UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended Commission File No. 0-16761
March 31, 1998
HIGHLANDS BANKSHARES, INC.
West Virginia 55-0650793
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 929
Petersburg, West Virginia 26847
(304) 257-4111
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes ..X. No ....
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding at March 31, 1998
Common Stock, par value - $5 501,898 shares
<PAGE> 1
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 1998 and 1997 2
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8K 17
SIGNATURES 19
<PAGE> 2
Part I Financial Information
Item 1.Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
March 31,
1998 1997
Interest Income
Interest and fees on loans $ 3,157 $ 2,935
Interest on federal funds sold 90 45
Interest on time deposits 10 10
Interest and dividends on investment securities
Taxable 529 591
Nontaxable 44 49
Total Interest Income 3,830 3,630
Interest Expense
Interest on time deposits over $100,000 351 322
Interest on other deposits 1,531 1,436
Interest on borrowed money 3 12
Total Interest Expense 1,885 1,770
Net Interest Income 1,945 1,860
Provision for Loan Losses 60 45
Net Interest Income After Loan Losses 1,885 1,815
Noninterest Income
Service charges 74 71
Other 90 76
Income on security transactions 5
Total Noninterest Income 164 152
Noninterest Expense
Salaries and employee benefits 718 691
Occupancy expense 67 61
Equipment expense 110 113
Data processing 110 108
Other 312 284
Total Noninterest Expense 1,317 1,257
Income Before Income Taxes 732 710
Provision for Income Taxes 235 230
Net Income $ 497 $ 480
Per Share Data
Net Income $ .99 $ .94
Cash Dividends $ .27 $ .25
Weighted Average Common Shares Outstanding 501,898 511,633
The accompanying notes are an integral part of these statements.
<PAGE> 3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
1998 1997
ASSETS
Cash and due from banks - interest bearing $ 3,823 $ 3,246
Time deposits in other banks 864 827
Federal funds sold 6,524 6,895
Securities held to maturity (note 2) 4,426 4,577
Securities available for sale (note 3) 30,401 31,683
Other investments 2,801 715
Loans, net of unearned interest (note 5) 140,682 137,105
Less allowance for loan losses (note 6) (1,320) (1,370)
Net Loans 139,362 135,735
Bank premises and equipment 4,696 4,773
Interest receivable 1,560 1,548
Deferred income tax benefits 167 165
Other assets 628 606
Total Assets $195,252 $190,770
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 16,071 $ 15,952
Interest bearing
Money market and checking 16,916 15,774
Money market savings 12,686 12,179
Savings 19,991 19,389
Time deposits over $100,000 23,286 23,328
All other time deposits 82,768 81,314
Total Deposits 171,718 167,936
Borrowed money 252 226
Accrued expenses and other liabilities 1,627 1,311
Total Liabilities 173,597 169,473
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 1,000,000 shares
authorized, 546,764 shares issued) 2,734 2,734
Surplus 1,662
1,662
Retained earnings 18,216 17,854
Net unrealized gain on securities available for sale 36 40
22,648 22,290
Treasury stock (at cost, 44,866 shares in 1998
and 1997) (993) (993)
Total Stockholders' Equity 21,655 21,297
Total Liabilities and Stockholders' Equity $195,252 $190,770
The accompanying notes are an integral part of these statements.
<PAGE> 4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Three Months Ended
March 31,
1998 1997
Cash Flows from Operating Activities:
Net income $ 497 $ 480
Adjustments to reconcile net income to net
cash provided by operating activities:
Income on securities transactions (5)
Depreciation 95 95
Net amortization 1 1
Provision for loan losses 60 45
Increase in interest receivable (12) (159)
(Increase) decrease in other assets (24) 44
Increase in accrued expenses 316 220
Net Cash Provided by Operating Activities 933 721
Cash Flows from Investing Activities:
Proceeds from maturities of securities
available for sale 1,964 1,282
Proceeds from maturities of securities
held to maturity 146 827
Purchase of securities available for sale (684)
Purchase of other investments (2,085) (76)
Net change in time deposits in other banks (37) 77
Net change in loans (3,687) (3,701)
Purchase of property and equipment (18) (224)
Net change in federal funds sold 371 (506)
Net Cash Consumed by Investing Activities (4,030) (2,321)
Cash Flows from Financing Activities:
Purchase of treasury stock (499)
Net increase in deposits 3,782 1,230
Dividends paid in cash (135) (129)
Other borrowed money 32 1,500
Repayment of borrowed money (5) (5)
Net Cash Provided by Financing Activities 3,674 2,097
Net Increase in Cash and Cash Equivalents 577 497
Cash and Cash Equivalents, Beginning of Period 3,246 3,195
Cash and Cash Equivalents, End of Period $ 3,823 $ 3,692
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 2 $ 2
Interest 1,917 1,818
The accompanying notes are an integral part of these statements.
