SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997 Commission file number: 0-16761
Highlands Bankshares, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0650743
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 929, Petersburg, West Virginia 26847
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (304) 257-4111
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $5 Par
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ..X. No ....
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $15,655,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of March 1, 1998 - most recent bid price $53.00
most recent ask price $55.00
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of March 1, 1998 -
501,898
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement of Highlands Bankshares, Inc. filed via Form DEF 14A on
March 18, 1998.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on pages 46-47.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT YES NO X
<PAGE>
FORM 10-KSB INDEX
Page
Part I
Item 1. Description of Business 3
General
Services Offered by the Banks
Employees
Competition
Regulation and Supervision
Item 2. Description of Properties 4
Item 3. Legal Proceedings 5
Item 4. Results of Votes of Security Holders 5
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation 6
Item 7. Financial Statements 24
Item 8. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure 46
Part III
Item 9. Directors and Executive Officers 46
Item 10. Executive Compensation 46
Item 11. Security Ownership of Certain Beneficial Owners
and Management 46
Item 12. Certain Relationships and Related Transactions 46
Part IV
Item 13. Exhibits and Reports on Form 8-K 46
Signatures 48
<PAGE> 3
Part I
Item 1. Description of Business
General
Highlands Bankshares, Inc. (Highlands), incorporated under the laws of West
Virginia in 1985, is a multi-bank holding company subject to the provisions of
the Bank Holding Company Act of 1956, as amended, and owns 100% of the
outstanding stock of its subsidiary banks, The Grant County Bank and Capon
Valley Bank (hereinafter referred to as the "Banks") and its life insurance
subsidiary, HBI Life Insurance Company (HBI Life). Capon Valley Bank became a
member of Highlands effective July 1, 1987, in a combination accounted for as a
pooling of interests.
The Grant County Bank was chartered on May 20, 1902, and Capon Valley Bank
was chartered on July 1, 1918. Both are state banks chartered under the laws of
the State of West Virginia. HBI Life was chartered in April 1988 under the laws
of the State of Arizona.
Services Offered by the Banks
The banks offer all services normally offered by a full service commercial
bank, including commercial and individual demand and time deposit accounts,
commercial and individual loans, drive-in banking services and automatic teller
machine banking. No material portion of the banks' deposits have been obtained
from a single or small group of customers and the loss of the deposits of any
one customer or of a small group of customers would not have a material adverse
effect on the business of the banks. Credit life accident and health insurance
are sold to customers of the subsidiary banks through HBI Life Insurance
Company.
Employees
As of December 31, 1997, The Grant County Bank had 43 full time equivalent
employees and Capon Valley Bank had 36 full time equivalent employees. No person
is employed by Highlands or HBI Life on a full time basis.
Competition
The banks' primary trade area is generally defined as Grant County, Hardy
County, Mineral County and the northern part of Pendleton County. This area
includes the cities of Petersburg, Wardensville, Moorefield and Keyser and
several rural towns. The banks compete with three state chartered banks and two
national banks. No financial institution has been chartered in the area within
the last five years although branches of state and nationally chartered banks
have located in this area within this time period. Competition for new loans and
deposits in the banks' service area is quite intense and all competition has
been forced to pay rates on deposits which exceed the national averages.
The banks' secondary trade area includes portions of Hampshire County in
West Virginia and Frederick County in Virginia. In addition, the banks compete
with money market mutual funds and investment brokerage firms for deposits in
their service area.
Regulation and Supervision
Highlands is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934. These include, but are not limited to, the
filing of annual, quarterly and other current reports with the Securities and
Exchange Commission.
<PAGE> 4
Regulation and Supervision (Continued)
Highlands, as a bank holding company, is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Act"). It is registered as
such and is supervised by the Federal Reserve Board. The Act requires Highlands
to secure the prior approval of the Federal Reserve Board before Highlands
acquires ownership or control of more than five percent of the voting shares, or
substantially all of the assets of any institution, including another bank.
As a bank holding company, Highlands is required to file with the Federal
Reserve Board an annual report and such additional information as it may require
pursuant to the Act. The Federal Reserve Board may also conduct examinations of
Highlands and any or all of its subsidiaries. Under Section 106 of the 1970
Amendments to the Act and the regulations of the Federal Reserve Board, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit, provision of
credit, sale, or lease of property or furnishing of services.
Federal Reserve regulations permit bank holding companies to engage in
nonbanking activities closely related to banking or to managing or controlling
banks. These activities include the making or servicing of loans, performing
certain data processing services, and certain leasing and insurance agency
activities. HBI Life acts as reinsurer of the credit life insurance coverage
sold by the Banks to bank customers. Approval of the Federal Reserve Board is
necessary to engage in any of these activities or to acquire corporations
engaging in these activities.
The operations of the Banks are subject to federal and state statutes which
apply to state chartered banks. Bank operations are also subject to the
regulations of the Federal Deposit Insurance Corporation (the "FDIC"), which
insures the banks' deposits. In addition, the Capon Valley Bank is a member of
the Federal Reserve Bank System and is subject to the regulations of the Federal
Reserve Bank Board.
The supervisory authorities regularly examine such areas as reserves, loans,
investments, management practices, and other aspects of the banks' operations.
These examinations are designed primarily for the protection of depositors. In
addition to these regular examinations, the banks must furnish the various
regulatory authorities quarterly reports containing a full and accurate
statement of its affairs.
The operations of the insurance subsidiary are subject to the oversight and
review of State of Arizona Department of Insurance.
Item 2. Description of Properties
The Grant County Bank's main office is located on Main Street in Petersburg,
West Virginia. The Bank recently modernized its existing facility which included
an additional 6,000 square feet of operating space and new, state-of-the-art
drive-up facilities. An automatic teller machine allows customers greater
flexibility in their banking transactions. In late 1996, the Bank opened a full
service branch in Mineral County to serve the Keyser area. This facility is
owned by the Bank and features state-of-the-art drive-up facilities and an
automatic teller machine. The Bank also has a branch in Riverton, West Virginia
which provides banking services in northwest Pendleton County. The Riverton
branch building has an annual lease while the main and Keyser office facilities
are owned by the Bank.
Capon Valley Bank has its main office in Wardensville, West Virginia and
branch offices located in Moorefield and Baker, West Virginia. Capon completed
the expansion of its Moorefield facilities in 1995 and it provides improved
drive-up capabilities and lobby service areas. The Bank opened its new Baker
branch in April of 1997 to serve the customer base between Moorefield and
Wardensville. This facility includes state-of-the-art drive in and automatic
teller operations. All facilities are owned by the Bank and considered adequate
for current operations.
<PAGE> 5
Item 3. Legal Proceedings
Management is not aware of any material pending or threatened litigation in
which Highlands or its subsidiaries may be involved as a defendant. In the
normal course of business the banks periodically must initiate suits against
borrowers as a final course of action in collecting past due loans.
Item 4. Results of Votes of Security Holders
Highlands has not submitted any matters to the vote of security holders for
the quarter ending December 31, 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company had approximately 840 stockholders of record as of March 1,
1997. The Company's stock is not traded on any national or regional stock
exchange although brokers in Cumberland, Maryland, Winchester and Harrisonburg,
Virginia may occasionally initiate or be a participant in a trade. Terms of an
exchange between individual parties may not be known to the Company. The
following outlines the dividends paid and market prices of the Company's stock
based on prices disclosed to management. Such prices may not include retail
mark-ups, mark-downs or commissions.
Dividends Market Price Range
1997 Per Share High Low
---- --------- ---- ---
First Quarter $ .25 $ 44.25 $ 41.00
Second Quarter .25 45.00 43.00
Third Quarter .25 46.86 44.00
Fourth Quarter .25 46.50 44.75
1996
First Quarter $ .18 $ 39.88 $ 38.00
Second Quarter .18 40.50 38.00
Third Quarter .18 40.50 39.00
Fourth Quarter .40 42.00 40.50
1995
First Quarter $ .16 $ 40.25 $ 39.00
Second Quarter .16 40.00 39.50
Third Quarter .16 41.25 37.00
Fourth Quarter .35 41.00 38.50
<PAGE> 6
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The net income of the Company declined 6.61% in 1997 compared to 1996
operations. While the net interest margin increased due to higher levels of
earning assets, noninterest expenses increased due to a full year of operations
of the branch in Keyser and eight months of operations at the Baker branch. In
addition, the Company had an increase in losses on security transactions due to
a recognized loss on the redemption of a mutual fund in the fourth quarter of
the year.
Average assets for the year increased 6.77% for 1997 when compared to 1996.
Increases in average loans outstanding of 11.97% were funded by increases in
average deposits of 6.35% and declines in investment securities of 8.59%.
Average stockholders' equity increased 6.11% for the year due to retained
operating earnings and increases in the market value of securities available for
sale.
The Company purchased treasury stock to be used for future business purposes
totaling $499,000 in 1997. Year end stockholders' equity increased 5.28% to
$21,297,000 at year end. This represents an equity/asset ratio of 11.16% and is
higher than most of our competitors. For 1997, the Company paid dividends
totaling 26.84% of income compared with 24.00% in 1996 and 23.03% in 1995.
The following outlines returns on equity and average assets for the period
of 1995 to 1997:
1997 1996 1995
---- ---- ----
Return on average equity 8.80% 9.99% 10.15%
Return on average assets 1.00% 1.15% 1.16%
A complete five year summary of operations appears as Table I on page 20.
The Company's yield on earning assets remained unchanged in 1997 as slight
declines in the yields on loans were offset by slight increases in the yields on
investments and federal funds sold. Declines in the cost of time deposits was
responsible for an eleven basis point decline in the cost of funds and thus a
three basis point increase in the overall net yield on earning assets. The
Company's loan/deposit ratio was 81.64% at December 31, 1997 compared with
79.31% at December 31, 1996. The increase is reflective of the strong national
and local economies and relatively low market rates. The Company expects
moderate loan growth in 1998 at a rate slightly lower than the 1997 growth rate.
The current loan/deposit ratio is reflective of the Company's commitment to
serve the local communities and provide financing for local investment.
Net Interest Margin
1997 compared to 1996
The Company's net interest income on a tax equivalent basis increased to
$7,721,000 for 1997 or 7.10% higher than the amount for 1996. Yields on loans
declined slightly (seventeen basis points) due to declines in mortgage rates.
The mortgage rate decline was the result of declines in the rate on long-term
government bonds and other market yields. Yields on investment securities
increased three basis points while yields on federal funds sold increased
eighteen basis points. The result of the above was a yield on earning assets of
8.55%, the same as the 1996 yield.
<PAGE> 7
Net Interest Margin (Continued)
1997 compared to 1996 (Continued)
The Company's overall cost of funds declined by eleven basis points in 1997
to 5.04%. The decline was primarily in the area of time deposits with a decline
of nineteen basis points. The decline was due to the maturity of higher costing
certificates that originated in 1995 and matured in the summer and fall of 1997.
Lesser reductions in the cost of demand and savings deposits were also
contributors to the decline in the cost of deposits.
Management believes the cost of funds will decline slightly in 1998 despite
considerable competition in all geographical locations that have kept rates
above the national averages. While it expects that yields on loans should remain
relatively stable, changes in the monetary policies of the Federal Reserve Bank
could have an immediate impact on the yields of federal funds sold and new
investment securities purchased.
A summary of the net interest margin analysis is shown as Table II on Page
21.
1996 compared to 1995
The Company's net interest margin on a tax equivalent basis was $7,209,000
for 1996, an increase of 8.39% over amounts for 1995. Increases in rates on
earning assets (fifteen basis points higher) were offset by higher rates paid on
certificates of deposit (39 basis points higher). Rates on contracts entered
into in 1995 are primarily responsible for the above average cost of funds.
Rates paid on certificates of deposit originated in 1996 were lower as the rates
paid on deposits in the local community declined to rates more in line with
state and national averages. Greater earnings were the result of volume
increases, mostly in the area of loan growth.
