are incorporated
by reference to Appendix D to
Highlands Bankshares, Inc.'s
Form S-4 filed October 20,
1986.
27 Financial Data Schedule
attached
(b) Reports on Form 8-K filed during the
nine months ended September 30,
1997.
None
<PAGE> 20
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
September 30, 1997 21
<PAGE> 22
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 November 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,495
<INT-BEARING-DEPOSITS> 653
<FED-FUNDS-SOLD> 7,070
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,902
<INVESTMENTS-CARRYING> 7,429
<INVESTMENTS-MARKET> 7,523
<LOANS> 133,374
<ALLOWANCE> (1,331)
<TOTAL-ASSETS> 190,465
<DEPOSITS> 166,745
<SHORT-TERM> 1,005
<LIABILITIES-OTHER> 1,687
<LONG-TERM> 158
0
0
<COMMON> 2,734
<OTHER-SE> 18,136
<TOTAL-LIABILITIES-AND-EQUITY> 190,465
<INTEREST-LOAN> 9,071
<INTEREST-INVEST> 1,913
<INTEREST-OTHER> 232
<INTEREST-TOTAL> 11,216
<INTEREST-DEPOSIT> 5,483
<INTEREST-EXPENSE> 5,551
<INTEREST-INCOME-NET> 5,665
<LOAN-LOSSES> 135
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 3,852
<INCOME-PRETAX> 2,189
<INCOME-PRE-EXTRAORDINARY> 1,447
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,447
<EPS-PRIMARY> 2.86
<EPS-DILUTED> 2.86
<YIELD-ACTUAL> 4.35
<LOANS-NON> 92
<LOANS-PAST> 518
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,257
<CHARGE-OFFS> 182
<RECOVERIES> 121
<ALLOWANCE-CLOSE> 1,331
<ALLOWANCE-DOMESTIC> 1,331
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
