UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended Commission File No. 0-16761
September 30, 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 September 30, 1999
Common Stock, par value - $5 501,898 shares
<PAGE> 1
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Nine Months Ended
September 30, 1999 and 1998 2
Consolidated Statements of Income - Three Months Ended
September 30, 1999 and 1998 3
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 4
Consolidated Statements of Changes in Stockholders' Equity -
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibit and Reports on Form 8K 21
SIGNATURES 23
<PAGE> 2
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Nine Months Ended
September 30,
1999 1998
Interest Income
Interest and fees on loans $10,096 $ 9,771
Interest on federal funds sold 354 284
Interest on time deposits 158 35
Interest and dividends on investment securities
Taxable 1,347 1500
Nontaxable 129 128
------ ------
Total Interest Income 12,084 11,718
------ ------
Interest Expense
Interest on time deposits over $100,000 1,130 1,083
Interest on other deposits 4,508 4,674
Interest on borrowed money 104 23
------ ------
Total Interest Expense 5,742 5,780
------ ------
Net Interest Income 6,342 5,938
Provision for Loan Losses 220 200
------ ------
Net Interest Income after Loan Losses 6,122 5,738
------ ------
Noninterest Income
Service charges 272 250
Other 324 278
Investment security gains (losses) 4 (3)
------ ------
Total Noninterest Income 600 525
------ ------
Noninterest Expense
Salaries and employee benefits 2,352 2,172
Occupancy expense 201 199
Equipment expense 321 326
Data processing expense 345 344
Other 1,041 974
------ ------
Total Noninterest Expense 4,260 4,015
------ ------
Income before Income Taxes 2,462 2,248
Provision for Income Taxes 841 769
------ ------
Net Income $ 1,621 $ 1,479
====== ======
Per Share Data
Net Income $ 3.23 $ 2.95
======= =======
Cash Dividends $ .87 $ .81
======= =======
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 STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
September 30,
1999 1998
Interest Income
Interest and fees on loans $ 3,471 $ 3,354
Interest on federal funds sold 85 96
Interest on time deposits 48 11
Interest and dividends on investment securities
Taxable 443 490
Nontaxable 43 41
------ ------
Total Interest Income 4,090 3,992
------ ------
Interest Expense
Interest on time deposits over $100,000 390 376
Interest on other deposits 1,482 1,577
Interest on borrowed money 36 11
------ ------
Total Interest Expense 1,908 1,964
------ ------
Net Interest Income 2,182 2,028
Provision for Loan Losses 85 80
------ ------
Net Interest Income after Loan Losses 2,097 1,948
------ ------
Noninterest Income
Service charges 101 89
Other income 123 102
Investment security gains 1
------ ------
Total Noninterest Income 225 191
------ ------
Noninterest Expense
Salaries and employee benefits 813 716
Occupancy expense 64 71
Equipment expense 106 106
Data processing 124 117
Other 350 349
------ ------
Total Noninterest Expense 1,457 1,359
------ ------
Income before Income Taxes 865 780
Provision for Income Taxes 285 263
------ ------
Net Income $ 580 $ 517
====== ======
Per Share Data
Net Income $ 1.16 $ 1.03
======= =======
Cash Dividends $ .29 $ .27
======= =======
Weighted Average Common Shares Outstanding 501,898 501,898
======= =======
The accompanying notes are an integral part of these statements.