The deposit growth of 9.19% in 1996 provided funding for loan and security
growth. The deposit growth, lower levels of federal funds sold and lower
interest bearing deposits in other banks provided the funding for a 18.30%
increase in average investment securities. Federal funds sold declined in 1996
as rates declined by 31 basis points. Federal Reserve monetary policy dictated
the yields of federal funds sold and 1996 saw only limited changes in the fed's
policies. Tax equivalent yields increased on an overall basis by fifteen basis
points as lower yielding investments matured and were reinvested at higher
rates.
Average interest bearing deposits increased 8.38% in 1996, mainly in the
areas of time deposits. The rate declines for demand and savings accounts
continued with a 21 and 31 basis point decline, respectively. Rates on time
deposits increased 39 basis points and reflected high rates paid on certificates
originated in 1995. The overall cost of deposits increased by 26 basis points
which was slightly higher than the increase in the overall yield on earning
assets of fifteen basis points. The higher level of earning assets than interest
bearing liabilities tempered this slight difference in rates earned and paid.
The results were a net interest margin of 4.32% for 1996 compared to the 1995
margin of 4.34%.
Provision and Allowance for Loan Losses
The Company's allowance for loan losses (the allowance against which future
losses will be charged) at December 31, 1997 increased $112,000 when compared to
the prior year end balance. As a percentage of loans outstanding, the allowance
was 1.00% at December 31, 1997 compared to 1.01% at December 31, 1996 and 1.16%
at December 31, 1995. Net charge offs declined to $78,000 in 1997 compared to
$197,000 in 1996 and $255,000 in 1995. The provision for loan losses was
increased to $190,000 in 1997 from $135,000 in 1996 due to the increase in
average loans outstanding. The Company's three year average charge off rate of
.15% is in line with industry standards and its peer group.
<PAGE> 8
Provision and Allowance for Loan Losses (Continued)
The Company did not have any loans in nonaccrual status as of December 31,
1997 or 1996. Loans contractually past due 90 days or more increased $866,000 to
$1,247,000 at December 31, 1997. This increase was due to the delinquency of a
single large borrower whose operations are tied to the poultry industry and an
unusually low level of delinquencies in the prior year. The Company is
adequately secured on these delinquencies and believes losses, if any, on these
loans will be minimal. Future loan losses in the entire loan portfolio may be
impacted by the problems currently being experienced by the poultry industry
which is a major employer in the Banks' service areas. Turkey prices have been
at historically low levels due to an oversupply of product. Compounding the
pricing problem has been high grain prices and high poult mortality levels. If
such problems continue into 1998, some poultry operators may not be able to
service their loans on their original terms and the value of the Company's
collateral may decline. The Company monitors this situation closely and believes
the current level of the allowance adequately addresses this problem.
Noninterest Income
1997 compared to 1996
Overall noninterest income declined in 1997 by 3.48% when compared with 1996
operations. The Company experienced a loss on the redemption of a mutual fund
investment that was redeemed in 1997. A loss of $123,000 was recognized on the
redemption though the Company may recover a portion of this loss in the
resolution of pending legal actions. Exclusive of the above, noninterest income
before security losses increased 10.77% as the result of higher service charges
on deposit accounts and the institution of minimum balance requirements on some
deposit accounts. Other types of noninterest income increased slightly in line
with asset growth. The Company expects future growth in noninterest income to
coincide with asset and deposit growth.
1996 compared to 1995
Service charge income increased 23.50% in 1996 compared to 1995 due to
increases in the levels of deposits and a full year of operations under an
increased fee structure implemented in 1995. Insurance commission income was
virtually unchanged ($162,000 in 1996 compared to $160,000 in 1995). Other
operating income declined 8.10%, the result of a bond loss recovery of $40,000
recognized in 1995 that was not repeated in 1996. Losses on security
transactions increased by $20,000 as the Company disposed of some
underperforming investments and reinvested the proceeds in higher yielding
obligations.
Noninterest Expenses
1997 compared to 1996
Total noninterest expenses increased 11.94% in 1997 when compared with 1996
operations. Salaries and benefits increased 13.41% due to the increase in staff
at the new branches and merit and inflationary raises. Average full time
equivalent employees increased 9.60% in 1997 and staffing the new branches was
the major reason for this increase. The costs of occupancy and equipment
increased 11.09% due to the branch openings and the equipment costs and
depreciation associated with this expansion. Data processing expenses increased
by 12.47% due to new communication lines, general asset growth and expanded
locations. Other noninterest expenses increased 8.92% in 1997 for all of the
reasons cited above. The overall noninterest expense as a percentage of average
assets was 2.73% in 1997 compared to 2.61% in 1996 and 2.62% in 1995. While the
ratio increased slightly in 1997, it is in line with peer group averages and was
expected by management.
<PAGE> 9
Noninterest Expenses (Continued)
1996 compared to 1995
Noninterest expenses rose 9.03% in 1996 when compared with 1995 operations.
Salaries and benefits rose 11.99% due to merit and inflationary raises, changes
in the employees' benefit packages and an increase in the number of full time
equivalent employees. Part of the increase was due to salaries paid new
employees for the Keyser branch during their training period. Occupancy and
equipment expenses rose 43.67% in 1996 as the Company incurred additional costs
in the expansion of facilities at Petersburg and Moorefield. In addition, the
Moorefield facility suffered flood damage in September of 1996 which was
responsible for about forty percent of the 1996 increase. FDIC insurance
expenses declined to almost zero in 1996 as insurance rates were virtually
eliminated in the second half of 1995. Data processing expense rose 5.61% due to
expanded volume and rate increases. Other noninterest expense increased 6.45%
due to inflation and asset growth. The overall noninterest expense as a
percentage of average assets was 2.61% for 1996 which is approximately the same
as in prior years.
Financial Condition
Loan Portfolio
The Company is an active residential mortgage and construction lender and
generally extends commercial loans to small and medium sized businesses within
its primary service area. The Company's commercial lending activity extends
across its primary service areas of Grant, Hardy, Hampshire, Mineral and
northern Pendleton counties. Consistent with its focus on providing
community-based financial services, the Company does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels, consumer
confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based upon
the strength and activity of the local economies of the Company's market areas.
The risk associated with real estate construction loans varies based upon the
supply of and demand for the type of real estate under construction.
Loans outstanding at December 31, 1997 increased 10.04% from amounts
outstanding at December 31, 1996. Commercial loans showed a 22.36% increase,
installment loans a 9.31% increase and real estate mortgages a 6.20% increase.
The loan to deposit ratio of 81.64% at December 31, 1997 was an increase over
the level of 79.31% at December 31, 1996 and 77.13% at December 31, 1995.
<PAGE> 10
Financial Condition (Continued)
Loan Portfolio (Continued)
The following table summarizes the Company's loan portfolio, net of
unearned income:
At December 31,
1997 1996 1995
(Dollars in Thousands)
Real Estate:
Mortgage $ 75,221 $ 70,829 $ 65,971
Construction 2,189 2,158 2,622
Commercial 30,716 25,104 20,749
Installment 31,492 28,693 26,740
------- ------- -------
139,618 126,784 116,082
Less unearned discount (2,513) (2,184) (2,147)
------- ------- -------
137,105 124,600 113,935
Allowance for loan losses (1,369) (1,257) (1,319)
------- ------- -------
Loans, net $135,736 $123,343 $112,616
======= ======= =======
The following table shows the maturity of loans outstanding (in thousands
of dollars) as of December 31, 1997, 1996 and 1995.
Maturity Range 1997 1996 1995
-------------- ---- ---- ----
Predetermined Rates:
0 - 12 months $ 63,117 $ 45,402 $ 57,049
13 - 60 months 54,070 68,879 49,973
More than 60 months 19,918 10,319 6,818
Nonaccrual Loans 95
Total Loans $137,105 $124,600 $113,935
======= ======= =======
The following table shows the Company's loan maturity distribution (in
thousands of dollars) as of December 31, 1997:
Maturity Range
Less Than 1-5 Over
Loan Type 1 Year Years 5 Years Total
--------- ------- ----- ------- -----
Commercial and
Agricultural Loans $ 23,833 $ 5,280 $ 1,603 $ 30,716
Real Estate - mortgage 30,053 27,171 17,997 75,221
Real Estate - construction 2,189 2,189
Consumer - installment 7,042 21,619 318 28,979
------- ------- ------- -------
Total $ 63,117 $ 54,070 $ 19,918 $137,105
======= ======= ======= =======
<PAGE> 11
Financial Condition (Continued)
Loan Portfolio (Continued)
Nonperforming loans include nonaccrual loans, loans 90 days or more past
due and restructured loans. Nonaccrual loans are loans on which interest
accruals have been discontinued. Loans which reach nonaccrual status may not be
restored to accrual status until all delinquent principal and interest has been
paid or the loan becomes both well secured and in the process of collection.
Restructured loans are loans with respect to which a borrower has been granted a
concession on the interest rate or the original repayment terms because of
financial difficulties. Loans classified for regulatory purposes as loss,
doubtful, substandard, or special mention do not represent or result from trends
or uncertainties which management reasonably expects will materially impact
future operating results, liquidity, or capital resources, or represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Nonperforming loans are listed in the table below. Real estate acquired
through foreclosure was $174,000 at December 31, 1997, $160,000 at December 31,
1996 and $269,000 at December 31, 1995. All foreclosed property held at December
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.
Management has continued its efforts to reduce delinquencies through
greater efforts in the early stages of the delinquency. The increase in 1997 is
due to the delinquent status of a small number of borrowers whose income can be
cyclical. Management does not anticipate any material losses from the current
level of nonperforming assets.
The following table summarizes the nonperforming loans:
At December 31,
1997 1996 1995
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis $ 0 $ 0 $ 95
Loans contractually past due 90 days or
more as to interest or principal
payments (not included in nonaccrual
loans above)
Commercial 17 63 487
Real estate 938 208 479
Installments 292 110 115
------ ----- ------
Total Delinquent Loans 1,247 381 1,081
------ ----- ------
Total Nonperforming Loans $ 1,247 $ 381 $ 1,176
====== ===== ======
As of December 31, 1997, the Company did not have any potential problem
loans as defined in Guide 3 that would require disclosure.
<PAGE> 12
Allowance for Loan Losses
Management has analyzed the potential risk of loss on the Company's loan
portfolio given the loan balances and the value of the underlying collateral and
has recognized losses where appropriate. Nonperforming loans are closely
monitored on an ongoing basis as part of the Company's loan review process.
Management reviews the loan loss allowance at the end of each quarter. Based
primarily on the Company's loan classification system, which classifies problem
credits as substandard, doubtful or loss, additional provisions for losses are
made monthly. The ratio of the allowance for loan losses to total loans
outstanding was 1.00% at December 31, 1997 compared to 1.01% at December 31,
1996 and 1.16% at December 31, 1995. At December 31, 1997, the ratio of the
allowance for loan losses to nonperforming loans was 109.78% compared to 329.92%
at December 31, 1996 and 112.16% at December 31, 1995.
The following table summarizes changes in the allowance for loan losses:
Year Ending December 31,
1997 1996 1995
(In Thousands of Dollars)
Balance at beginning of period $1,257 $1,319 $1,454
----- ----- -----
Loan Losses:
Commercial and agricultural 34 92 129
Real estate - mortgage 20 59 95
Installment loans to individuals 170 186 156
----- ----- -----
Total loan losses 224 337 380
----- ----- -----
Recoveries:
Commercial and agricultural 9 9 12
Real estate - mortgage 25 15 11
Installment loans to individuals 113 116 102
----- ----- -----
Total recoveries 147 140 125
----- ----- -----
Net loan losses 77 197 255
----- ----- -----
Additions charged to operations 190 135 120
----- ----- -----
Balance at end of period $1,370 $1,257 $1,319
===== ===== =====
The Company has allocated the allowance for loan losses according to the
amounts deemed to be reasonably necessary to provide for the possibility of
losses incurred within each of the above categories of loans. The allocation of
the allowance as shown in the table below should not be interpreted as an
indication that loan losses in future years will occur in the same proportions
or that the allocation indicates future loan loss trends. Furthermore, the
portion allocated to each loan category is not the total amount available for
future losses that might occur within such categories since the total allowance
is a general allowance applicable to the entire portfolio.