<PAGE> 5
<TABLE>
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
<CAPTION>
Accumulated
Other
Treasury Common Retained Comprehensive
Stock Stock Surplus Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 $ (494) $ 2,734 $ 1,662 $ 16,478 $ (151) $ 20,229
Comprehensive Income
Net income 480 480
Net change in unrealized
depreciation on investment
securities available for sale,
net of taxes (169) (169)
Total Comprehensive Income 480 (169) 311
Purchase of treasury stock (499) (499)
Dividends paid (129) (129)
Balances, March 31, 1997 $ (993) $ 2,734 $ 1,662 $ 16,829 $ (320) $19,912
Accumulated
Other
Treasury Common Retained Comprehensive
Stock Stock Surplus Earnings Income (Loss) Total
Balances, December 31, 1997 $ (993) $ 2,734 $ 1,662 $ 17,854 $ 40 $21,297
Comprehensive Income
Net income 497 497
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes (4) (4)
Total Comprehensive Income 497 (4) 493
Dividends paid (135) (135)
Balances, March 31, 1998 $ (993) $ 2,734 $ 1,662 $ 18,216 $ 36 $21,655
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 6
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally
accepted accounting principles and to general industry
practices. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of March
31, 1998, and the results of operations for the three month
periods ended March 31, 1998 and 1997. The notes included herein
should be read in conjunction with the notes to financial
statements included in the 1997 annual report to stockholders of
Highlands Bankshares, Inc.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and fair value of securities held to
maturity as of March 31, 1998 and December 31, 1997, are as
follows:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
US Treasury securities and
obligations of US Government
corporations and agencies $ 1,277 $ 1,281 $ 1,282 $ 1,287
Obligations of states and
political subdivisions 3,149 3,239 3,295 3,390
Total $ 4,426 $ 4,520 $ 4,577 $ 4,677
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for
sale as of March 31, 1998 and December 31, 1997 are as follows:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
US Treasury securities and
obligations of US Government
corporations and agencies $ 29,614 $ 29,738 $ 30,889 $ 31,014
Obligations of states and
political subdivisions 100 101 100 101
Other investments 630 562 630 568
Total $ 30,344 $ 30,401 $ 31,619 $ 31,683
<PAGE> 7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS:
Other investments consist of two single premium insurance
contracts which have the dual purposes of providing a rate of
return to the Company which approximately equals the rate of
return on one year Treasury obligations and providing life
insurance and retirement benefits to employees. The carrying
value of this investment is $2,086,000. Other investments
totaling $715,000 include investments in the Federal Home Loan
Bank and other governmental entities whose transferability is
restricted.
NOTE 5 LOANS OUTSTANDING:
A summary of loans outstanding as of March 31, 1998 and
December 31, 1997, is as follows:
1998 1997
Commercial $ 32,061 $ 30,717
Real estate - construction 2,839 2,189
- mortgages 76,283 75,221
Consumer installment 31,495 31,492
Total 142,678 139,619
Unearned interest (1,996) (2,514)
Net loans outstanding $140,682 $137,105
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for
the three months ended March 31, 1998 and 1997, follows:
1998 1997
Balance, beginning of period $ 1,370 $ 1,257
Provisions charged to operating expenses 60 45
Loan recoveries 23 45
Loan charge-offs (133) (60)
Balance, end of period $ 1,320 $ 1,287
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's net income was $497,000 in the first quarter of 1998, an
increase of 3.54% compared to the first quarter of 1997. Earnings per
share were $.99 for the first quarter of 1998 compared to $.94 per share
for the same quarter in 1997 (a 5.32% increase). The Company's annualized
return on average equity was 9.26% in the first quarter of 1998 compared to
9.54% for the first quarter of 1997. Return on average assets was 1.04% for
1998 and 1.06% for 1997.
The increase in earnings per share for the first quarter was due to
moderate increases in net interest income and noninterest income. Both are
reflective of growth in assets and deposits within the last twelve months -
a 6.03% increase in interest earning assets and a 8.35% increase in
deposits and other borrowed money. Net interest income on a tax equivalent
basis increased 4.34% due to increased volume of loans outstanding and a
declining cost of funds in time deposits. The provision for loan losses
increased slightly due to a higher volume of loans outstanding. Other
noninterest expenses increased 4.77%, mainly the result of the opening of a
new branch of the Capon Valley Bank in Baker, West Virginia.
