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, 1999
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, 1999
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, 1999 and 1998 2
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 1999 and 1998 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 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibit and Reports on Form 8K 18
SIGNATURES 20
<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,
1999 1998
Interest Income
Interest and fees on loans $ 3,284 $ 3,157
Interest on federal funds sold 129 90
Interest on time deposits 45 10
Interest and dividends on investment securities
Taxable 448 529
Nontaxable 42 44
Total Interest Income 3,948 3,830
Interest Expense
Interest on time deposits over $100,000 372 351
Interest on other deposits 1,499 1,531
Interest on borrowed money 35 3
Total Interest Expense 1,906 1,885
Net Interest Income 2,042 1,945
Provision for Loan Losses 60 60
Net Interest Income After Loan Losses 1,982 1,885
Noninterest Income
Service charges 81 74
Other 81 90
Total Noninterest Income 162 164
Noninterest Expense
Salaries and employee benefits 757 718
Occupancy expense 67 67
Equipment expense 109 110
Data processing 111 110
Other 334 312
Total Noninterest Expense 1,378 1,317
Income Before Income Taxes 766 732
Provision for Income Taxes 261 235
Net Income $ 505 $ 497
Per Share Data
Net Income $ 1.01 $ .99
Cash Dividends $ .29 $ .27
Weighted Average Common Shares Outstanding 501,898 501,898
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,
1999 1998
ASSETS
Cash and due from banks - interest bearing $ 6,138 $ 5,112
Time deposits in other banks 3,673 3,432
Federal funds sold 12,857 12,374
Securities held to maturity (note 2) 3,502 3,504
Securities available for sale (note 3) 29,035 29,758
Other investments 731 731
Loans, net of unearned interest (note 5) 149,907 148,384
Less allowance for loan losses (note 6) (1,303) (1,356)
Net Loans 148,604 147,028
Bank premises and equipment 4,714 4,760
Interest receivable 1,641 1,556
Deferred income tax benefits 156 125
Other assets 2,599 2,601
Total Assets $213,650 $210,981
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 18,328 $ 22,043
Interest bearing
Money market and checking 20,482 18,353
Money market savings 12,495 11,394
Savings 21,658 20,849
Time deposits over $100,000 25,783 25,723
All other time deposits 87,616 86,225
Total Deposits 186,362 184,587
Borrowed money 2,586 2,320
Accrued expenses and other liabilities 1,578 1,228
Total Liabilities 190,526 188,135
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 19,683 19,324
Accumulated other comprehensive income 38 119
24,117 23,839
Treasury stock (at cost, 44,866 shares
in 1999 and 1998) (993) (993)
Total Stockholders' Equity 23,124 22,846
Total Liabilities and Stockholders' Equity $213,650 $210,981
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,
1999 1998
Cash Flows from Operating Activities:
Net income $ 505 $ 497
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 89 95
Net amortization 48 1
Provision for loan losses 60 60
Increase in interest receivable (85) (12)
(Increase) decrease in other assets 18 (24)
Increase in accrued expenses 351 316
Net Cash Provided by Operating Activities 986 933
Cash Flows from Investing Activities:
Proceeds from maturities of securities
available for sale 3,672 1,964
Proceeds from maturities of securities
held to maturity 146
Purchase of securities available for sale (3,124) (684)
Net change in time deposits in other banks (241) (37)
Net change in loans (1,636) (3,687)
Purchase of property and equipment (43) (18)
Net change in federal funds sold (483) 371
Investment in insurance contracts (2,085)
Net Cash Consumed by Investing Activities (1,855) (4,030)
Cash Flows from Financing Activities:
Net increase in deposits 1,775 3,782
Dividends paid in cash (146) (135)
Other borrowed money 307 32
Repayment of borrowed money (41) (5)
Net Cash Provided by Financing Activities 1,895 3,674
Net Increase in Cash and Cash Equivalents 1,026 577
Cash and Cash Equivalents, Beginning of Period 5,112 3,246
Cash and Cash Equivalents, End of Period $ 6,138 $ 3,823
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 18 $ 2
Interest 1,885 1,917
The accompanying notes are an integral part of these statements.