<PAGE> 4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
September 30, December 31,
1999 1998
ASSETS
Cash and due from banks - noninterest bearing $ 5,123 $ 5,112
Time deposits in other banks 3,544 3,432
Federal funds sold 6,411 12,374
Securities held to maturity (note 2) 3,238 3,504
Securities available for sale (note 3) 26,546 29,758
Other investments 746 731
Loans, net of unearned interest (note 4) 160,449 148,384
Less allowance for loan losses (note 5) (1,307) (1,356)
------- -------
Net Loans 159,142 147,028
Bank premises and equipment 5,407 4,760
Interest receivable 1,674 1,556
Investment in insurance contracts 4,617 2,122
Deferred income tax benefits 232 125
Other assets 505 479
------- -------
Total Assets $217,185 $210,981
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 20,554 $ 22,043
Interest bearing
Money market and checking 19,693 18,353
Money market savings 13,644 11,394
Savings 22,405 20,849
Time deposits over $100,000 26,670 25,723
All other time deposits 86,557 86,225
------- -------
Total Deposits 189,523 184,587
Borrowed money 2,568 2,320
Accrued expenses and other liabilities 1,368 1,228
------- -------
Total Liabilities 193,459 188,135
------- -------
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 20,508 19,324
Accumulated other comprehensive income (loss) (185) 119
------- -------
24,719 23,839
Treasury stock (at cost, 44,866 shares in 1999
and 1998) (993) (993)
Total Stockholders' Equity 23,726 22,846
------- -------
Total Liabilities and Stockholders' Equity $217,185 $210,981
======= =======
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
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 2,734 $ 1,662 $ 19,324 $ 119 $ (993) $ 22,846
Comprehensive Income
Net Income 1,621 1,621
Net change in unrealized
appreciation (depreciation)
on investment securities
available for sale,
net of taxes (304) (304)
----- ----- ----- ----- ----- -----
Total Comprehensive Income 1,317
Dividends paid (437) (437)
----- ----- ----- ----- ----- -----
Balances, September 30, 1999 $ 2,734 $ 1,662 $ 20,508 $ (185) $ (993) $ 23,726
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
Balance, December 31, 1997 $ 2,734 $ 1,662 $ 17,854 $ 40 $ (993) $ 21,297
Comprehensive Income
Net Income 1,479 1,479
Net change in unrealized
appreciation on investment
securities available for sale,
net of taxes 119 119
----- ----- ----- ----- ----- -----
Total Comprehensive Income 1,598
Dividends paid (406) (406)
----- ----- ----- ----- ----- -----
Balances, September 30, 1998 $ 2,734 $ 1,662 $ 18,927 $ 159 $ (993) $ 22,489
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 6
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Nine Months Ended
September 30,
1999 1998
Cash Flows from Operating Activities:
Net income $ 1,621 $ 1,479
Adjustments to reconcile net income to net
cash provided by operating activities:
Investment securities (gains) losses (4) 3
Depreciation 268 278
Increase in insurance contracts (97) (46)
Net amortization (accretion) 131 (3)
Provision for loan losses 220 200
(Increase) decrease in interest receivable (118) 4
Decrease in other assets 46 68
Increase in accrued expenses 141 101
------ ------
Net Cash Provided by Operating Activities 2,208 2,084
------ ------
Cash Flows from Investing Activities:
Net change in federal funds sold 5,963 (4,830)
Proceeds from maturities of securities available
for sale 12,444 8,708
Proceeds from maturities of securities held to
maturity 268 1,071
Purchase of other investments (15) (16)
Net change in time deposits in other banks (112) (10)
Purchase of securities available for sale (9,845) (5,370)
Net change in loans to customers (12,334) (8,554)
Purchase of property and equipment (915) (75)
Investment in insurance contracts (2,398) (2,070)
------ ------
Net Cash Consumed by Investing Activities (6,944) (11,146)
------ -------
Cash Flows from Financing Activities:
Net increase in deposits 4,936 10,312
Increase in other borrowed money 248 503
Payment of dividends (437) (406)
------ ------
Net Cash Provided by Financing Activities 4,747 10,409
------ ------
Net Increase in Cash and Cash Equivalents 11 1,347
Cash and Cash Equivalents, Beginning of Period 5,112 3,246
------ ------
Cash and Cash Equivalents, End of Period $ 5,123 $ 4,593
====== ======
Supplementary Disclosures:
Cash paid for:
Income taxes $ 877 $ 749
Interest expense 5,738 5,801
The accompanying notes are an integral part of these statements.