<PAGE> 13
Allowance for Loan Losses (Continued)
The following table shows the balance and percentage of the Company's
allowance for loan losses allocated to each major category of loans:
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
Percent Percent Percent
of of of
Loans Loans Loans
Percent in Percent in Percent in
of Category of Category of Category
Allow- to Total Allow- to Total Allow- to Total
Amount ance Loans Amount ance Loans Amount ance Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 343 25% 22% $ 314 25% 18% $ 325 25% 18%
Real estate
mortgage 548 40 56 440 35 59 463 35 60
Installment 343 25 22 314 25 23 368 28 22
Unallocated 136 10 189 15 163 12
------- --- --- ------- ---- ---- ------- ----
$ 1,370 100% 100% $ 1,257 100% 100% $ 1,319 100% 100%
======= ==== ==== ======= ==== ==== ======= ==== ====
</TABLE>
For each period presented, the provision for loan losses charged to
operations is based on management's judgment after taking into consideration all
factors connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include internally generated loan review reports, previous
loan loss experience with the borrower, the status of past due interest and
principal payments on the loan, the quality of financial information supplied by
the borrower and the general financial condition of the borrower.
Loan losses in 1997 were spread over all loan types with no individual loss
constituting a significant portion of the total. Recoveries are unpredictable
and 1997 showed a slightly higher recovery rate than the prior year. The net
credit losses of $77,000 were slightly below management expectations. Management
does not foresee credit losses to be a significant problem in the near future.
The provision for loan losses totaled $190,000 for the year ended December
31, 1997, $135,000 for 1996 and $120,000 for 1995. In the opinion of management,
the provision charged to operations over this three year period has been
sufficient to absorb the net loan losses.
<PAGE> 14
Securities
The Company's securities portfolio serves several purposes. Portions of the
portfolio are used to secure certain public and trust deposits. The remaining
portfolio is held as investments or used to assist the Company in liquidity and
asset liability management. During 1997, total securities decreased to $37.0
million or 19.38% of total assets at December 31, 1997. Total securities were
$42.3 million or 23.62% of total assets at December 31, 1996.
The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity when management has the intent and the Company has the ability at the
time of purchase to hold the securities to maturity. Held to maturity securities
are carried at cost, adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as available for sale and accounted for at market value. Securities available
for sale include securities that may be sold in response to changes in market
interest rates, changes in the security's prepayment risk, increases in loan
demand, general liquidity needs and other similar factors. The Company's
purchases of securities have generally been limited to securities of high credit
quality with short to medium term maturities.
The Company identifies at the time of acquisition those securities that are
available for sale. These securities are valued at their market value with any
difference in market value and amortized cost shown as an adjustment in
stockholders' equity. Changes within the year in market values are reflected as
changes in stockholders' equity, net of the deferred tax effect. As of December
31, 1997, the market value of the securities available for sale exceeded their
cost by $63,000 ($39,700 after tax considerations).
The following table summarizes the carrying value of the Company's
securities at the dates indicated:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Carrying Value Carrying Value
December 31, December 31,
1997 1996 1995 1997 1996 1995
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasuries, agencies
and corporations $ 751 $ 4,200 $ 5,107 $20,349 $18,304 $14,312
Obligations of states and
political subdivisions 3,295 3,818 4,064 101 200
Mortgage-backed securities 531 541 636 10,665 13,807 13,321
------ ------ ------ ------ ------ ------
Total Debt Securities 4,577 8,559 9,807 31,115 32,111 27,833
Other securities 567 946 1,207
------ ------ ------ ------ ------ ------
Total $ 4,577 $ 8,559 $ 9,807 $31,682 $33,057 $29,040
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 15
Securities (Continued)
The carrying amount and estimated market value of debt securities (in
thousands of dollars) at December 31, 1997 by contractual maturity are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Securities Held to Maturity Carrying Market Average
Amount Value Yield
Due in one year or less $ 760,922 $ 761,983 7.18
Due after one year through five years 1,295,899 1,306,313 4.66
Due after five years through ten years 1,494,296 1,532,908 5.09
Due after ten years 495,108 540,915 7.08
Mortgage-backed securities 530,738 535,545 7.08
-------- --------- -----
Total Held to Maturity $4,576,963 $4,677,664 5.76
========= ========= =====
Securities Available for Sale Amortized Market Average
Cost Value Yield
Due in one year or less $ 5,958,403 $ 5,978,201 5.79
Due after one year through five years 13,269,088 13,378,153 6.48
Due after five years through ten years 1,002,330 991,957 6.85
Due after ten years 100,000 101,467 5.34
Mortgage-backed securities 10,659,595 10,665,813 6.43
---------- ---------- -----
Total Fixed Rate Securities 30,989,416 31,115,591 6.34
Equities 629,908 566,767
-------- ---------
Total Available for Sale $31,619,324 $31,682,358
========== ==========
Yields on tax exempt securities are stated at tax equivalent yields.
Management has generally kept the maturities of investments relatively
short providing for flexibility in investing. Such a philosophy allows the
Company to better match deposit maturities with investment maturities and thus
react more quickly to interest rate changes.
Deposits and Short-Term Borrowings
The Company's predominant source of funds is local deposits. The Company's
deposit base is comprised of demand deposits, savings and money market accounts
and other time deposits. The Company's deposits are provided by individuals and
businesses located within the communities served.
The average balance of interest bearing deposits increased by 6.70% in 1997
over average levels in 1996. The average rate paid on deposits declined to 5.03%
in 1997 from 5.15% in 1996 and 4.89% in 1995. The majority of the Company's
deposits are higher yielding time deposits as most of its customers are
individuals who seek higher yields than savings accounts or don't wish to accept
the risks of the stock market.
<PAGE> 16
Deposits and Short-Term Borrowings (Continued)
The Company does not actively solicit large certificates of deposit (those
more than $100,000) due to the unstable nature of these deposits. Increases in
1997 are the result of overall deposit growth and higher than average rates
offered by the Company. A summary of the maturity of large deposits is as
follows:
December 31,
Maturity Range 1997 1996 1995
-------------- ---- ---- ----
(In Thousands of Dollars)
Three months or less $ 6,086 $ 4,832 $ 2,567
Four to twelve months 8,497 11,360 6,699
One year to five years 8,744 4,667 6,575
------- ------- --------
Total $ 23,327 $ 20,859 $ 15,841
======= ======= ========
Capital Resources
The assessment of capital adequacy depends on a number of factors such as
asset quality, liquidity, earnings performance and changing competitive
conditions and economic forces. The Company seeks to maintain a strong capital
base to support its growth and expansion activities, to provide stability to
current operations and to promote public confidence.
The Company's capital position continues to exceed regulatory minimums. The
primary indicators relied on by the Federal Reserve Board and other bank
regulators in measuring strength of capital position are the Tier 1 Capital,
Total Capital and Leverage ratios. Tier 1 Capital consists of common
stockholders' equity. Total Capital consists of Tier 1 Capital and a portion of
the allowance for loan losses. Risk-based capital ratios are calculated with
reference to risk-weighted assets which consist of both on and off-balance sheet
risks.
The following table shows risk-based capital ratios and stockholders'
equity to total assets:
Regulatory December 31,
Minimum 1997 1996
Capital Ratios
Risk-based capital to risk-weighted assets
Tier 1 4.00% 17.35% 18.85%
Total 8.00% 18.47% 18.82%
Stockholders' equity to total assets 3.00% 11.16% 11.31%
The capital management function is an ongoing process. Central to this
process is internal equity generation accomplished by earnings retention. During
1997, 1996 and 1995, total stockholders' equity increased by $1,068,000,
$1,367,000 and $2,086,000, respectively, as a result of earnings retention and
changes in the unrealized gains (losses) on securities available for sale. The
return on average equity was 8.80% in 1997 compared to 9.99% for 1996 and 10.15%
for 1995. Total cash dividends declared represent 26.84% of net income for 1997
compared to 24.00% of net income for 1996 and 23.03% for 1995. Book value per
share was $42.43 at December 31, 1997 compared to $39.35 at December 31, 1996
and $36.69 at December 31, 1995.
<PAGE> 17
Capital Resources (Continued)
In April of 1997, the Company repurchased 12,168 shares of common stock for
$499,000. The repurchased stock is being held as treasury stock and may be used
in future periods for a variety of business purposes. The stock was repurchased
from the estate of William G. VanMeter for whom the Company's chairman, John
VanMeter, is the executor.
The Company's principal source of cash income is dividend payments from the
Banks. Certain limitations exist under applicable law and regulation by
regulatory agencies regarding dividend payments to a parent by its subsidiaries.
As of December 31, 1997, the Banks had $2,141,000 of retained earnings available
for distribution to the Company as dividends without prior regulatory approval.
Liquidity and Interest Rate Sensitivity
Liquidity. Liquidity is the ability to meet present and future financial
obligations through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. The Company's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of the Company's management of liquid assets and the
ability to generate liquidity through liability funding, management believes
that the Company maintains overall liquidity sufficient to satisfy its
depositors' requirements and meet its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions, the Federal Reserve Bank of Richmond and
the Federal Home Loan Bank of Pittsburgh. In the past, growth in deposits and
proceeds from the maturity of investment securities have been sufficient to fund
the net increase in loans.
The investing activity saw a net increase in loans of $12,504,000 and an
increase in federal funds sold of $4,401,000. New equipment and facility
additions totaled $607,000 in 1997. Funding these investments was a decline in
investment securities of $5,280,000, an increase in deposits of $10,827,000 and
retained operating income (after the purchase of treasury stock) of $877,000.
In the year ending December 31, 1997, cash and due from banks increased
$50,000 as cash provided by operations and financing activities slightly
exceeded cash used in investing activities. Cash provided by operations consists
primarily of earnings from operations and noncash expenses such as the provision
for loan losses, deferred income taxes and depreciation. The dividends paid of
$505,000 in 1997 was an increase of 6.38 percent over 1996 amounts.
The Company is not aware of any trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations. The Company is not aware of any
proposals from any regulatory authority which, if implemented, would have such
an effect.
<PAGE> 18
Liquidity and Interest Rate Sensitivity (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 December 31, 1997, the Company had a negative gap position. This
liability sensitive position typically produces a favorable contribution to
earnings during periods of decreasing rates and an unfavorable contribution to
earnings during a period of increasing rates. Although the financial markets
were in a relatively stable rate environment for 1997, certificates of deposit
entered into in early 1995 continued to affect the overall cost of funds through
the fall of 1997. Absent any major changes in federal reserve policy, the
Company expects a slight decline in the overall cost of money in 1998 due to the
maturity of these certificates and stability in other deposit rates.
With the largest amount of interest sensitive assets and liabilities
repricing within three years, the Company monitors these areas closely. Early
withdrawal of deposits, prepayments of loans and loan delinquencies are some of
the factors that could affect actual versus expected cash flows. In addition,
changes in rates on interest sensitive assets and liabilities may not be equal,
which could result in a change in net interest margin. While the Company does
not match each of its interest sensitive assets against specific interest
sensitive liabilities, it does periodically review its cumulative position of
interest sensitive assets and liabilities.
The majority of the Company's commercial and real estate loans are made
with repricing frequencies of three months to three years. For this reason, 77%
of all loans will reprice within three years of December 31, 1997. Installment
loans generally have a fixed rate of interest but have limited amortization
periods. These loans have an average life to maturity of less than two years.
Management believes that its philosophy of generally requiring loan repricing
within a three to five year period to be the most prudent approach to
asset/liability management.
In the area of investments, the Company employs a management technique
known as "laddering" to minimize interest rate exposures and provide a constant
flow of maturities subject to repricing at current market rates. To assist in
the management of investments, the Company employs an independent investment
counsel that advises it in planning and risk diversification. The Company
utilizes many forms of investment with a significant use of mortgage-backed
securities issued by federally chartered institutions. The Company does not
employ the use of derivatives in its approach to controlling market risk.
Although the majority of its investments are classified as available for sale,
the Company rarely sells securities except in unusual circumstances.
Table IV (page 23) shows the maturity of liabilities and assets in future
periods. Table III (page 22) shows the effects of rate and volume changes on the
net interest margin for the past three year period.