<PAGE> 5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
<TABLE>
Accumulated
Other
Treasury Common Retained Comprehensive
Stock Stock Surplus Earnings Income (Loss) Total
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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 493
Dividends paid (135) (135)
Balances, March 31, 1998 $ (993) $ 2,734 $ 1,662 $ 18,216 $ 36 $ 21,655
Accumulated
Other
Treasury Common Retained Comprehensive
Stock Stock Surplus Earnings Income (Loss) Total
Balances, December 31, 1998 $ (993) $ 2,734 $ 1,662 $ 19,324 $ 119 $ 22,846
Comprehensive Income
Net income 505 505
Net change in unrealized
depreciation on investment
securities available for sale,
net of taxes (81) (81)
Total Comprehensive Income 424
Dividends paid (146) (146)
Balances, March 31, 1999 $ (993) $ 2,734 $ 1,662 $ 19,683 $ 38 $ 23,124
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally accepted
accounting principles and to general industry practices. In the
opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of March 31, 1999, and the results of operations for the
three month periods ended March 31, 1999 and 1998. The notes included
herein should be read in conjunction with the notes to financial
statements included in the 1998 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, 1999 and December 31, 1998, are as follows:
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
US Treasury securities and
obligations of US Government
corporations and agencies $ 516 $ 522 $ 517 $ 523
Obligations of states and
political subdivisions 2,986 3,096 2,987 3,098
Total $ 3,502 $ 3,618 $3,504 $ 3,621
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of March 31, 1999 and December 31, 1998 are as follows:
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
US Treasury securities and
obligations of US Government
corporations and agencies $ 27,594 $ 27,723 $ 28,179 $ 28,439
Obligations of states and
political subdivisions 255 261 255 262
Other investments 1,126 1,051 1,134 1,057
Total $ 28,975 $ 29,035 $ 29,568 $ 29,758
<PAGE> 7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS:
Other investments totaling $731,000 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, 1999 and December
31, 1998, is as follows:
1999 1998
Commercial $ 30,402 $ 30,718
Real estate - construction 2,696 2,969
- mortgages 84,884 83,446
Consumer installment 33,985 33,464
Total 151,967 150,597
Unearned interest (2,060) (2,213)
Net loans outstanding $149,907 $148,384
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 1999 and 1998, follows:
1999 1998
Balance, beginning of period $ 1,356 $ 1,370
Provisions charged to operating expenses 60 60
Loan recoveries 31 23
Loan charge-offs (144) (133)
Balance, end of period $ 1,303 $ 1,320
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's net income was $505,000 in the first quarter of 1999, an
increase of 1.61% compared to the first quarter of 1998. Earnings per share were
$1.01 for the first quarter of 1999 compared to $.99 per share for the same
quarter in 1998 (a 1.61% increase). The Company's annualized return on average
equity was 8.79% in the first quarter of 1999 compared to 9.26% for the first
quarter of 1998. Return on average assets was .95% for 1999 and 1.04% for 1998.
The increase in earnings per share for the first quarter was due to moderate
increases in net interest income. Growth in average earning assets (7.92%) and
interest bearing liabilities (8.18%) within the last twelve months were
responsible for the increase. Net interest income on a tax equivalent basis
increased 4.87% due to increased volume of loans outstanding and a declining
cost of funds for all deposits. The provision for loan losses was unchanged
between years. Other noninterest expenses increased 4.63%, mainly the result of
salary and benefit increases and year 2000 expenses.
Net Interest Income
The Company's net interest income on a tax equivalent basis was 4.21% in the
first quarter of 1999 compared to 4.34% for the first quarter of 1998.
Commercial rates fell from 8.70% in 1998 to 8.40% in 1999 due to competition for
loans in existing and expanding markets. The volume of mortgage and installment
lending increased in 1999 due to a strong economy and declining rates. Rates on
installment loans dropped twenty-one basis points and rates on real estate loans
dropped thirty basis points. The overall decline of twenty-seven basis points in
returns on loans outstanding was offset by declines in the rates paid on
deposits and borrowed money (see below) and volume increases.
In 1999, the Company saw an overall decline of thirty basis points in the
yields on investment securities compared to 1998 results. The decline is
reflective of lower rates on taxable investments and stems mainly from
investments maturing at higher rates than reinvestment alternatives. Total
investments in securities declined in the first quarter of 1999 as maturities
were used to fund loan increases. Interest rates on federal funds sold and
interest bearing deposits decreased ninety-five basis points as rates in the
overall market declined within the last year. 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.