<PAGE> 7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally accepted
accounting principles and to general industry practices. In the
opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of September 30, 1999, and the results of operations for
the nine and three month periods ended September 30, 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 market value of securities held to maturity
as of September 30, 1999 and December 31, 1998, are as follows:
1999 1998
-------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US government
corporations and agencies $ 404 $ 406 $ 517 $ 523
Obligations of states and
political subdivisions 2,834 2,857 2,987 3,098
------ ------ ----- ------
Total $ 3,238 $ 3,263 $3,504 $ 3,621
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and market value of securities available for
sale as of September 30, 1999 and December 31, 1998, are as follows:
1999 1998
-------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US government
corporations and agencies $25,462 $25,275 $28,179 $28,439
Obligations of states and
political subdivisions 255 246 255 262
Other investments 1,124 1,025 1,134 1,057
------ ------ ----- ------
Total $26,841 $26,546 $29,568 $29,758
====== ====== ====== ======
<PAGE> 8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of September 30, 1999 and
December 31, 1998, is as follows:
1999 1998
Commercial $30,866 $ 30,718
Real estate - construction 3,176 2,969
- mortgages 89,752 83,446
Consumer installment 38,583 33,464
------ -------
Total 162,377 150,597
Unearned interest (1,928) (2,213)
------ -------
Net loans outstanding $160,449 $148,384
======= =======
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
nine months ended September 30, 1999 and 1998, follows:
1999 1998
Balance, beginning of period $ 1,356 $ 1,370
Provisions charged to operating expenses 220 200
Loan recoveries 71 59
Loan charge-offs (340) (436)
------ -------
Balance, end of period $ 1,307 $ 1,193
====== =======
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Year to Date Operations
The Company's nine month income of $1,621,000 represents a 9.60% increase in
total earnings and earnings per share compared to 1998. Earnings represented a
return of 9.31% on average equity for the first nine months of 1999 compared to
9.08% for the same period in 1998. Returns on average assets for the nine month
period ending September 30, 1999 and 1998 were 1.01% and 1.00%, respectively.
The increase in earnings was due to an increasing volume of earning assets and
increases in noninterest income.
In 1999 the tax equivalent interest income increased to $6,418,000 (a 6.74%
increase) as compared to $6,013,000 in 1998. An 8.06% increase in the level of
earning assets and a slight increase in the net interest spread was responsible
for the improvement. The increase in earning assets is attributable to a 7.31%
increase in average loans outstanding. The increase was primarily in real estate
and consumer loans. The funding of the asset growth was from deposits of local
customers and a decline in investments available for sale.
Noninterest income increased 14.28% in 1999 compared to 1998 due to an
increase in service charge income and insurance operations. Noninterest expenses
increased 6.10% in 1999 due mainly to the higher cost of personnel and year 2000
compliance expenses.
Quarter Ending September 30 Operations
Net income for the quarter ending September 30, 1999 increased 12.19% when
compared to 1998 operations. Increases in other noninterest expenses were more
than offset by an increase in the net interest margin and an increase in
noninterest income. An increased provision for loan losses was the result of an
increase in average loans outstanding.
Net Interest Income
Year to Date Operations
The Company's net interest margin on a tax equivalent basis was $6,418,000
in the first nine months of 1999 compared to $6,013,000 for 1998. The increase
was due to an increase in average earning assets (8.06%) and an increased spread
(the difference in rates earned on assets and paid on liabilities) from 3.59% in
1998 to 3.64% in 1999. Average loans outstanding grew by 7.31% from 1998 to
1999. This growth reflects good local and national economic conditions, moderate
interest rates and expanded banking locations. The overall costs of funds
reflects the high level of competition for deposits in the Company's service
area which has traditionally paid higher rates on deposits than larger statewide
financial institutions. The deposit increase represents growth in all types of
accounts (except non-interest bearing deposits) and has been obtained primarily
from customers in the immediate service areas.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Year to Date Operations (Continued)
Loans outstanding at September 30, 1999 increased 10.44% over amounts at
September 30, 1998 and 10.84% on annualized basis since December 31, 1998. The
loan increase has been the result of a continued effort to increase lending in
existing markets and a strong local economy. Loan growth has been funded
primarily by deposit growth coupled with a decline in the level of federal funds
sold and securities available for sale. The slight decrease in the tax
equivalent net interest margin for 1999 (4.28% versus 4.34%) is the result of
annualized growth in earning assets exceeding the growth in the interest spread.
Barring any future increases in interest rates by the Federal Reserve Bank, the
Company anticipates its net interest margin remaining stable or increasing
slightly as it expects continued loan growth in the near term future. Rates paid
on deposits are expected to remain stable or decline slightly over the next
twelve months and returns on and the levels of earning assets are expected to
remain at current levels during this period.