<PAGE> 19
Effects of Inflation
Inflation significantly affects industries having high levels of property,
plant and equipment or inventories. Although the Company is not significantly
affected in these areas, inflation does have an impact on the growth of assets.
As assets grow rapidly, it becomes necessary to increase equity capital at
proportionate levels to maintain the appropriate equity to asset ratios.
Traditionally, the Company's earnings and high capital retention levels have
enabled the Company to meet these needs.
The Company's reported earnings results have been affected by inflation,
but isolating the effect is difficult. The different types of income and expense
are affected in various ways. Interest rates are affected by inflation, but the
timing and magnitude of the changes may not coincide with changes in the
consumer price index. Management actively monitors interest rate sensitivity, as
illustrated by the Gap Analysis (Table IV, page 23) in order to minimize the
effects of inflationary trends on interest rates. Other areas of noninterest
expenses may be more directly affected by inflation.
Preparing for the Year 2000
Considerable media attention has heightened the awareness of our
shareholders, business partners, customers, and regulators to Year 2000 issues
associated with the banking industry. The Company's directors, officers, and
staff recognize the importance of minimizing any potential problems or business
disruptions attributable to Year 2000 or other date sensitivity issues. The
Company's subsidiaries have developed and implemented plans to identify and
address the issues raised by the century date change.
The basic Year 2000 issue comes about because of design or programming
shortcuts used in the past to conserve valuable computer space. However, as the
reliance on computerized technology has grown, the Year 2000 problem has grown
from one of merely revising program code and replacing older hardware to an
"enterprise-wide" issue. The cost to the Company for necessary upgrades and
replacements should be absorbed in the normal course of business. As part of its
efforts, the Company is working closely with key customers, suppliers, and
business partners to educate them on pertinent issues and to assist them where
possible. The Company does not anticipate substantial, nonrecurring charges to
address this issue.
At this time, the Company anticipates no problems in making the Year 2000
transition. Management is making every effort to ensure an enterprise-wide
solution with particular attention to the concerns of shareholders and
customers.
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 (including the Company) that file electronically with the
Commission. That address is (http: //www.sec.gov)
<PAGE> 20
TABLE I
<TABLE>
SUMMARY OF OPERATIONS
(Dollar amounts in thousands)
<CAPTION>
- - - - - - - - Years Ending December 31, - - - - - - -
In Thousands Except for Share Amounts)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total Interest Income $15,084 $14,182 $12,758 $11,726 $12,038
Total Interest Expense (7,474) (7,103) (6,219) (5,082) (5,360)
------ ------ ------ ------ ------
Net Interest Income 7,610 7,079 6,539 6,644 6,678
Provision for Loan Losses 190 135 120 240 390
------ ------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 7,420 6,944 6,419 6,404 6,288
Other Income 571 592 581 467 700
Other Expenses 5,115 4,570 4,191 4,052 3,830
------ ------ ------ ------ ------
Income before Income Taxes 2,876 2,966 2,809 2,819 3,158
Income Tax Expense 996 953 956 944 1,068
------ ------ ------ ------ ------
Net Income $ 1,880 $ 2,013 $ 1,853 $ 1,875 $ 2,090
====== ====== ====== ====== ======
Net Income Per Share $ 3.73 $ 3.92 $ 3.60 $ 3.65 $ 4.06
Dividends Per Share $ 1.00 $ .94 $ .83 $ .72 $ .63
Total Assets at Year End $190,770 $178,847 $167,884 $153,361 $150,964
======= ======= ======= ======= =======
Return on Average Assets 1.00% 1.15% 1.16% 1.22% 1.40%
Return on Average Equity 8.80% 9.99% 10.15% 11.05% 13.93%
Dividend Payout Ratio 26.80% 24.00% 23.03% 19.74% 15.50%
Year End Equity to Assets Ratio 11.16% 11.31% 11.24% 10.94% 10.49%
</TABLE>
<PAGE> 21
TABLE II
<TABLE>
NET INTEREST MARGIN AND AVERAGE BALANCE ANALYSIS
(Dollar amounts in thousands)
<CAPTION>
1997 1996 1995
Income/ Yield/ Income/ Yield/ Income/ Yield/
EARNING ASSETS Average Expense Rate Average Expense Rate Average Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans 3 $130,848 $ 12,230 9.35 $116,864 $11,135 9.52 $ 108,659 $ 10,115 9.30
Investment securities:
Taxable 4 37,032 2,315 6.25 40,270 2,491 6.19 34,069 2,047 6.00
Nontaxable 1,4 3,568 298 8.35 4,146 354 8.53 3,475 302 8.69
------ ------- ----- ------ ------- ------ ------ ------- -------
Total Investment
Securities 40,600 2,613 6.44 44,416 2,845 6.41 37,544 2,349 6.26
Interest bearing deposits
in banks 685 37 5.40 898 48 5.35 587 29 4.94
Federal funds sold 5,561 314 5.65 5,192 284 5.47 6,524 377 5.78
------ ------- ----- ------ ------- ------- ------ ------- -------
Total Earning Assets 177,694 15,194 8.55 167,370 14,312 8.55 153,314 12,870 8.40
------- ------- ------- ------- ------- -------
Allowance for loan losses (1,314) (1,288) (1,384)
Nonearnings assets 10,860 9,280 7,986
------ ------ ------
Total Assets $187,240 $175,362 $159,916
======= ======= =======
INTEREST-BEARING LIABILITIES
Deposits:
Demand $27,823 $ 799 2.87 $26,701 $ 778 2.91 $27,913 $ 870 3.12
Savings 18,684 659 3.53 17,535 620 3.54 16,674 642 3.85
Time deposits 100,444 5,930 5.90 93,482 5,695 6.09 82,477 4,704 5.70
Other borrowed money 1,443 85 5.89 148 10 6.75 49 3 6.12
------ ------- ----- ------ ------ ----- ------ ------- -------
Total Interest Bearing
Liabilities 148,394 7,473 5.04 137,866 7,103 5.15 127,113 6,219 4.89
------- ------- ------- ----- ------ -------
Noninterest bearing deposits 16,100 15,600 13,356
Other liabilities 1,370 1,751 1,187
------ ------ ------
Total Liabilities 165,864 155,217 141,656
Stockholders' Equity 21,376 20,145 18,260
------ ------ ------
Total Liabilities and Equity $187,240 $175,362 $159,916
======= ======= =======
Net Interest Earnings $ 7,721 $7,209 $6,651
======== ===== =====
Net Yield on Interest Earning Assets 4.35% 4.32% 4.34%
==== ==== ====
1 Yields are computed on a taxable equivalent basis using a 37% income tax rate.
2 Average balances are based on daily balances.
3 Includes loans in nonaccrual status.
4 Average balances for securities available for sale are based on amortized carrying values and do not reflect changes in
market values.
</TABLE>
<PAGE> 22
TABLE III
<TABLE>
EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
(On a fully taxable equivalent basis)
(In thousands of dollars)
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Change in: Total Due to Change in: Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans 2 $ 1,331 $ (236) $ 1,095 $ 763 $ 257 $ 1,020
Investment Securities:
Taxable (200) 24 (176) 372 72 444
Nontaxable (49) (7) (56) 58 (6) 52
------ -------- -------- ------ ------ ------
Total Investment Securities (249) 17 (232) 430 66 496
Interest bearing deposits
in banks (11) (11) 15 4 19
Federal funds sold 20 10 30 (77) (16) (93)
------ -------- -------- ------ ------ ------
Total Interest Income 1,091 (209) 882 1,131 311 1,442
------ -------- -------- ------ ------ ------
Interest Expense:
Deposits:
Demand 33 (12) 21 (38) (54) (92)
Savings 41 (2) 39 33 (55) (22)
All other time deposits 424 (189) 235 627 364 991
Other borrowed money 87 (12) 75 6 1 7
------ -------- -------- ------ ------ ------
Total Interest Expense 585 (215) 370 628 256 884
------ -------- -------- ------ ------ ------
Net Interest Income $ 506 $ 6 $ 512 $ 503 $ 55 $ 558
====== ======== ======== ====== ====== ======
1 Changes in volume are calculated based on the difference in average balance
multiplied by the prior year average rate. Rate change differences are the
difference in the volume changes and the actual dollar amount of interest
income or expense changes.
2 Nonaccrual loans have been included in average asset balances.
</TABLE>
<PAGE> 23
TABLE IV
<TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
(In thousands of dollars)
DECEMBER 31, 1997
<CAPTION>
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or Without
Days Days Years Years Maturity Total
EARNINGS ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans $19,814 $43,303 $42,456 $11,614 $19,918 $137,105
Fed funds sold 6,895 6,895
Securities 4,274 6,559 16,526 4,611 5,004 36,974
Interest bearing time
deposits 226 601 827
------ ------ ------ ------ ------ ------
Total 31,209 50,463 58,982 16,225 24,922 181,801
-------- -------- -------- -------- -------- ---------
INTEREST BEARING LIABILITIES
Transaction accounts 15,774 15,774
Money market accounts 12,179 12,179
Savings accounts 19,389 19,389
Time deposits more than
$100,000 6,086 8,497 6,871 1,533 340 23,327
Time deposits less than
$100,000 13,376 36,596 26,189 5,153 81,314
Other borrowed money 5 17 48 54 102 226
------ ------ ------ ------ ------ ------
Total 66,809 45,110 33,108 6,740 442 152,209
------- -------- -------- ------- ----- ---------
Discrete interest
sensitivity GAP (35,600) 5,353 25,874 9,485 24,480 29,592
Cumulative interest
sensitivity GAP (35,600) (30,247) (4,373) 5,112 29,592
Ratio of cumulative interest
sensitive assets to cumulative 46.71% 72.97% 96.98% 103.37% 119.44%
interest sensitive liabilities
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
</TABLE>
<PAGE> 24
Item 7. Financial Statements
Index to Financial Statements
Page
Consolidated Balance Sheets as of December 31, 1997 and 1996 25
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 26
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
Independent Auditors' Report 45
<PAGE> 25
CONSOLIDATED BALANCE SHEETS
HIGHLANDS BANKSHARES, INC.
December 31,
ASSETS 1997 1996
Cash and due from banks (notes 2, 3 and 14) $ 3,246,056 $ 3,195,822
Interest bearing deposits in banks 826,636 833,626
Federal funds sold 6,895,115 2,494,077
Investments:
Securities held to maturity (note 4) 4,576,963 8,558,956
Securities available for sale (note 4) 31,682,358 33,056,700
Other investments 715,250 638,850
Loans (notes 5, 12, 13 and 14) 137,105,218 124,600,872
Less allowance for loan losses (note 6) (1,369,566) (1,257,454)
---------- ----------
Net Loans 135,735,652 123,343,418
Bank premises and equipment (note 7) 4,772,798 4,525,538
Interest receivable 1,547,604 1,361,433
Deferred income tax benefits (note 9) 164,988 275,337
Other assets 606,442 563,621
---------- ----------
Total Assets $190,769,862 $178,847,378
=========== ===========
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $15,952,124 $15,416,012
Interest bearing
Money market and interest checking 15,773,770 14,131,971
Money market savings 12,179,095 12,974,842
Savings accounts 19,389,384 17,993,883
Certificates of deposit over $100,000 23,327,442 20,859,000
All other time deposits 81,313,896 75,733,399
---------- ----------
Total Deposits 167,935,711 157,109,107
Borrowed money 226,152 141,616
Accrued expenses and other liabilities 1,310,998 1,367,198
---------- ----------
Total Liabilities 169,472,861 158,617,921
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 1,000,000 shares
authorized, 546,764 shares issued 2,733,820 2,733,820
Surplus 1,661,987 1,661,987
Retained earnings (note 11) 17,854,185 16,478,655
Net unrealized gains (losses) on securities
available for sale 39,710 (151,192)
---------- -----------
22,289,702 20,723,270
Treasury stock (at cost, 44,866 shares in
1997 and 32,698 shares in 1996) (992,701) (493,813)
---------- ----------
Total Stockholders' Equity 21,297,001 20,229,457
---------- ----------
Total Liabilities and Stockholders' Equity $190,769,862 $178,847,378
The accompanying notes are an integral part of this statement.