Interest rates paid on transaction and savings amounts declined a combined
fifty-nine basis points due to lower rates paid by the local competition. The
rate paid on these deposit accounts has traditionally been higher than larger
institutions within the state although this disparity is decreasing. 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 6.60% in 1999 compared to 1998 and was a major source of
funding for the loan growth discussed earlier. A twenty-one basis point drop in
rates paid on time deposits between 1998 and 1999 reflects older certificates
maturing and renewing at rates in line with current market conditions.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Within 1998 and the first quarter of 1999, the Company has borrowed amounts
from the FHLB at fixed rates of interest and loaned these monies to customers on
a fixed rate basis. The Company anticipates continuing to use this approach as a
mechanism to provide long-term financing to customers and limit market rate
risk. Yields on this money increased thirty-six basis points due to a change in
the level of average maturities.
A complete yield analysis is shown as Table I on page 15.
Noninterest Income
Noninterest income for 1999 was virtually unchanged from amounts for 1998.
Increases in service charge income of 9.46% due to volume increases were offset
by declines in insurance and other income as the result of higher than usual
insurance claims.
Noninterest Expenses
Overall noninterest expense increased 4.63% in 1999 as the result of
personnel expense increases and year 2000 preparedness costs. Personnel expense
increases were the result of a 2.53% increase in full time equivalent employees
and a 2.93% increase in average wages. Expenses for occupancy, equipment and
data processing were unchanged from 1998 to 1999. Other noninterest expense
increased 7.05% due to costs associated with the year 2000 preparedness and
costs of asset growth. The overall increase in nonoperating expense of 4.63% is
consistent with prior periods and the growth in assets and deposits.
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.
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.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Loan Portfolio (Continued)
Loans outstanding increased $1,523,000 or 1.03% in the first quarter in 1999
compared to levels at December 31, 1998. A 1.72% rise in mortgage loans was
primarily responsible for the increase. Modest gains in consumer lending and
declines in commercial lending were also experienced. The loan to deposit ratio
was 80.44% at March 31, 1999 compared to 80.39% at December 31, 1998. 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 $35,000 at March
31, 1999 compared to $39,000 in nonaccrual loans at December 31, 1998.
Real estate acquired through foreclosure was $95,000 at March 31, 1999 and
December 31, 1998. All foreclosed property held at March 31, 1999 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, 1999,
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 conditions, changes in the nature 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,
1999 1998
Balance, beginning of period $ 1,356 $ 1,370
Net charge-offs (recoveries)
Charge-offs (144) (133)
Recoveries 31 23
Total net charge-offs * (113) (110)
Provision for credit losses 60 60
Balance, End of Period $ 1,303 $ 1,320
* Components of net charge-offs:
Commercial (72) (103)
Installment (41) (7)
Total $ (113) $ (110)
The allowance for credit losses of $1,303,000 at March 31, 1999, was down
$53,000 from its level at December 31, 1998. The decline was due to a couple of
large credit losses charged to the reserve in the first quarter of 1999. The
allowance was equal to .87% and .91% of total loans outstanding at March 31,
1999 and December 31, 1998, 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, 1999
were $33,268,000 compared to $33,993,000 at December 31, 1998. Total securities
and other investments as a percentage of total assets were 15.57% at March 31,
1999 compared to 16.11% at December 31, 1998. The decline in securities is due
to a lack of good investment opportunities and adequate loan demand.
The securities portfolio consists of three components, specifically,
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, 1999, the cost of the securities available for sale exceeded their
market value by $60,000 ($38,000 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 .96% between December 31, 1998 and March 31, 1999.