Quarter Ending September 30 Operations
The Company's net interest income on a tax equivalent basis of $2,207,000
was 4.38% of earning assets for the quarter ending September 30, 1999 compared
to $2,052,000 (4.39% of earning assets) for the same period in 1998. Increased
income from loans was the result of increases in volume as the level of average
loans outstanding rose in the period and rates of return declined. Yields on
investment securities and short term investments declined slightly from 1998
operations. A decline in rates paid on interest bearing liabilities of 51 basis
points was offset by a decline in the yields on loans of 42 basis points. The
overall result was a slight decrease in the net interest margin percentage from
4.39% to 4.38%. The Company expects future deposit rates to remain stable in the
last quarter of 1999 as local rates on deposits move towards those of state and
national competition. Rates on loans will be heavily influenced by the local
economy and to a lesser degree by national policy changes.
A complete yield analysis is shown as Table I on page 19.
Noninterest Income
Year to Date Operations
Noninterest income for the nine months ending September 30, 1999 increased
14.29% from 1998 amounts. An increase in service charge income of 8.80% was the
result of an increased number of accounts subject to service charges and
increasing service charge rates. An increase in other income was due to higher
earnings from the insurance subsidiary and a slight security gain in 1999
compared to a slight loss in 1998.
Quarter Ending September 30 Operations
Noninterest income for the quarter ending September 30, 1999 increased
17.80% compared to 1998 operations as the result of the same reasons as cited
above.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest Expenses
Year to Date Operations
Overall, noninterest expense increased 6.10% in the first nine months of
1999 when compared to the same period in 1998. Personnel expenses increased
8.29% as the result of merit raises and additional staff hired for a new branch
which opened in October. Occupancy and equipment expenses declined 0.57% as the
result of various factors. Data processing expenses increased by 0.29% as a
result of increase transaction volume. Other noninterest expenses increased by
6.88% due to asset growth and costs incurred for Year 2000 preparedness. The
overall increase in noninterest expenses is in line with the increase in assets
and is in line with management's expectations.
Quarter Ending September 30 Operations
Overall, noninterest expenses increased 7.21% for the quarter ending
September 30, 1999 compared to the quarter ending September 30, 1998. The
reasons for the quarterly increase include the cost of year 2000 preparedness
and increased salaries and benefits for additional staffing.
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 (Grant, Hardy, Mineral, northern Pendleton and
southeastern Hampshire counties). Consistent with its focus on providing
community-based financial services, the Company does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels, consumer
confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based upon
the strength and activity of the local economies of the Company's market areas.
The risk associated with real estate construction loans varies based upon the
supply of and demand for the type of real estate under construction.
Loans outstanding increased $12,065,000 or 8.13% in the first nine months in
1999. The bulk of this increase was in real estate mortgages with smaller
increases in other types of loans. The loan to deposit ratio was 84.66% at
September 30, 1999 compared to 80.39% at December 31, 1998. Management believes
this level of lending activity is satisfactory to generate adequate earnings
without undue credit risk. Loan demand is expected to remain good in the near
future with any growth a function of local and national economic conditions and
increased service locations.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Asset Quality
Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have been changed due to
financial hardship of the borrower. The Company had no material restructured
loans at September 30, 1999, June 30, 1999 or December 31, 1998.
Real estate acquired through foreclosure was $164,000 at September 30, 1999
compared to $95,000 at December 31, 1998. All foreclosed property held at
September 30, 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 September 30, 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.
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and local
economic changes, changes in the nature and value of the portfolio and industry
standards. The Company's loan classification system, which rates existing loans,
provides the basis for adjusting the allowance for loan losses. Management
reviews these classification totals, along with internally generated loan review
reports, past due reports, historical loan loss experience and individual
borrower's financial health to determine the necessary amount to be provided in
the allowance for loan losses. Management evaluates nonperforming loans relative
to their collateral value and makes the appropriate adjustments to the allowance
when needed.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
The provision for credit losses and changes in the allowance for credit
losses are shown below (in thousands of dollars).