<PAGE> 26
CONSOLIDATED STATEMENTS OF INCOME
HIGHLANDS BANKSHARES, INC.
Years Ended December 31,
1997 1996 1995
INTEREST INCOME:
Loans, including fees $12,229,824 $11,134,887 $10,115,016
Federal funds sold 314,382 284,286 377,367
Interest bearing deposits 36,915 48,357 29,131
Investment securities - taxable 2,314,849 2,491,490 2,047,061
Investment securities - nontaxable 187,667 223,795 189,953
--------- -------- --------
Total Interest Income 15,083,637 14,182,815 12,758,528
---------- ---------- ----------
INTEREST EXPENSE:
Time deposits over $100,000 1,374,899 1,246,000 975,298
Other deposits 6,013,147 5,847,251 5,240,768
--------- --------- ---------
Total Interest on Deposits 7,388,046 7,093,251 6,216,066
Borrowed money 85,224 9,921 3,176
--------- -------- --------
Total Interest Expense 7,473,270 7,103,172 6,219,242
--------- --------- ---------
NET INTEREST INCOME 7,610,367 7,079,643 6,539,286
PROVISION FOR LOAN LOSSES (note 6) 190,000 135,000 120,000
--------- -------- --------
Net Interest Income after Provision
for Loan Losses 7,420,367 6,944,643 6,419,286
--------- --------- ---------
NONINTEREST INCOME:
Service charges 302,726 252,689 204,614
Insurance commissions and sales 174,061 162,306 160,316
Other operating income 211,546 206,398 224,583
Loss on security transactions (note 4) (117,036) (29,503) (9,185)
--------- -------- --------
Total Noninterest Income 571,297 591,890 580,328
--------- -------- --------
NONINTEREST EXPENSES:
Salaries and benefits (note 10) 2,810,116 2,477,928 2,212,677
Occupancy expense 241,478 270,678 172,406
Equipment expense 424,032 328,372 244,554
Data processing expense 437,232 388,753 368,101
Other operating expenses 1,202,271 1,103,804 1,193,310
--------- --------- ---------
Total Noninterest Expenses 5,115,129 4,569,535 4,191,048
--------- --------- ---------
Income before Income Tax Expense 2,876,535 2,966,998 2,808,566
INCOME TAX EXPENSE (note 9) 996,390 953,874 956,085
--------- -------- --------
NET INCOME $1,880,145 $2,013,124 $1,852,481
========= ========= =========
Net Income Per Share $ 3.73 $ 3.92 $ 3.60
========== ========= =========
Cash Dividends Paid Per Share $ 1.00 $ .94 $ .83
========== ========= =========
Weighted Average Shares Outstanding 504,330 514,066 514,066
========= ======== ========
The accompanying notes are an integral part of this statement.
<PAGE> 27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
HIGHLANDS BANKSHARES, INC.
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Securities
Capital Retained Available Treasury
Stock Surplus Earnings for Sale Stock Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1994 $2,733,820 $1,661,987 $13,522,947 $(648,869) $ (493,813) $16,776,072
Net income 1,852,481 1,852,481
Cash dividends (426,671) (426,671)
Change in unrealized gain
on securities available
for sale, net of tax
effect of $387,706 660,149 660,149
-------- -------- -------- -------- --------- --------
BALANCE
DECEMBER 31, 1995 2,733,820 1,661,987 14,948,757 11,280 (493,813) 18,862,031
Net income 2,013,124 2,013,124
Cash dividends (483,226) (483,226)
Change in unrealized loss
on securities available
for sale, net of tax
effect of $95,420 (162,472) (162,472)
-------- -------- -------- -------- --------- --------
BALANCE
DECEMBER 31, 1996 2,733,820 1,661,987 16,478,655 (151,192) (493,813) 20,229,457
Net income 1,880,145 1,880,145
Cash dividends (504,615) (504,615)
Change in unrealized loss
on securities available
for sale, net of tax
effect of $112,119 190,902 190,902
Purchase of treasury stock
(12,168 shares) (498,888) (498,888)
-------- -------- -------- -------- --------- --------
BALANCE
DECEMBER 31, 1997 $2,733,820 $1,661,987 $17,854,185 $ 39,710 $ (992,701) $21,297,001
========= ========= ========== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>28
CONSOLIDATED STATEMENTS OF CASH FLOWS
HIGHLANDS BANKSHARES, INC.
Years Ended December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,880,145 $2,013,124 $1,852,481
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on equipment 26,339
Loss on sale of securities 117,036 29,503 9,185
Depreciation 359,740 262,757 198,517
Net amortization of security premiums 25,000 66,023 167,260
Provision for loan losses 190,000 135,000 120,000
Deferred income taxes (1,768) 62,065 89,518
Change in other assets and liabilities:
Interest receivable (186,171) (58,820) 386
Other assets (42,801) (49,593) (12,921)
Accrued expenses (56,201) 239,230 130,256
--------- --------- ---------
Net Cash Provided by Operating Activities 2,284,980 2,725,628 2,554,682
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of securities
held to maturity 3,354,000 3,736,267 2,018,760
Purchases of securities held to maturity (620,600) (2,859,702)
Proceeds from maturities of securities
available for sale 9,291,964 12,028,403 12,612,466
Proceeds from sales of securities available
for sale 501,000 1,511,173
Purchases of securities available for sale(7,630,000)(19,863,779)(12,307,206)
Net change in other investments (76,065)
Net change in deposits in other banks 6,990 160,957 (601,942)
Net increase in loans 12,582,234) 10,712,064)(10,109,618)
Change in federal funds sold (4,401,038) 3,522,275 (1,391,007)
Purchase of property and equipment (607,000) (1,476,627) (1,836,894)
Net Cash Used in Investing Activities (12,142,383)(11,713,995)(14,475,143)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in time deposits 8,048,939 9,398,863 12,080,569
Net change in other deposit accounts 2,777,665 (2,468) 69,059
Net change in borrowed money 84,536 (15,844) 157,460
Dividends paid in cash (504,615) (483,226) 426,671)
Purchase of treasury stock (498,888)
---------
Net Cash Provided by Financing Activities 9,907,637 8,897,325 1,880,417
---------- ----------- ----------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and
due from banks 50,234 (91,042) (40,044)
Cash and due from banks, beginning of year 3,195,822 3,286,864 3,326,908
---------- ----------- ----------
Cash and Due from Banks, End of Year $3,246,056 $3,195,822 $3,286,864
========= ========= =========
Supplemental Disclosures:
Cash paid for:
Interest expense $7,525,000 $6,993,122 $6,040,215
Income taxes 939,000 940,000 908,608
The accompanying notes are an integral part of this statement.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 1 NATURE OF OPERATIONS:
Highlands Bankshares, Inc. (the "Company") is a bank holding
company and operates under a charter issued by the state of West
Virginia. The Company owns all of the outstanding stock of The
Grant County Bank, the Capon Valley Bank and HBI Life Insurance
Company, Inc. which operate under charters issued in West Virginia
and Arizona. State chartered banks are subject to regulation by
the West Virginia Division of Banking, Federal Reserve Bank and
the Federal Deposit Insurance Corporation while the insurance
company is regulated by the Arizona Department of Insurance. The
Banks provide services to customers located mainly in Grant,
Hardy, Hampshire, Mineral and Pendleton counties of West Virginia,
including the towns of Petersburg, Keyser, Moorefield and
Wardensville through six branch offices. The insurance company
sells life and accident coverage exclusively through the Company's
subsidiary banks.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Highlands Bankshares,
Inc. ("Company") and its subsidiaries conform to generally
accepted accounting principles and to accepted practice within the
banking industry.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
The Grant County Bank, the Capon Valley Bank and HBI Life
Insurance Company. All significant intercompany accounts and
transactions have been eliminated.
(b) Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported
amounts in those statements; actual results could differ
significantly from those estimates. A material estimate that
is particularly susceptible to significant changes is the
determination of the allowance for loan losses, which is
sensitive to changes in local economic conditions.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and noninterest
bearing funds at correspondent institutions.
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Securities
Securities that the Company has both the positive intent and
ability to hold to maturity (at time of purchase) are
classified as held to maturity securities. All other
securities are classified as available for sale. Securities
held to maturity are carried at historical cost and adjusted
for amortization of premiums and accretion of discounts, using
the effective interest method. Securities available for sale
are carried at fair value with any valuation adjustments
reported, net of deferred taxes, as a separate component of
stockholders' equity. Also included in securities available
for sale are marketable equity securities.
Other investments consist of investments in the Federal Home
Loan Bank of Pittsburgh and the Federal Reserve Bank of
Richmond. Such investments are required as members of these
institutions and these investments cannot be sold without a
change in the members' borrowing or service levels.
Interest and dividends on securities and amortization of
premiums and discounts on securities are reported as interest
income using the effective interest method. Gains (losses)
realized on sales and calls of securities are determined using
the specific identification method.
(e) Loans
Loans are carried on the balance sheet net of any unearned
interest and the allowance for loan losses. Interest income on
loans is determined using the effective interest method on the
daily amount of principal outstanding except where serious
doubt exists as to collectibility of the loan, in which case
the accrual of income is discontinued.
(f) Allowance For Loan Losses
The allowance for loan losses is based upon management's
knowledge and review of the loan portfolio. Estimation of an
adequate allowance for loan losses involves the exercise of
judgement, the use of assumptions with respect to present
economic conditions and knowledge of the environment in which
the Banks operate. Among the factors considered in determining
the level of the allowance are the changes in composition of
the loan portfolio, the amount of delinquent and nonaccrual
loans, past loan loss experience and the value of collateral
securing the loans.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Impaired Loans
Accounting standards require that impaired loans within the
scope of the statements be presented in the financial
statements at the present value of expected future cash flows
or at the fair value of the loan's collateral. A valuation
allowance is required to the extent that such measurement is
less than the recorded investment. Under this standard a loan
is considered impaired based on current information and
events, if it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when
due under the contractual terms of the loan agreement.
Charge-offs for impaired loans occur when the loan, or portion
of the loan is determined to be uncollectible, as is the case
for all loans. The effect of these standards was not material
to the Company's consolidated financial statements as of and
for the years ended December 31, 1997, 1996 or 1995.
(h) Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to income
over the estimated useful lives of the assets using a
combination of the straight-line and accelerated methods. The
ranges of the useful lives of bank premises and equipment are
as follows:
Buildings and Improvements 15 - 40 years
Furniture and fixtures 6 - 15 years
Maintenance, repairs, renewals, and minor improvements are
charged to operations as incurred. Gains and losses on routine
dispositions are reflected in other income or expense.
(i) Income Taxes
Amounts provided for income tax expense are based on income
reported for financial statement purposes rather than amounts
currently payable under federal and state tax laws. Deferred
taxes, which arise principally from differences between the
period in which certain income and expenses are recognized for
financial accounting purposes and the period in which they
affect taxable income, are included in the amounts provided
for income taxes.
(j) Earnings Per Share
Earnings per share are based on the weighted average number of
shares outstanding.
(k) Foreclosed Real Estate
The components of foreclosed real estate are adjusted to the
lower of cost or fair value less estimated costs of disposal.
The current year provision for a valuation allowance has been
recorded as an expense to current operations.