Net Interest Income
The Company's net interest income on a tax equivalent basis was 4.34% in
the first quarter of 1998 compared to 4.41% for the first quarter of 1997.
Commercial rates fell from 8.97% in 1997 to 8.70% in 1998 due to
competition for loans in existing and expanding markets. Due to a strong
economy, average commercial loans outstanding increased 19.35% in the first
quarter of 1998 compared to the first quarter of 1997. Rates on consumer
loans declined thirty-six basis points as volume increases mirrored overall
loan growth resulting in a net rise in income. Rates on real estate loans
declined fourteen basis points due to competition in the secondary market
and changes in overall market conditions. A 6.69% increase in average real
estate loans outstanding for the 1998 quarter helped increase real estate
income. The overall decline of nineteen basis points in returns on loans
outstanding was more than offset by declines in the rates paid on deposits
and borrowed money (see below) and volume increases.
The Company saw an overall increase of nineteen basis points in the
yields on investment securities compared to 1997 results. The increase is
reflective of higher rates on taxable investments and stems mainly from
reinvestments at increased rates. Total investments in securities declined
in the first quarter of 1998 as maturities were used to fund loan
increases. Interest rates on federal funds sold and interest bearing
deposits increased 28 basis points as rates in the overall market hovered
between 5.50% and 5.75% within the quarter. The increase in the average
balance of federal funds outstanding reflects the increase in deposits, a
flat yield curve and the Company's desire to increase liquidity.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Interest rates paid on transaction and savings amounts increased a
combined five basis points due to higher than average rates paid by the
local competition. The rate paid on these deposit accounts has
traditionally been higher than larger institutions within the state. With
market rates quite low on transaction accounts, customers have moved
additional savings to instruments yielding higher rates, i.e. time
deposits. The average balance in time deposits grew 9.68% in 1998 compared
to 1997 and was a major source of funding for the loan growth discussed
earlier. A nine basis point drop in rates paid on deposits between 1997
and 1998 reflects older certificates maturing and renewing at rates in line
with current market conditions.
A complete yield analysis is shown as Table I on page 15.
Noninterest Income
Noninterest income increased 7.89% during the first quarter of 1998
compared to the same quarter in 1997. The increase was due to greater
income from service charges on transaction accounts and loan servicing
income. The increase was in line with asset growth and management's
expectations.
Noninterest Expenses
Overall noninterest expenses rose 4.77% for the first quarter of 1998
when compared to the first quarter of 1997. Personnel expenses increased
3.91% in the first quarter of 1998 over the same quarter in 1997 due to
merit and inflationary increases. Occupancy and equipment expense rose
1.72% while data processing expenses rose 1.85% between the periods.
Increased costs for advertising, ATM services, stationery and communication
services resulted in other noninterest expenses increasing 9.86% in 1998
compared to 1997. The overall increase in noninterest expense of 4.77% was
in line with management's expectations.
Most branch operations take one to three years to become profitable.
Management believes the Keyser location will provide loan and deposit
growth immediately and will attain profitability within two to three
years. The Baker location, which opened in April 1997, is located in an
area with good potential growth. The estimate of time to attain
profitability at this location is two to four years. Costs incurred prior
to profitability are viewed as a part of the investment in this location
and are accepted as part of the costs incurred for long-term growth.
Loan Portfolio
The Company is an active residential mortgage and construction lender
and generally extends commercial loans to small and medium sized businesses
within its primary service area. The Company's commercial lending activity
extends across its primary service areas of Grant, Hardy, Mineral 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.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Loan Portfolio (Continued)
The principal economic risk associated with each of the categories of
loans in the Company's portfolio is the creditworthiness of its borrowers.
Within each category, such risk is increased or decreased depending on
prevailing economic conditions. The risk associated with the real estate
mortgage loans and installment loans to individuals varies based upon
employment levels, consumer confidence, fluctuations in value of
residential real estate and other conditions that affect the ability of
consumers to repay indebtedness. The risk associated with commercial,
financial and agricultural loans varies based upon the strength and
activity of the local economies of the Company's market areas. The risk
associated with real estate construction loans varies based upon the supply
of and demand for the type of real estate under construction.