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Balance, beginning of period $ 1,326 $ 1,358 $ 1,356 $ 1,370
Net charge-offs (recoveries)
Charge-offs 125 267 340 436
Recoveries (21) (22) (71) (59)
------ ------ ------ ------
Total net charge-offs * 104 245 269 377
Provision for credit losses 85 80 220 200
------ ------ ------ ------
Balance, End of Period $ 1,307 $ 1,193 $ 1,307 $ 1,193
====== ====== ====== ======
* Components of net charge-offs:
Real estate mortgages $ 46 $ 53 $ 46 $ 53
Commercial 13 27 88 132
Installment 45 165 135 192
---- ------- ----- ----
Total $ 104 $ 245 $ 269 $ 377
====== ====== ====== ======
The allowance for credit losses, of $1,307,000 at September 30, 1999, was
down $19,000 from its level at June 30, 1999, and down $49,000 from December 31,
1998 levels. The allowance was equal to .81%, .86% and .91% of total loans at
September 30, 1999, June 30, 1999 and December 31, 1998, respectively. The
unusually large amount of net charge offs in the third quarter of 1998 was the
result of a couple of large bankruptcies. 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.
Securities
The Company's securities portfolio serves numerous purposes. Portions of
the portfolio may secure certain public deposits. The remaining portions are
held as investments or used to assist the Company in liquidity and
asset/liability management. Total securities at September 30, 1999 were
$30,530,000 compared to $33,993,000 at December 31, 1998. Securities as a
percentage of total assets were 14.06% at September 30, 1999 compared to 16.11%
at December 31, 1998. The decline in securities is a result of moderate loan
growth and a relatively flat yield curve.
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Securities (Continued)
The securities portfolio consists of three components: securities held to
maturity, securities available for sale and restricted 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. Restricted investments include investments in federal
agencies such as the Federal Reserve Bank and the Federal Home Loan Bank. The
Company's recent purchases of all securities have generally been limited to
securities of high credit quality with short to medium term maturities. Changes
within the year in market values are reflected as changes in stockholders'
equity, net of the deferred tax effect. As of September 30, 1999, the cost of
the securities available for sale exceeded their market value by $295,000
($185,000 after tax considerations).
Deposits
The Company's main source of funds remains deposits received from
individuals, governmental entities and businesses located within the Company's
service area. Deposit accounts include demand deposits, savings, money market
and certificates of deposit.
Total deposits increased 2.67% between December 31, 1998 and September 30,
1999, in all deposit areas except noninterest bearing demand accounts. The cost
of funds for the first nine months of 1999 was 4.47% compared to 4.91% for the
same period in 1998. The yields on all 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 and saw only moderate
increases in these deposits in the first nine months of 1999.
Borrowed Money
The Company will occasionally borrow funds from the Federal Home Loan Bank
to reduce market rate risks. Borrowings allow the Company to match long-term
loans with fixed rates to a fixed rate liability of similar duration. Such
borrowings are on a relatively small scale and are not a significant source of
funding to the Company.
Capital
The Company seeks to maintain a strong capital base to expand facilities,
promote public confidence, support current operations and grow at a manageable
level. As of September 30, 1999, the Company's total risk based capital ratio
was 17.57% which is far above the regulatory minimum of 8.0%. The ratio of total
capital to total assets was 10.92% at September 30, 1999.
Management believes this level of capital is adequate to meet current
requirements and allow for future growth.
<PAGE> 15
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 liquidity exposure. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions and the Federal Reserve Bank of Richmond.
Both subsidiary banks have lines of credit with the Federal Home Loan Bank of
Pittsburgh although utilization has been 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 and investment securities.
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on the
balance sheet. Managing this risk involves regular monitoring of the interest
sensitive assets relative to interest sensitive liabilities over specific time
intervals.
At September 30, 1999 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. (See Table II)
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Disclosure of Year 2000 Issues
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 ascertained its compliance
internally through the help of computer and data processing consultants and
through the upgrade of computer and information processing hardware.
Noncompliant items and systems have been identified. Remediation and testing
have progressed according to plan. Testing of substantially all mission critical
systems was completed 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 September 30, 1999, the Company has incurred $515,000 for services
and equipment costs in its efforts to become Year 2000 compliant. Most of these
expenditures are amounts for normal and scheduled equipment upgrades. The
Company has budgeted $590,000 in total expenditures through December 31, 1999,
for its Year 2000 compliance efforts. Roughly 60 to 70% of this amount is 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 capacity 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> 17
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Disclosure of Year 2000 Issues (Continued)
The Company has developed 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 processing strategies. The Company is also
enhancing its existing business resumption contingency 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
before or after December 31, 1999. The Company has identified mission critical
areas and has met the June 30, 1999, regulatory deadline for drafting its Y2K
business resumption contingency plans. Further plan testing occurred during the
third quarter of 1999. Testing and training drills will continue during the
fourth quarter of 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 telecommunications companies, where
alternative arrangements or sources are limited or unavailable.