NOTE 3 CASH AND DUE FROM BANKS:
The Banks are required to maintain average reserve balances based
on a percentage of deposits. The Banks have generally met this
requirement through average cash on hand and balances with their
correspondent institutions.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 4 SECURITIES:
The carrying amount and estimated fair value of securities are as
follows:
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
Held to Maturity
December 31, 1997
U. S. Treasuries
and Agencies $ 750,921 $ 1,480 $ 447 $ 751,954
Mortgage-backed 530,738 4,807 535,545
State and municipals 3,295,304 97,662 2,801 3,390,165
--------- -------- -------- ---------
Total Securities
Held to Maturity $4,576,963 $ 103,949 $ 3,248 $4,677,664
========= ======== ======== =========
December 31, 1996
U. S. Treasuries
and Agencies $4,200,310 $ 23,351 $ 855 $4,222,806
Mortgage-backed 540,327 4,906 545,233
State and municipals 3,818,319 62,493 28,742 3,852,070
--------- -------- -------- ---------
Total Securities
Held to Maturity $8,558,956 $ 90,750 $ 29,597 $8,620,109
========= ======== ======== =========
Available for Sale
December 31, 1997
U. S. Treasuries
and Agencies $20,229,821 $ 131,837 $ 13,347 $20,348,311
Mortgage-backed 10,659,595 57,894 51,676 10,665,813
State and municipals 100,000 1,467 101,467
Marketable equities 629,908 63,141 566,767
--------- -------- -------- ---------
Total Securities
Available for Sale$31,619,324 $ 191,198 $ 128,164 $31,682,358
========== ======== ======== ==========
December 31, 1996
U. S. Treasuries
and Agencies $18,270,372 $ 100,114 $ 66,191 $18,304,295
Mortgage-backed 13,890,315 61,810 145,273 13,806,852
Marketable equities 1,136,002 190,449 945,553
--------- -------- -------- ---------
Total Securities
Available for Sale$33,296,689 $ 161,924 $ 401,913 $33,056,700
========== ======== ======== ==========
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 4 SECURITIES (CONTINUED):
The carrying amount and fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Securities Held to Maturity Carrying Fair
Amount Value
Due in one year or less $ 760,922 $ 761,983
Due after one year through five years 1,295,899 1,306,313
Due after five years through ten years 1,494,296 1,532,908
Due after ten years 495,108 540,915
Mortgage-backed securities 530,738 535,545
--------- ---------
Total Held to Maturity $4,576,963 $4,677,664
========= =========
Securities Available for Sale Carrying Fair
Amount Value
Due in one year or less $5,958,403 $5,978,201
Due after one year through five years 13,269,088 13,378,153
Due after five years through ten years 1,002,330 991,957
Due after ten years 100,000 101,467
Mortgage-backed securities 10,659,595 10,665,813
---------- ----------
Total Fixed Rate Securities 30,989,416 31,115,591
Equities 629,908 566,767
--------- ---------
Total Available for Sale $31,619,324 $31,682,358
========== ==========
The carrying amount (which approximates market value) of securities
pledged by the banks to primarily secure deposits amounted to
$8,116,050 at December 31, 1997 and $7,051,868 at December 31, 1996.
There were no holdings totaling more than 10% of stockholders' equity
with any issuer as of December 31, 1997 and 1996.
Gains and losses recognized in 1997 are primarily from securities
available for sale. All gains or losses in 1996 and 1995 are from
calls or early payoffs of securities designated as held to maturity.
Losses in 1997 include a loss on a mutual fund investment as well as
gains/losses on calls and redemptions. Realized gains or losses for
the years ending December 31 are as follows:
1997 1996 1995
------------ ------------ --------
Gains $ 6,982 $ 2,386 $ 813
Losses (124,018) (31,889) (9,998)
-------- --------- ---------
Total $(117,036) $ (29,503) $ (9,185)
========- ========= =========
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 5 LOANS:
Loans outstanding as of December 31 are summarized as follows:
1997 1996
Commercial $30,716,769 $25,103,784
Real estate construction 2,189,000 2,158,000
Real estate mortgages 75,221,128 70,829,083
Consumer installment 31,491,717 28,693,887
---------- ----------
Subtotal 139,618,614 126,784,754
Unearned interest (2,513,396) (2,183,882)
---------- ----------
Total Loans $137,105,218 $124,600,872
=========== ===========
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses for the years
ended December 31 is shown in the following schedule:
1997 1996 1995
Balance at beginning
of year $1,257,454 $1,319,099 $1,454,307
Provision charged to
operating expenses 190,000 135,000 120,000
Loan recoveries 146,855 140,289 124,501
Loans charged off (224,743) (336,934) (379,709)
--------- --------- ----------
Balance at end of year $1,369,566 $1,257,454 $ 1,319,099
========= ========= ==========
Percentage of outstanding
loans 1.00% 1.01% 1.16%
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment as of December 31 are summarized as
follows:
1997 1996
Land $ 553,652 $ 553,652
Buildings and improvements 4,597,205 4,232,937
Furniture and equipment 2,680,767 2,446,961
--------- ---------
Total cost 7,831,624 7,233,550
Less - accumulated depreciation (3,058,826) (2,708,012)
---------- ----------
Net Book Value $4,772,798 $4,525,538
========= =========
Provisions for depreciation of $359,740 in 1997, $262,757 in 1996
and $198,517 in 1995, were charged to operations.
NOTE 8 DEPOSITS:
At December 31, 1997, the scheduled maturities of certificates of
deposit are as follows:
1998 $64,555,588
1999 22,130,930
2000 10,929,125
2001 3,007,298
2002 and thereafter 4,018,397
----------
Total $104,641,338
NOTE 9 INCOME TAX EXPENSE:
The components of income tax expense for the years ended December 31
are summarized as follows:
1997 1996 1995
------------ --------------------
Current expense
Federal $ 883,728 $ 829,724 $ 751,593
State 114,430 62,085 114,974
---------- --------- ----------
Total current expense 998,158 891,809 866,567
-------- -------- ---------
Deferred expense
Federal (1,625) 56,940 82,260
State (143) 5,125 7,258
------- -------- --------
Total deferred expense (1,768) 62,065 89,518
-------- -------- ---------
Income tax expense $ 996,390 $ 953,874 $ 956,085
======== ======== =========
Income expense (benefits)
relating to losses on
security transactions
are as follows: $ 2,040 $ (10,916) $ (3,398)
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 9 INCOME TAX EXPENSE (CONTINUED):
The deferred tax effects of temporary differences for the years ended
December 31 are as follows:
1997 1996 1995
--------------------------------
Tax effect of temporary differences:
Provision for loan losses $(42,793) $ 2,492 $ 60,187
Sale of loans (7,744) 11,105 12,128
Pension expense (10,404) (13,587) (2,053)
Depreciation 51,675 41,825 14,363
Miscellaneous 7,498 20,230 4,893
------- ------ -------
Net (increase) decrease in
deferred income tax benefit $ (1,768) $62,065 $ 89,518
======= ====== =======
The net deferred tax assets arising from temporary differences as of
December 31 are summarized as follows:
1997 1996
Deferred Tax Assets:
Provision for loan losses $282,258 $231,530
Insurance commissions 32,199 34,350
Sale of loans 46,385 38,640
Capital loss carryforward 45,343
Unrealized loss on securities
available for sale 88,797
Other 26,819 20,635
Less valuation allowance (45,343)
Total Assets 387,661 413,952
------- -------
Deferred Tax Liabilities:
Pension prepaids 43,070 53,474
Unrealized gain on securities
available for sale 23,322
Accretion income 47,828 28,272
Accelerated depreciation 108,453 56,869
------- -------
Total Liabilities 222,673 138,615
------- -------
Net Tax Asset $164,988 $275,337
======= =======
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 9 INCOME TAX EXPENSE (CONTINUED):
The following table summarizes the difference between income tax
expense and the amount computed by applying the federal statutory
income tax rate of 34 percent for the years ended December 31:
1997 1996 1995
Amounts at federal statutory rates $978,023 $1,008,779 $954,912
(Reductions) additions resulting
from:
Tax-exempt income (69,759) (77,900) (54,343)
Partially exempt income (39,429) (39,771) (35,739)
State income taxes, net 80,113 69,538 86,179
Nondeductible capital losses 45,343
Other 2,099 (6,772) 5,076
-------- --------- --------
Income tax expense $ 996,390 $ 953,874 $956,085
======== ========= ========
NOTE 10 EMPLOYEE BENEFITS:
The Company's two subsidiary banks each have separate retirement and
profit sharing plans which cover substantially all full time employees
at each bank. The Capon Valley Bank has a defined contribution pension
plan with 401(k) features that is funded with discretionary
contributions by the Company. The Company matches on a limited basis
the contributions of the employees. Investment of employee balances is
done through the direction of each employee.
The Grant County Bank is a member of the West Virginia Bankers'
Association Retirement Plan. Benefits under the plan are based on
compensation and years of service with 100% vesting after seven years
of service. The Plan's assets are in excess of the projected benefit
obligations and thus the Bank was not able to make contributions to
the Plan in 1997, 1996 or 1995. The amounts of the prepaid expense and
the net pension expense reflected in operations are insignificant. In
addition, The Grant County Bank also maintains a profit sharing plan
covering substantially all employees to which contributions are made
at the discretion of the Board of Directors.
The Company has established an employee stock ownership plan which
will provide stock ownership to all employees of the Company. The Plan
provides total vesting upon the attainment of seven years of service.
Contributions to the plan are made at the discretion of the Board of
Directors and are allocated based on the compensation of each employee
relative to total compensation paid by the Company. All shares held by
the Plan will be considered outstanding in the computation of earnings
per share. Shares of Company stock when distributed will have
restrictions on transferability.
Deferred compensation expenses for the above benefits charged to
operations totaled $189,595 in 1997, $206,893 in 1996 and $139,371 in
1995.
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 11 RESTRICTIONS ON DIVIDENDS OF SUBSIDIARY BANKS:
The principal source of funds of Highlands Bankshares, Inc. is
dividends paid by subsidiary banks. The various regulatory authorities
impose restrictions on dividends paid by a state bank. A state bank
cannot pay dividends (without the consent of state banking
authorities) in excess of the total net profits of the current year
and the combined retained profits of the previous two years. As of
January 1, 1998, the banks could pay dividends to the Company of
approximately $2,140,964 without permission of the regulatory
authorities.
NOTE 12 TRANSACTIONS WITH RELATED PARTIES:
During the year, officers and directors (and companies controlled by
them) were customers of and had transactions with the subsidiary Banks
in the normal course of business. These transactions were made on
substantially the same terms as those prevailing for other customers
and did not involve any abnormal risk. The aggregate amount of loans
to related parties of $1,593,252 at December 31, 1996, was increased
$2,762,595 by new loans and reduced $1,017,330 by payments, resulting
in an ending balance of $3,338,517 at December 31, 1997.
NOTE 13 COMMITMENTS AND GUARANTEES:
The Banks make commitments to extend credit in the normal course of
business and issues standby letters of credit to meet the financing
needs of its customers. The amount of the commitments represents the
Banks' exposure to credit loss that is not included in the balance
sheet. As of the balance sheet dates, the Banks had outstanding the
following commitments:
1997 1996
Commitments to extend credit $8,414,000 $5,743,000
Standby letters of credit 645,000 677,000
The Banks use the same credit policies in making commitments and
issuing letters of credit as it does for the loans reflected in the
balance sheet.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Banks evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies
but may include accounts receivable, inventory, property, plant and
equipment.
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 14 CONCENTRATIONS OF CREDIT:
The Banks grant commercial, residential real estate and consumer loans
to customers located primarily in the eastern portion of the State of
West Virginia. Although the Banks have a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts
is dependent upon the agribusiness economic sector. Collateral
required by the Banks is determined on an individual basis depending
on the purpose of the loan and the financial condition of the
borrower. The ultimate collectibility of the loan portfolios is
susceptible to changes in local economic conditions. Approximately 59%
of the loan portfolio is secured by real estate. See note 5 for a
complete breakdown of loans by type.
The Bank has cash deposited in and federal funds sold to other
commercial banks totaling $7,661,626 and $3,511,000 at December 31,
1997 and 1996, respectively.
NOTE 15 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's assets and liabilities is influenced
heavily by market conditions. Fair value applies to both assets and
liabilities, either on or off the balance sheet. Fair value is defined
as the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash, Due from Banks and Money Market Investments
The carrying amount of cash, due from bank balances, interest bearing
deposits and federal funds sold is a reasonable estimate of fair
value.
Securities
Fair values of securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities, taking into consideration the credit risk in various loan
categories.
Deposits
The fair value of demand, interest checking, regular savings and money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 15 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
Interest Payable and Receivable
The carrying value of amounts of interest receivable and payable is a
reasonable estimate of fair value.
Off-Balance-Sheet Items
The carrying amount and estimated fair value of off-balance-sheet
items were not material at December 31, 1997.