Loans outstanding increased $3,577,000 or 2.61% in the first quarter in
1998 compared to levels at December 31, 1997. A 6.06% rise in commercial
and construction loans was primarily responsible for the increase. Modest
gains in consumer and mortgage lending were also experienced. The loan to
deposit ratio was 81.93% at March 31, 1998 compared to 81.64% at December
31, 1997. Loan demand is expected to remain satisfactory in the near
future barring any credit tightening by the Federal Reserve.
Asset Quality and Risk Elements
Nonperforming loans include nonaccrual loans, loans 90 days or more past
due and restructured loans. Nonaccrual loans are loans on which interest
accruals have been suspended or discontinued permanently. Restructured
loans are loans on which the original interest rate or repayment terms have
been changed due to financial hardship of the borrower. Nonaccrual loans
totaled $70,000 at March 31, 1998 compared to zero nonaccrual loans at
December 31, 1997.
Real estate acquired through foreclosure was $214,000 at March 31, 1998
compared to $174,000 at December 31, 1997. All foreclosed property held at
March 31, 1998 was in the Company's primary service area. The Company's
practice is to value real estate acquired through foreclosure at the lower
of (i) an independent current appraisal or market analysis less anticipated
costs of disposal, or (ii) the existing loan balance. The Company is
actively marketing all foreclosed real estate and does not anticipate
material write-downs in value before disposition.
An inherent risk in the lending of money is that the borrower will not
be able to repay the loan under the terms of the original agreement. The
allowance for loan losses (see subsequent section) provides for this risk
and is reviewed periodically for adequacy. This review also considers
concentrations of loans in terms of geography, business type or level of
risk. While lending is geographically diversified within the service area,
the Company does have some concentration of loans in the area of
agriculture (primarily poultry farming), timber and related industries.
Management recognizes these concentrations and considers them when
structuring its loan portfolio. As of March 31, 1998, management is not
aware of any significant potential problem loans in which the debtor is
currently meeting their obligations as stated in the loan agreement but
which may change in future periods.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and local
economic changes, changes in the nature and value of the portfolio and
industry standards. The Company's loan classification system, which rates
existing loans, provides the basis for adjusting the allowance for loan
losses. Management reviews these classification totals, along with
internally generated loan review reports, past due reports, historical loan
loss experience and individual borrower's financial health to determine the
necessary amount to be provided in the allowance for loan losses.
Management evaluates nonperforming loans relative to their collateral value
and makes the appropriate adjustments to the allowance when needed.
The provision for credit losses and changes in the allowance for credit
losses are shown below (in thousands of dollars).
Quarter Ended
March 31,
1998 1997
Balance, beginning of period $ 1,370 $ 1,257
Net charge-offs (recoveries)
Charge-offs (133) (60)
Recoveries 23 45
Total net charge-offs * (110) (15)
Provision for credit losses 60 45
Balance, End of Period $ 1,320 $ 1,287
* Components of net charge-offs:
Real estate - mortgages 12
Commercial (103)
Installment (7) (27)
Total $ (110) $ (15)
The allowance for credit losses of $1,320,000 at March 31, 1998, was
down $50,000 from its level at December 31, 1997. The decline was due to a
couple of large credit losses charged to the reserve in the first quarter
of 1998. The allowance was equal to .94% and 1.00% of total loans
outstanding at March 31, 1998 and December 31, 1997, respectively. The
Company believes that its allowance must be viewed in its entirety and,
therefore, is available for potential credit losses in its entire
portfolio, including loans, credit-related commitments and other financial
instruments. In the opinion of management, the allowance, when taken as a
whole, is adequate to absorb reasonably estimated credit losses inherent in
the Company's portfolio.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Securities
The Company's securities portfolio serves several purposes. Portions
of the portfolio secure certain public and trust deposits while the
remaining portions are held as investments or used to assist the Company in
liquidity and asset liability management. Total securities and other
investments at March 31, 1998 were $37,628,000 compared to $36,975,000 at
December 31, 1997. Total securities and other investments as percent of
total assets were 19.27% at March 31, 1998 compared to 19.38% at December
31, 1997. The slight increase in securities is in line with general asset
growth.
The securities portfolio consists of three components, securities held
to maturity, securities available for sale and other investments.
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. Other
investments consist of investments in insurance products which are designed
to provide a rate of return similar to one year Treasury obligations.
These products may provide additional employee benefits based on their
annualized performance. Other investments also include restricted
securities whose ownership is required to participate in certain
governmental programs. The Company's recent purchases of all securities
have generally been limited to securities of high credit quality with short
to medium term maturities. Changes in the market values of securities
available for sale are reflected as changes in stockholders' equity, net of
the deferred tax effect. As of March 31, 1998, the cost of the securities
available for sale exceeded their market value by $57,000 ($36,000 after
tax considerations).