To the extent that borrowers fail to adequately address Year 2000 issues,
problem loans and credit losses may increase in future years. It is the opinion
of the Company and its Board that Year 2000 risk constitutes only a small
portion of the overall risk inherent in its loan portfolio. It is not, however,
possible at this time to quantify the potential impact of borrowers' Year 2000
risk on their ability to repay loans as agreed.
The Company is addressing possible liquidity risks associated with Year
2000 by identifying alternative funding sources, by monitoring and communicating
with large depositors, and by planning investment maturities. Plans are in place
to acquire extra cash as needed in cooperation with the Federal Reserve Bank
System. The Company and its Board believe that its Year 2000 liquidity planning
addresses any potential Year 2000 cash flow disruption reasonably anticipated at
this time. If Year 2000 liquidity issues are not adequately addressed by the
Company and third parties, the Company's business, results of operations, and
financial position could be materially and 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.
<PAGE> 18
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 20) 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> 19
Table I
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Rate Related Income
Loans
Commercial $ 30,088 $ 1,930 8.55% $ 31,422 $ 2,080 8.83%
Consumer 33,290 2,659 10.65% 30,045 2,509 11.13%
Real Estate 88,876 5,507 8.26% 80,418 5,182 8.59%
------ ----- ---- ------ ----- ----
Total 152,254 10,096 8.84% 141,885 9,771 9.18%
Federal funds sold 9,887 354 4.77% 6,935 284 5.46%
Interest bearing
deposits 4,476 158 4.71% 853 35 5.47%
Investments
Taxable 29,959 1,347 5.99% 31,918 1,500 6.27%
Tax exempt 1 3,226 205 8.47% 3,314 203 8.17%
----- --- ---- ----- ---- ----
Total Earning
Assets 1 199,802 12,160 8.11% 184,905 11,793 8.50%
--------- ------ -------- ----------- ------ -------
Interest Expense
Demand deposits 32,799 596 2.42% 28,830 615 2.84%
Savings 21,228 434 2.73% 19,944 519 3.47%
Time deposits 114,593 4,608 5.36% 107,494 4,623 5.73%
Other borrowed
money 2,566 104 5.40% 557 23 5.51%
-------- --- ------ ------- ---- -------
Total Interest
Bearing
Liabilities 171,186 5,742 4.47% 156,825 5,780 4.91%
------- ------- ------- --------- ----- ------
Net Interest Margin $ 6,418 $ 6,013
========== =====
Net Yield on Interest
Earning Assets 1 4.28% 4.34%
==== ====
1 Yields are on a taxable equivalent basis using an assumed tax rate of 37%.
<PAGE> 19
Table I (Continued)