The cost of funds for the first quarter of 1999 was 4.58% compared to 4.90% for
the same quarter in 1998. With the exception of other borrowed money, the cost
of all types of liabilities 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, 1999, the Company's total risk based capital ratio was
18.21% which is far above the regulatory minimum of 8.0%. The ratio of total
capital to total assets was 10.83% at March 31, 1999 which is in line with the
Company's peers.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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, 1999 the Company had a negative gap position through the first
twelve months. This liability sensitive position typically produces an
unfavorable contribution to earnings during a period of increasing rates. With
the largest amount of interest sensitive assets and liabilities repricing within
three years, the Company monitors these areas very closely. Early withdrawal of
deposits, prepayments of loans and loan delinquencies are some of the factors
that could affect actual versus expected cash flows. In addition, changes in
rates on interest sensitive assets and liabilities may not be equal, which could
result in a change in net interest margin. While the Company does not match each
of its interest sensitive assets against specific interest sensitive
liabilities, it does review its positions regularly and takes actions to
reposition itself when necessary.
Effects of Inflation
Inflation significantly affects industries having high proportions of
property, plant and equipment or high levels of inventories. Although the
Company is not significantly affected in these areas, inflation does have an
impact on the growth of assets. As assets grow rapidly, it becomes necessary to
increase equity capital at proportionate levels to maintain the appropriate
equity to asset ratios. Traditionally, the Company's earnings and high capital
retention levels have enabled the Company to meet these needs.
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Effects of Inflation (Continued)
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.
Year 2000 Readiness Disclosure
The following statements are being designated as Year 2000 Readiness
Disclosures under the Year 2000 Information and Readiness Disclosure Act,
enacted by the 105th Congress on October 19. 1998.
Each of the subsidiary banks and the insurance company have appointed a
group of individuals from within the Organization to identify critical areas for
year 2000 compliance and to determine if that area will be year 2000 compliant.
Critical compliance areas include third party data processing, wire transfers,
internal computer readiness, transaction processing, security, liquidity
planning and correspondent banking. The Company has begun to ascertain its
compliance internally through the help of computer and information consultants
and the upgrade of computer and information processing hardware. Noncompliance
items and systems have been identified. Remediation and testing are progressing
according to plan and testing of substantially all systems is anticipated to be
complete by June 30, 1999. Continuing discussions with third party vendors who
perform data processing functions and with correspondent banking institutions do
not indicate any critical shortcomings in their compliance at this time.
As of March 31, 1999, the Company has incurred $430,000 in services and
equipment costs in its efforts to become year 2000 compliant. Most of these
expenditures include amounts for normal and scheduled equipment upgrades. The
Company has budgeted $650,000 in total expenditures through December 31, 1999
for its compliance effort. Roughly 60 to 70% of this amount will be for
equipment replacements and upgrades. Some of the costs of the year 2000 project
include the cost of Company personnel who will spend significant time on the
project. The Company does not anticipate that these costs, when aggregated, will
have a materially negative impact on the Company operations in any one period.
The impact of year 2000 issues on the Company will depend not only on
corrective actions that the Company takes, but also on the way in which year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Company, or whose financial condition or operational capability is important to
the Company. To reduce this exposure, the Company has an ongoing process of
identifying and contacting mission critical third party vendors and other
significant third parties to determine their year 2000 plans and target dates.
Notwithstanding the Company's efforts, there can be no assurance that mission
critical third party vendors or other significant third parties will adequately
address their year 2000 issues.
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Year 2000 Readiness Disclosure (Continued)
The Company is developing contingency plans for implementation in the event
that mission critical third party vendors or other significant third parties
fail to adequately address year 2000 issues. Such plans principally involve
identifying alternate vendors or internal remediation. The Company is also
enhancing its existing business resumption plans to reflect year 2000 issues and
is developing plans designed to coordinate the efforts of its personnel and
resources in addressing any year 2000 problems that become evident after
December 31, 1999. The Company has identified mission critical areas and
anticipates its business resumption plan will be completed by June 30, 1999.
There can be no assurance that any such plans will fully mitigate any such
failure or problems. Furthermore, there may be certain mission critical third
parties, such as utilities or telecommunication companies, where alternative
arrangements or sources are limited or unavailable.
The Company's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address year 2000 issues. As a result, there
may be increases in the Company's problem loans and credit losses in future
years. It is not, however, possible to quantify the potential impact of such
losses at this time.
If year 2000 issues are not adequately addressed by the Company and third
parties, the Company's business, results of operations and financial position
could be materially adversely affected.