Deposits
The Company's main source of funds is customer deposits received from
individuals, governmental entities, and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings,
money market and certificates of deposit.
Total deposits increased 2.25% between December 31, 1997 and March 31,
1998. The cost of funds for the first quarter of 1998 was 4.90% compared
to 4.99% for the same quarter in 1997. With the exception of demand
deposits, the yields on all types of deposits declined within the period.
The majority of the Company's deposits are time deposits which are
attractive to persons seeking high yields on their deposits but without the
need for liquidity. The Company has not actively pursued deposits in
excess of $100,000 due to the volatile nature of these relationships.
Capital
The Company seeks to maintain a strong capital base to expand
facilities, promote public confidence, support current operations and grow
at a manageable level. As of March 31, 1998, the Company's total risk
based capital ratio was 18.20% which is far above the regulatory minimum of
8.0%. The ratio of total capital to total assets was 11.09% at March 31,
1998 which exceeds that of the Company's peers.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Capital (Continued)
In the first quarter of 1997, the Company repurchased 12,168 shares of
common stock at a cost of $499,000. This repurchase reduced total shares
outstanding by 2.37% and will be used for future corporate needs.
Liquidity
Liquidity is the ability to meet present and future financial
obligations through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid
assets include cash, interest bearing deposits with banks, federal funds
sold, investments and loans maturing within one year. The Company's
ability to obtain deposits and purchase funds at favorable rates determines
its liability liquidity. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that the Company maintains overall liquidity sufficient
to satisfy its depositors' requirements and meet its customers' credit
needs.
Additional sources of liquidity available to the Company include, but
are not limited to, loan repayments, the ability to obtain deposits through
the adjustment of interest rates and the purchasing of federal funds. To
further meet its liquidity needs, the Company also maintains lines of
credit with correspondent financial institutions and the Federal Reserve
Bank of Richmond. Both subsidiary banks have lines of credit with the
Federal Home Loan Bank of Pittsburgh although utilization has been quite
limited. In the past, growth in deposits and proceeds from the maturity of
investment securities have been sufficient to fund the net increase in
loans.
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on
the balance sheet. Managing this risk involves regular monitoring of the
interest sensitive assets relative to interest sensitive liabilities over
specific time intervals.
At March 31, 1998 the Company had a negative gap position. This
liability sensitive position typically produces an unfavorable contribution
to earnings during a period of increasing rates. With the largest amount
of interest sensitive assets and liabilities repricing within three years,
the Company monitors these areas very closely. Early withdrawal of
deposits, prepayments of loans and loan delinquencies are some of the
factors that could affect actual versus expected cash flows. In addition,
changes in rates on interest sensitive assets and liabilities may not be
equal, which could result in a change in net interest margin. While the
Company does not match each of its interest sensitive assets against
specific interest sensitive liabilities, it does review its positions
regularly and takes actions to reposition itself when necessary.
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Effects of Inflation
Inflation significantly affects industries having high proportions of
property, plant and equipment or high levels of inventories. Although the
Company is not significantly affected in these areas, inflation does have
an impact on the growth of assets. As assets grow rapidly, it becomes
necessary to increase equity capital at proportionate levels to maintain
the appropriate equity to asset ratios. Traditionally, the Company's
earnings and high capital retention levels have enabled the Company to meet
these needs.
The Company's reported earnings results have been affected by
inflation, but isolating the effect is difficult. The different types of
income and expense are affected in various ways. Interest rates are
affected by inflation, but the timing and magnitude of the changes may not
coincide with changes in the consumer price index. Management actively
monitors interest rate sensitivity, as illustrated by the Gap Analysis
(Table II, page 16) in order to minimize the effects of inflationary trends
on interest rates. Other areas of noninterest expenses may be more directly
affected by inflation.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission,
including Highlands Bankshares, Inc., and the address is
(http://www.sec.gov).