The estimated fair values of financial instruments as of December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $3,246,056 $3,246,056 $3,195,822 $3,195,822
Interest bearing deposits 826,636 826,636 833,626 833,626
Federal funds sold 6,895,115 6,895,115 2,494,077 2,494,077
Securities held to maturity 4,576,963 4,677,664 8,558,956 8,620,109
Securities available for sale 31,682,358 31,682,358 33,056,700 33,056,700
Other investments 715,250 715,250 638,850 638,850
Loans, net 135,735,652 136,215,953 123,343,418 123,592,407
Interest receivable 1,547,604 1,547,604 1,361,433 1,361,433
Financial Liabilities:
Demand deposits 63,294,373 63,294,373 60,516,708 60,516,708
Term deposits 104,641,338 104,624,538 96,592,399 96,535,118
Borrowed money 226,152 226,152 141,616 141,616
Interest payable 743,000 743,000 795,000 795,000
</TABLE>
NOTE 16 REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 16 REGULATORY MATTERS (CONTINUED):
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier
I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997 and 1996, that the Company meets all
capital adequacy requirements to which it is subject.
To be categorized as well capitalized the Company must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events
that management believes have changed the Company's category from a
well capitalized status.
The Company's actual capital ratios are presented in the following
table:
Actual Regulatory Requirements
December Adequately Well
1997 1996 Capitalized Capitalized
Total risk-based ratio 17.35% 18.82% 8.00% 10.00%
Tier 1 risk-based ratio 18.47% 18.85% 4.00% 6.00%
Total assets leverage ratio 11.15% 11.58% 3.00% 5.00%
Capital ratios and amounts are applicable both at the individual bank
level and on a consolidated basis. At December 31, 1997, both
subsidiary banks had capital levels far in excess of minimum
requirements. As such, both banks qualified as "well capitalized
banks" for FDIC insurance purposes and thus were charged the minimum
rate for insurance coverage.
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 17 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
Assets December 31,
1997 1996
Cash $ 18,695 $ 29,819
Investment in subsidiaries 21,155,702 20,087,421
Other investments 100,000 100,000
Other assets 652
Income taxes receivable 5,436 11,565
Due from subsidiaries 17,168
---------
Total Assets $21,297,001 $20,229,457
========== ==========
Stockholders' Equity
Common stock, par value $5 per share
authorized 1,000,000 shares; 546,764
shares issued 2,733,820 2,733,820
Surplus 1,661,987 1,661,987
Retained earnings 17,854,185 16,478,655
Net unrealized gains (losses) on
securities available for sale 39,710 (151,192)
--------- ---------
22,289,702 20,723,270
Less treasury stock (at cost,
44,866 shares in 1997 and
32,698 shares in 1996) (992,701) (493,813)
--------- ---------
Total Stockholders' Equity 21,297,001 20,229,457
---------- ----------
Total Liabilities and Stockholders'
Equity $21,297,001 $20,229,457
========== ==========
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 17 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31,
1997 1996 1995
Income
Dividends from subsidiaries $1,055,054 $ 483,226 $ 451,675
Other dividends 630 630 630
-------- -------- --------
Total 1,055,684 483,856 452,305
---------- --------- ----------
Expenses
Professional fees 37,980 34,478 22,203
Advertising 6,094 3,320 3,452
Other expenses 39,054 18,754 26,189
-------- -------- --------
Total 83,128 56,552 51,844
--------- --------- ---------
Net income before income tax benefit
and undistributed income of
subsidiaries 972,556 427,304 400,461
Income tax benefit (30,211) (18,815) (20,112)
-------- -------- --------
Income before undistributed income
of subsidiaries 1,002,767 446,119 420,573
Undistributed income of
subsidiaries 877,378 1,567,005 1,431,908
-------- --------- ---------
Net Income 1,880,145 2,013,124 1,852,481
Retained earnings,
Beginning of period 16,478,655 14,948,757 13,522,947
Dividends paid (504,615) (483,226) (426,671)
-------- -------- --------
Retained Earnings,
End of Period $17,854,185 $16,478,655 $14,948,757
========== ========== ==========
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 17 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996 1995
Cash Flows from Operating Activities:
Net income $1,880,145 $2,013,124 $1,852,481
Adjustments
Undistributed subsidiary income (877,378) (1,567,005) (1,431,908)
Depreciation 181 408 391
Increase (decrease) in payables (41,738) 16,901
(Increase) decrease in receivables(10,569) 19,139 (31,176)
Net Cash Provided by Operating
Activities 992,379 423,928 406,689
-------- -------- --------
Cash Flows from Financing Activities:
Dividends paid (504,615) (483,226) (426,671)
Purchase of treasury stock (498,888)
--------
Net Cash Used in Financing
Activities (1,003,503) (483,226) (426,671)
---------- --------- ----------
Net Decrease in Cash (11,124) (59,298) (19,982)
Cash, Beginning of Year 29,819 89,117 109,099
-------- -------- --------
Cash, End of Year $ 18,695 $ 29,819 $ 89,117
======== ======== ========
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Highlands Bankshares, Inc.
Petersburg, West Virginia
We have audited the accompanying consolidated balance sheets of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
S. B. Hoover & Company, L.L.P.
January 15, 1998
Harrisonburg, Virginia
<PAGE> 46
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 9. Directors and Executive Officers
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 18, 1998.
Item 10. Executive Compensation
We are incorporating the Proxy Statement of Highlands
Bankshares, Inc. via Form DEF 14A filed March 18, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management
We are incorporating the Proxy Statement of Highlands
Bankshares, Inc. via Form DEF 14A filed March 18, 1998.
Item 12. Certain Relationships and Related Transactions
We are incorporating the Proxy Statement of Highlands
Bankshares, Inc. via Form DEF 14A filed March 18, 1998.
Most of the directors, partnerships of which they may be general partners
and corporations of which they are officers or directors, maintain normal
banking relationships with the Bank. Loans made by the Bank to such persons or
other entities were made only in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than normal risk of collectibility or present other unfavorable
features. See Note 12 of the consolidated financial statements.
John VanMeter is a partner with the law firm of VanMeter and VanMeter,
which has been retained by the Company as legal counsel and it is anticipated
that the relationship will continue. Jack H. Walters is a partner with the law
firm of Walters, Krauskopf & Roth, which provides legal counsel to the Company
and it is anticipated that the relationship will continue.
Part IV
Item 13. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
2 Not applicable
3 (i) Articles of Incorporation of Highlands
Bankshares, Inc. are incorporated by reference to
Appendix C to Highlands Bankshares, Inc.'s Form S-4
filed October 20, 1986.
Amendments to the original Articles of Incorporation
were filed on December 8, 1997 and are attached
hereto.
<PAGE> 47
Item 13. Exhibits and Reports on Form 8-K (Continued)
a) Exhibits (Continued)
Exhibit No. Description
3 (ii) Bylaws of Highlands Bankshares, Inc. are
incorporated by reference to Appendix D to Highland
Bankshares, Inc.'s Form S-4 filed October 20, 1986.
Amendments to the original Bylaws were filed with
the West Virginia Secretary of State on December 8,
1997 and are attached hereto.
4 Not applicable
9 Not applicable
10 Not applicable
11 Not applicable
12 Not applicable
16 Not applicable
18 Not applicable
21 Subsidiaries of the Small Business Issuer is
attached on Page 49
22 Not applicable
23 Consent of Certified Public Accountant attached on
Page 50
24 Not applicable
27 Financial Data Schedule attached
28 Not applicable
b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1997.
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
By LESLIE A. BARR
Leslie A. Barr
President, Chief Executive Officer
Date March 27, 1998
By CLARENCE E. PORTER
Clarence E. Porter
Secretary/Treasurer,
Chief Financial Officer
and Chief Accounting Officer
Date March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
Signature Title Date
March 27, 1998
LESLIE A. BARR ------------------
Leslie A. Barr President
& Chief Executive Officer
Director
March 27, 1998
THOMAS B. MCNEIL, SR. ------------------
Thomas B. McNeil, Sr. Director
GEORGE B. MOOMAU March 27, 1998
George B. Moomau Director
CLARENCE E. PORTER March 27, 1998
Clarence E. Porter Secretary/Treasurer
Chief Financial
and Accounting Officer
Director
COURTNEY R. TUSING March 27, 1998
Courtney R. Tusing Director
John G. VanMeter Chairman of the Board
Director
Jack H. Walters Director
L. Keith Wolfe Director
Exhibit 3
RESTATED ARTICLES OF INCORPORATION
OF
HIGHLANDS BANKSHARES, INC.
Pursuant to Section 31-1-33 and Section 31-1-110 of the West Virginia
Code, HIGHLANDS BANKSHARES, INC., a corporation organized and existing under
the laws of the State of West Virginia, hereby restates its Articles of
Incorporation as hereinafter set forth:
I. The undersigned agrees to become a corporation by the name of
HIGHLANDS BANKSHARES, INC.
II. The address of the principal office of said corporation will be
located at 3 North Main Street, in the City of Petersburg, County of Grant,
State of West Virginia, 26847.
III. The purpose or purposes for which corporation is formed are as
follows:
The principal purposes for which the corporation is formed are to
purchase, own, and hold the stock of other corporations, and to do every act
and thing covered generally by the denomination "holding corporation", and
especially to direct the operations of other corporations through the
ownership of stock therein; to purchase, subscribe for, acquire, own, hold,
sell, exchange, assign, transfer, create security interests in, pledge, or
otherwise dispose of shares or voting trust certificates for shares of the
capital stock issued by any corporation organized under the laws of this
state or any other state or district or the United States, and also bonds,
notes, securities and evidences of indebtedness of the United States or of
any state, district, territory, dependency or country or subdivision or
municipality thereof; to issue in exchange therefor shares of the capital
stock, bonds, notes or other obligations of this corporation and while the
owner thereof to exercise all the rights, powers, and privileges of ownership
including the right to vote on any shares of stock or voting trust
certificate so owned; to promote, lend money to, and guarantee the dividends,
stocks, bonds, notes, evidences of indebtedness, contracts, or other
obligations of, and otherwise aid in any manner which shall be lawful, any
corporation or association of which any bonds, stocks, voting trust
certificates, or other securities or evidences of indebtedness shall be held
by or for this corporation, or in which, or in the welfare of which, this
corporation shall have any interest, and to do any acts and things permitted
by law and designed to protect, preserve, improve, or enhance the value of
any such bonds, stocks, or other securities or evidences of indebtedness or
the property of this corporation. Further, this corporation shall have the
power to carry on businesses of any character whatsoever which are not
prohibited by law or required to be stated in these Articles.
<PAGE>
IV. No holder of shares of the stock of any class of this
corporation shall have any pre-emptive or preferential rights of subscription
to any shares of any class of stock of this corporation, whether now or
hereafter authorized, or to any obligations of this corporation convertible
into stock of this corporation, issued or sold, or to any options, warrants
or rights to subscribe to any such shares.
V. Provisions for the regulation of the internal affairs of the
corporation are:
(a) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil or criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually or reasonably incurred by him in
connection with such action, suit or proceeding; provided, however, no such
indemnification shall be made if such director, officer, employee, or agent
shall have been determined to be guilty of gross negligence or willful
misconduct in the performance of his duty as such director, officer, employee
or agent. In the absence of a judicial or administrative determination of
gross negligence or willful misconduct, the indemnification shall be made if
a determination that no gross negligence or willful misconduct exists shall
be made by (1) the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable
and a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the shareholders. The indemnification
herein granted shall inure to the benefit of such present or former
directors, officers, employees and agents and their heirs, executors and
administrators.
<PAGE>
(b) At each election of directors of this corporation every
shareholder entitled to vote at such election shall have the right to vote,
in person or by proxy, the number of shares owned by such shareholder for as
many persons as there are directors to be elected and for whose election such
shareholder has the right to vote, or to cumulate his votes by giving one
candidate as many votes as the number of such directors multiplied by the
number of his shares shall equal, or by distributing such votes on the same
principle among any number of such candidates for the Board of Directors of
this corporation.
(c) No director of the corporation shall be removed from his
office as a director except by the affirmative vote of the holders of at
least eighty percent (80%) of the shares of the corporation's capital stock,
issued, outstanding and entitled to vote.