The foregoing year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs, the dates by which
the Company expects to substantially complete programming changes, remediation
and testing of systems and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third party service
providers and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to identify and convert all relevant computer systems,
results of year 2000 testing, adequate resolution of year 2000 issues by
governmental agencies, businesses or other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
system costs, the need to replace hardware, the adequacy of and ability to
implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing year 2000 discussion speak only as of the date
on which such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
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> 16
TABLE 1
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
Interest Income
Loans
Commercial $ 29,989 $ 630 8.40% $ 31,043 $ 675 8.70%
Consumer 31,614 859 10.87 29,097 806 11.08
Real estate 86,896 1,795 8.26 78,281 1,676 8.56
Total Loans 148,499 3,284 8.85 138,421 3,157 9.12
Federal funds sold 11,557 129 4.46 6,429 90 5.60
Interest bearing
deposits 3,649 45 4.93 819 10 4.88
Investments
Taxable 29,226 448 6.13 32,758 529 6.46
Tax exempt 1 3,242 67 8.27 3,348 70 8.36
Total Earning
Assets 1 196,173 3,973 8.10 181,775 3,856 8.49
Interest Expense
Demand deposits 3 0,135 181 2.40 28,161 201 2.85
Savings 20,744 138 2.66 19,464 168 3.45
Time deposits 112,960 1,552 5.50 105,967 1,513 5.71
Other borrowed money 2,576 35 5.43 237 3 5.06
Total Interest
Bearing
Liabilities $ 166,415 1,906 4.58 $153,829 1,885 4.90
Net Interest Margin $ 2,067 $1,971
Net Yield on Interest Earning Assets 1 4.21% 4.34%
1 Yields are on a taxable equivalent basis.
2 Includes loans in nonaccrual status.
<PAGE> 17
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31, 1999
(In Thousands of Dollars)
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or Without
Days Days Years Years Maturity Total
EARNINGS ASSETS
Loans $21,681 $62,136 $40,961 $13,670 $11,459 $149,907
Fed funds sold 12,857 12,857
Securities 4,674 9,616 13,415 1,235 4,328 33,268
Interest bearing time
deposits 2,073 600 1,000 3,673
Total 41,285 72,352 55,376 14,905 15,787
199,705
INTEREST BEARING LIABILITIES
Transaction accounts 20,482 20,482
Money market savings 12,495 12,495
Savings accounts 21,658 21,658
Time deposits more
than $100,000 4,909 12,632 4,339 3,903 25,783
Time deposits less
than $100,000 13,435 45,201 24,680 4,200 100 87,616
Other borrowed money 42 129 371 404 1,640 2,586
Total 73,021 57,962 29,390 8,507 1,740 170,620
Rate sensitivity GAP (31,736) 14,390 25,986 6,398 14,047 29,085
Cumulative GAP (31,736) (17,346) 8,640 15,038 29,085
Ratio of cummulative
interest sensitive
assets to cummulative
interest sensitive
liabilities 56.54% 86.76% 105.39% 108.90% 117.05%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
<PAGE> 18
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,
1999
None
<PAGE> 19
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
March 31, 1999 21
<PAGE> 20
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 14, 1999
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,138
<INT-BEARING-DEPOSITS> 3,673
<FED-FUNDS-SOLD> 12,857
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,766
<INVESTMENTS-CARRYING> 3,502
<INVESTMENTS-MARKET> 3,618
<LOANS> 149,907
<ALLOWANCE> (1,303)
<TOTAL-ASSETS> 213,650
<DEPOSITS> 186,362
<SHORT-TERM> 171
<LIABILITIES-OTHER> 1,578
<LONG-TERM> 2,415
0
0
<COMMON> 2,734
<OTHER-SE> 20,390
<TOTAL-LIABILITIES-AND-EQUITY> 213,650
<INTEREST-LOAN> 3,284
<INTEREST-INVEST> 490
<INTEREST-OTHER> 174
<INTEREST-TOTAL> 3,948
<INTEREST-DEPOSIT> 1,871
<INTEREST-EXPENSE> 1,906
<INTEREST-INCOME-NET> 2,042
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,378
<INCOME-PRETAX> 766
<INCOME-PRE-EXTRAORDINARY> 766
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 505
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 4.21
<LOANS-NON> 35
<LOANS-PAST> 542
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,355
<CHARGE-OFFS> 143
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 1,303
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</TABLE>