<PAGE> 15
TABLE 1
<TABLE>
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans
Commercial $ 31,043 $ 675 8.70% $ 26,009 $ 583 8.97%
Consumer 29,097 806 11.08 26,423 756 11.44
Real estate 78,281 1,676 8.56 73,404 1,596 8.70
Total Loans 138,421 3,157 9.12 125,836 2,935 9.33
Federal funds sold 6,429 90 5.60 3,384 45 5.32
Interest bearing deposits 819 10 4.88 806 10 4.96
Investments
Taxable 32,758 529 6.46 37,728 591 6.27
Tax exempt 1 3,348 70 8.36 3,691 78 8.45
Total Earning Assets 1 181,775 3,856 8.49 171,445 3,659 8.54
Interest Expense
Demand deposits 28,161 201 2.85 26,399 182 2.76
Savings 19,464 168 3.45 18,141 158 3.48
Time deposits 105,967 1,513 5.71 96,616 1,418 5.87
Other borrowed money 237 3 5.06 822 12 5.84
Total Interest
Bearing Liabilities $153,829 1,885 4.90 $141,978 1,770 4.99
Net Interest Margin $ 1,971 $ 1,889
Net Yield on Interest Earning Assets 1 4.34% 4.41%
1 Yields are on a taxable equivalent basis.
2 Includes loans in nonaccrual status.
</TABLE>
<PAGE> 16
TABLE II
<TABLE>
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31, 1998
(In Thousands of Dollars)
<CAPTION>
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or Without
Days Days Years Years Maturity Total
<S> <C> <C> <C> <C> <C> <C>
EARNINGS ASSETS
Loans $22,828 $49,581 $48,401 $11,612 $ 8,260 $140,682
Fed funds sold 6,524 6,524
Securities 6,634 6,741 16,029 3,465 4,759 37,628
Interest bearing time
deposits 264 600 864
Total 36,250 56,922 64,430 15,077 13,019 185,698
INTEREST BEARING LIABILITIES
Transaction accounts 16,916 16,916
Money market savings 12,686 12,686
Savings accounts 19,991 19,991
Time deposits more
than $100,000 4,450 9,393 7,404 2,039 23,286
Time deposits less
than $100,000 14,557 37,595 25,493 4,759 364 82,768
Other borrowed money 6 18 52 58 118 252
Total 68,606 47,006 32,949 6,856 482 155,899
Rate sensitivity GAP (32,356) 9,916 31,481 8,221 12,537 29,799
Cumulative GAP (32,356) (22,440) 9,041 17,262 29,799
Ratio of cummulative
interest sensitive assets
to cummulative interest
sensitive liabilities 52.83% 80.59% 106.09% 111.11% 119.11%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
</TABLE>
<PAGE> 17
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a) Exhibits
3 (i) Articles of Incorporation of
Highlands Bankshares, Inc.
are incorporated by
reference to Appendix C to
Highlands Bankshares, Inc.'s
Form S-4 filed October 20,
1986; amended on December 8,
1997 and incorporated in
1997 Form 10-KSB.
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;
amended on December 8, 1997
and incorporated in 1997
Form 10-KSB.
27 Financial Data Schedule
attached.
(b) Reports on Form 8-K filed during
the three months ended March 31,
1998
None
<PAGE> 18
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending March 31, 1998 20
<PAGE> 19
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
LESLIE A. BARR
Leslie A. Barr
President
CLARENCE E. PORTER
Clarence E. Porter
Secretary/Treasurer
Date May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Highlands Bankshares, Inc. Form 10QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,823
<INT-BEARING-DEPOSITS> 864
<FED-FUNDS-SOLD> 6,524
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,401
<INVESTMENTS-CARRYING> 4,426
<INVESTMENTS-MARKET> 4,520
<LOANS> 140,682
<ALLOWANCE> (1,320)
<TOTAL-ASSETS> 195,252
<DEPOSITS> 171,718
<SHORT-TERM> 24
<LIABILITIES-OTHER> 1,627
<LONG-TERM> 228
0
0
<COMMON> 2,734
<OTHER-SE> 18,921
<TOTAL-LIABILITIES-AND-EQUITY> 195,252
<INTEREST-LOAN> 3,157
<INTEREST-INVEST> 573
<INTEREST-OTHER> 100
<INTEREST-TOTAL> 3,830
<INTEREST-DEPOSIT> 1,882
<INTEREST-EXPENSE> 1,885
<INTEREST-INCOME-NET> 1,945
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 1,317
<INCOME-PRETAX> 732
<INCOME-PRE-EXTRAORDINARY> 732
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 497
<EPS-PRIMARY> .99
<EPS-DILUTED> .99
<YIELD-ACTUAL> 4.34
<LOANS-NON> 70
<LOANS-PAST> 1,216
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,370
<CHARGE-OFFS> 133
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 1,320
<ALLOWANCE-DOMESTIC> 1,320
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