(d) Except as set forth below, the affirmative vote of holders
of at least eighty percent (80%) of the shares of the corporations capital
stock, issued, outstanding, and entitled to vote shall be required to approve
any of the following:
1. any merger or consolidation of the corporation with
or into any other corporation; or
2. any share exchange in which a corporation, person or
entity acquires the issued or outstanding shares of capital stock of the
corporation pursuant to a vote of shareholder; or
3. any issuance of shares of the corporation that
results in the acquisition of control of the corporation by any person, firm
or corporation or group of one or more thereof that previously did not
control the corporation; or
4. any sale, lease, exchange, mortgage, pledge or other
transfer, in one transaction or a series of transactions, of all, or
substantially all, of the assets of the corporation to any other corporation,
person, or entity; or
<PAGE>
5. the adoption of a plan for the liquidation or
dissolution of the corporation proposed by any other corporation, person or
entity; or
6. any proposal in the nature of a reclassification or
reorganization that would increase the proportionate voting rights of any
other corporation, person or entity; or
7. any transaction similar to, or having similar effect
as, any of the foregoing transactions, if, in any such case, as of the record
date for the determination of shareholders entitled to notice thereof and to
vote thereon, such other corporation, person or entity is the beneficial
owner, directly or indirectly, of more than 5 percent of the shares of
capital stock of the corporation issued, outstanding and entitled to vote.
If any of the transactions identified above in this Section V (d)
is with a corporation, person or entity that is not the beneficial owner,
directly or indirectly, of more than 5 percent of the shares of capital stock
of the corporation issued, outstanding and entitled to vote, then the
affirmative vote of holders of more than a majority of the shares of the
corporation's capital stock issued, outstanding and entitled to vote shall be
required to approve any of such transactions.
The Board of Directors of the corporation shall have the power
and duty to determine, for purposes of this Section V (d) on the basis of
information known to the Board, if and when such other corporation, person or
entity is the beneficial owner, directly or indirectly, of more than 5
percent of the shares of capital stock of the corporation issued, outstanding
and entitled to vote and/or if any transaction is similar to, or has a
similar effect as, any of the transactions identified above in this Section V
(d). Any such determination shall be conclusive and binding for all purposes
of this Section V (d). The provisions of this Section V (d) shall not apply
to any transaction which is approved in advance by a majority of those
Directors (1) who were Directors before the corporation, person or entity
acquired beneficial ownership of more than 5 percent of the shares of capital
stock of the corporation and who are not affiliates of such corporation,
person or entity and (2) who became Directors at the recommendation of the
Directors referred to in (1) above.
<PAGE>
The Board of Directors of the corporation, when evaluating any
offer of another party to (1) make a tender or exchange offer for any equity
security of the corporation, (2) merge or consolidate the corporation with
another corporation, (3) purchase or otherwise acquire all or substantially
all of the properties and assets of the corporation, or (4) engage in any
transaction similar to, or having similar effects as, any of the foregoing
transactions, shall, in connection with the exercise of its judgment in
determining what is in the best interest of the corporation and its
shareholders, give due consideration to all relevant factors, including
without limitation the social and economic effects of the proposed
transaction on the depositors, employees, suppliers, customers and other
constituents of the corporation and its subsidiaries and on the communities
in which the corporation and its subsidiaries operate or are located, the
business reputation of the other party, and the Board of Directors'
evaluation of the then value of the corporation in a freely negotiated sale
and of the future prospects of the corporation as an independent entity.
(e) The provisions of this Section V (paragraphs (a) through
(e), both inclusive) of these Articles of Incorporation may not be amended,
nor shall any amendment be adopted which is inconsistent with any of the
provisions of such Article V hereof except upon the affirmative vote of the
holders of at least eighty percent (80%) of the shares of the corporation's
capital stock, issued, outstanding and entitled to vote.
VI. Commencing with the election of directors at the annual meeting
of shareholders in 1998, the directors shall be divided into three Classes,
A, B, and C, as nearly equal in number as possible, following such procedure
as shall be established by the Board of Directors. The initial term of office
for directors in Class A shall expire at the annual meeting of shareholders
in 1999; the initial term of office for directors in Class B shall expire at
the annual meeting of shareholders in 2000; and the initial term of office
for directors in Class C shall expire at the annual meeting of shareholders
in 2001. As the initial term of office for each Class of directors expires in
accordance with the schedule previously described, successive elections for
directors for each Class shall be held at the corresponding annual
shareholder meeting and, thereafter, upon successive three-year intervals; it
is the intent of this paragraph to establish staggered three-year terms of
office for three distinct classes of directors A, B, and C. However, any
director named between any annual meeting of shareholders shall be for the
term ending with the next annual meeting of shareholders. If the number of
directors fixed by the bylaws increases or decreases, all Classes of
directors shall be increased or decreased as equally as possible.
<PAGE>
VII. The amount of the total authorized capital stock of said
corporation shall be Five Million Dollars ($5,000,000.00), which shall be
divided into one million (1,000,000) shares of the par value of Five Dollars
($5.00) each.
VIII. The full name and address of the incorporator is: Edwin B.
Roller, Jr., 124 Newman Avenue, Harrisonburg, Virginia, 22801.
IX. The existence of this corporation is to be perpetual.
X. The name and address of the appointed person to whom notice or
process may be sent: George B. Moomau, 18 North Main Street, Petersburg,
West Virginia, 26847.
XI. The number of directors constituting the initial board of
directors of the corporation is six, and the names and addresses of the
persons who are to serve as directors until the first annual meeting of
shareholders or until their successors are elected and shall qualify:
Roy S. Harman P.O. Box 276
Petersburg, WV 26847
(Grant County)
George B. Moomau 18 North Main Street
Petersburg, WV 26847
Fred M. Riggleman Rt. 1, Box 30
Dorcas, WV 26835
(Grant County)
Harold Roby 12 Ours Street
Petersburg, WV 26847
John G. VanMeter 5 Water Street
Petersburg, WV 26847
L. Keith Wolfe P.O. Box 127
Petersburg, WV 26847
(Grant County)
<PAGE>
THESE RESTATED ARTICLES OF INCORPORATION do correctly set forth without
change the corresponding provisions of the Corporation's original Articles of
Incorporation as heretofore amended, and do supersede the Corporation's
original Articles of Incorporation and all amendments thereto.
THESE RESTATED ARTICLES OF INCORPORATION are now signed by Leslie A.
Barr, President, and Clarence E. Porter, Secretary/Treasurer, of Highlands
Bankshares, Inc., a corporation organized and existing under the laws of the
State of West Virginia, under the corporate seal of the corporation hereto
affixed and attested by Clarence E. Porter, its Secretary/Treasurer, this
8th day of DECEMBER , 1997.
HIGHLANDS BANKSHARES, INC.
By: LESLIE A. BARR
LESLIE A. BARR, President
By: CLARENCE E. PORTER
CLARENCE E. PORTER, Secretary/Treasurer
<PAGE>
ATTEST:
DECEMBER 8, 1997
CLARENCE E. PORTER, Secretary/Treasurer
STATE OF WEST VIRGINIA
CITY/COUNTY OF GRANT , to-wit;
I, SHELLEY R. MONGOLD , a Notary Public, do hereby certify that on
this 8th day of DECEMBER, 1997, personally appeared before me LESLIE A.
BARR, who, being by me first duly sworn, declared that he is the President of
Highlands Bankshares, Inc., that he signed the foregoing document as
President of the Corporation, and that the statements therein contained are
true.
My commission expires: 3-8-05
SHELLEY R. MONGOLD
Notary Public
STATE OF WEST VIRGINIA
CITY/COUNTY OF GRANT ,to-wit;
I, SHELLEY R. MONGOLD , a Notary Public, do hereby certify
that on this 8th day of DECEMBER, 1997, personally appeared before me
CLARENCE E. PORTER, who, being by me first duly sworn, declared that he is the
Secretary/Treasurer of Highlands Bankshares, Inc., that he signed the
foregoing document as Secretary/Treasurer of the Corporation, and that
the statements therein contained are true.
My commission expires: 3-8-05
SHELLEY R. MONGOLD
Notary Public
These Restated Articles of Incorporation were prepared by Carla W. Tanner,
Wharton, Aldhizer & Weaver, P.L.C., 100 South Mason Street, P.O. Box 20028,
Harrisonburg, Virginia 22801-7528
CWT/21900/98674
Exhibit 3
AMENDMENTS TO BY-LAWS
OF
HIGHLANDS BANKSHARES, INC.
Highlands Bankshares, Inc. ("Corporation"), a corporation organized
and existing under the laws of the State of West Virginia, pursuant to West
Virginia Code Section 31-1-17 and the By-laws of the Corporation, hereby
adopts, effective December 9, 1997 the following Amendments to the By-laws of
the Corporation which, together with the original By-laws not amended herein,
shall govern the management and operation of the Corporation's business and
the regulation of its affairs, to the extent consistent with the
Corporation's Articles of Incorporation, as amended, and applicable law:
1. Section 5 under Article I entitled "Stockholders" shall be
amended to state as follows:
"Section 5. ANNUAL ELECTION OF DIRECTORS. The
annual meeting of the stockholders for the election
of directors and the transaction of other business,
shall be held at the office of the corporation at 3
North Main Street, in the City of Petersburg, County
of Grant, State of West Virginia, or at such other
place as may be designated by the President, on the
second Tuesday of April of each year after December
9, 1997."
2. A new section, Section 9, shall be added under Article II
entitled "Directors," after Section 8 therein, and shall state as follows:
"Section 9. NUMBER. The board of directors shall
consist of not less than five nor more than eight
directors, the exact number within such minimum and
maximum to be fixed by the board of directors or the
stockholders."
3. Section 2 under Article IV entitled "Resignations, Filling of
Vacancies, Removal of Directors" shall be amended to state as follows:
"Section 2. FILLING OF VACANCIES. If the office of
any director, member of a committee, or other office
becomes vacant, the directors in office, except as
otherwise provided by law, may appoint any qualified
person to fill such vacancy, who shall hold office
until the next annual meeting of stockholders for
the election of directors, and until a successor
shall have been elected and have qualified."
<PAGE>
The foregoing amendments were approved by the unanimous vote of the
board of directors of the corporation at the board's meeting held on December
9, 1997, the substance of the amendments having been stated in the notice of
such meeting.
Except to the extent amended above, the By-laws of the Corporation
are hereby reaffirmed, republished and restated as if fully set forth herein.
NOW THEREFORE, THESE AMENDMENTS TO BY-LAWS are now signed by Leslie
A. Barr, President, and Clarence E. Porter, Secretary/Treasurer,
of Highlands Bankshares, Inc., a corporation organized and existing under
the laws of the State of West Virginia, under the corporate seal of the
Corporation hereto affixed and attested by Clarence E. Porter,
its Secretary/Treasurer.
DATE: DECEMBER 8, , 1997
HIGHLANDS BANKSHARES, INC.
By: LESLIA A. BARR
LESLIE A. BARR, President
By: CLARENCE E. PORTER
CLARENCE E. PORTER,
Secretary/Treasurer
46694/1/110899
Exhibit 21 - List of Subsidiaries of the Registrant
The following is a list of subsidiaries meeting the requirements of Exhibit
21.
a) The Grant County Bank (incorporated in West Virginia), doing business as
The Grant County Bank.
b) Capon Valley Bank (incorporated in West Virginia), doing business as the
Capon Valley Bank.
c) HBI Life Insurance Company, Inc. (incorporated in the state of Arizona),
doing business as HBI Life.
Exhibit 21
Exhibit 23 - Consent of Certified Public Accountant
Board of Directors
Highlands Bankshares, Inc.
We consent to the use of our report, dated January 15, 1998, relating to the
consolidated balance sheets of Highlands Bankshares, Inc. as of December 31,
1997 and 1996, and the related statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1997, which report appears on page 23 in the December 31, 1997
Annual Report to Shareholders of Highlands Bankshares, Inc. and page 45 of this
10KSB.
S. B. HOOVER & COMPANY, L.L.P.
Harrisonburg, VA
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HIGHLANDS
BANKSHARES, INC. FORM 10KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> HIGHLANDS BANKSHARES, INC.
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