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
September 30,1999 September 30, 1998
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Rate Related Income
Loans
Commercial $ 30,532 $ 656 8.59% $ 31,127 $ 698 8.96%
Consumer 35,346 928 10.50% 31,110 872 11.21%
Real Estate 91,242 1,887 8.27% 82,571 1,784 8.64%
------ ----- ---- ------ ----- ----
Total 157,120 3,471 8.84% 144,808 3,354 9.26%
Federal funds sold 6,452 85 5.27% 7,054 96 5.44%
Interest bearing
deposits 4,495 48 4.27% 811 11 5.43%
Investments
Taxable 30,498 443 5.81% 31,126 490 6.30%
Tax exempt 1 3,193 68 8.52% 3,225 65 8.06%
----- --- ---- ----- ---- ----
Total Earning
Assets 1 201,758 4,115 8.16% 187,024 4,016 8.59%
--------- ----- -------- ------- ----- --------
Interest Expense
Demand deposits 32,740 201 2.46% 28,445 203 2.85%
Savings 21,515 149 2.77% 20,271 178 3.51%
Time deposits 114,636 1,522 5.31% 108,871 1,572 5.78%
Other borrowed
money 2,561 36 5.62% 734 11 5.99%
-------- -- ------ ------- ---- --------
Total Interest
Bearing
Liabilities 171,452 1,908 4.45% 158,321 1,964 4.96%
------- ------ ------- ------- ----- -------
Net Interest Margin $ 2,207 $ 2,052
========== =====
Net Yield on Interest
Earning Assets 1 4.38% 4.39%
==== ====
1 Yields are on a taxable equivalent basis using an assumed tax rate of 37%.
<PAGE> 20
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
SEPTEMBER 30, 1999
(In Thousands of Dollars)
1 - 90 91 - 365 1 to 3 3 to 5 More than
Days Days Years Years 5 Years Total
EARNINGS ASSETS
Loans $24,705 $ 64,989 $ 38,025 $ 19,256 $13,474 $160,449
Fed funds sold 6,411 6,411
Securities 3,226 4,218 12,770 4,852 5,464 30,530
Time deposits in
other banks 1,917 600 1,027 3,544
------ ------- ------- ------- ------ ------
Total 36,259 69,807 51,822 24,108 18,938 200,934
INTEREST BEARING LIABILITIES
Transaction accounts 19,693 19,693
Money market accounts 13,644 13,644
Savings accounts 22,405 22,405
Time deposits more
than $100,000 3,614 14,524 6,010 2,522 26,670
Time deposits less
than $100,000 13,687 46,813 20,601 5,456 86,557
Other borrowed money 44 134 387 408 1,595 2,568
------ ------- ------- ------- ------ ------
Total 73,087 61,471 26,998 8,386 1,595 171,537
Rate sensitivity GAP (36,828) 8,336 24,824 15,722 17,343
Cumulative GAP (36,828) (28,492) (3,668) 12,054 29,397
Ratio of cumulative
interest sensitive
assets to cumulative
interest sensitive
liabilities 49.61% 78.83% 97.73% 107.09% 117.14%
Assumes all transaction and money market deposit accounts reprice within 90
days.
<PAGE> 21
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a) Exhibits
3 (i) Articles of Incorporation of
Highlands Bankshares, Inc.
are incorporated by reference
to Appendix C to Highlands
Bankshares, Inc.'s Form S-4
filed October 20, 1986.
3(ii) Bylaws of Highlands
Bankshares, Inc. are
incorporated by reference
to Appendix D to Highlands
Bankshares, Inc.'s Form
S-4 filed October 20, 1986.
27 Financial Data Schedule
attached
(b) Reports on Form 8-K filed during
the nine months ended September 30
1999.
None
<PAGE> 22
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
September 30, 1999 24
<PAGE> 23
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
LESLIE A. BARR
Leslie A. Barr
President
JOHN G. VANMETER
John G. VanMeter
Chairman
Date: September 9, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,123
<INT-BEARING-DEPOSITS> 3,544
<FED-FUNDS-SOLD> 6,411
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,292
<INVESTMENTS-CARRYING> 3,238
<INVESTMENTS-MARKET> 3,263
<LOANS> 160,449
<ALLOWANCE> (1,307)
<TOTAL-ASSETS> 217,185
<DEPOSITS> 189,523
<SHORT-TERM> 178
<LIABILITIES-OTHER> 1,368
<LONG-TERM> 2,390
0
0
<COMMON> 2,734
<OTHER-SE> 20,992
<TOTAL-LIABILITIES-AND-EQUITY> 217,185
<INTEREST-LOAN> 10,096
<INTEREST-INVEST> 1,476
<INTEREST-OTHER> 512
<INTEREST-TOTAL> 12,084
<INTEREST-DEPOSIT> 5,638
<INTEREST-EXPENSE> 5,742
<INTEREST-INCOME-NET> 6,342
<LOAN-LOSSES> 220
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 4,260
<INCOME-PRETAX> 2,462
<INCOME-PRE-EXTRAORDINARY> 1,621
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621
<EPS-BASIC> 3.23
<EPS-DILUTED> 3.23
<YIELD-ACTUAL> 4.28
<LOANS-NON> 66
<LOANS-PAST> 1,209
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,355
<CHARGE-OFFS> 220
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 1,307
<ALLOWANCE-DOMESTIC> 1,307
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
