SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1999 Commission file number: 0-16761
Highlands Bankshares, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0650743
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 929, Petersburg, West Virginia 26847
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (304) 257-4111
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $5 Par
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ..X. No
....
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $17,270,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of February 25, 2000 - $26,127,717
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of March 1, 2000 - 501,898
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement of Highlands Bankshares, Inc. filed via Form DEF 14A on
March 13, 2000.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on pages 47-48.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT YES NO X
<PAGE> 2
FORM 10-KSB INDEX
Page
Part I
Item 1. Description of Business 3
General
Services Offered by the Banks
Employees
Competition
Regulation and Supervision
Item 2. Description of Property 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for Common Equity and
Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation 6
Item 7. Financial Statements 23
Item 8. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure 47
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 47
Item 10. Executive Compensation 47
Item 11. Security Ownership of Certain Beneficial Owners
and Management 47
Item 12. Certain Relationships and Related Transactions 47
Part IV
Item 13. Exhibits and Reports on Form 8-K 47
Signatures 49
<PAGE> 3
Part I
Item 1. Description of Business
General
Highlands Bankshares, Inc. (hereinafter referred to as "Highlands"),
incorporated under the laws of West Virginia in 1985, is a multi-bank holding
company subject to the provisions of the Bank Holding Company Act of 1956, as
amended, and owns 100% of the outstanding stock of its subsidiary banks, The
Grant County Bank and Capon Valley Bank (hereinafter referred to as the "Banks")
and its life insurance subsidiary, HBI Life Insurance Company (hereinafter
referred to as "HBI Life").
The Grant County Bank was chartered on May 20, 1902, and Capon Valley Bank
was chartered on July 1, 1918. Both are state banks chartered under the laws of
the State of West Virginia. HBI Life was chartered in April 1988 under the laws
of the State of Arizona.
Services Offered by the Banks
The banks offer all services normally offered by a full service commercial
bank, including commercial and individual demand and time deposit accounts,
commercial and individual loans, drive-in banking services and automated teller
machines. No material portion of the banks' deposits have been obtained from a
single or small group of customers and the loss of the deposits of any one
customer or of a small group of customers would not have a material adverse
effect on the business of the banks. Credit life accident and health insurance
are sold to customers of the subsidiary banks through HBI Life.
Employees
As of December 31, 1999, The Grant County Bank had 54 full time equivalent
employees and Capon Valley Bank had 36 full time equivalent employees. No person
is employed by Highlands or HBI Life on a full time basis.
Competition
The banks' primary trade area is generally defined as Grant County, Hardy
County, Mineral County and the northern part of Pendleton County. This area
includes the cities of Petersburg, Wardensville, Moorefield and Keyser and
several rural towns. The banks compete with four state chartered banks and six
national banks. No financial institution has been chartered in the area within
the last five years although branches of state and nationally chartered banks
have located in this area within this time period. Competition for new loans and
deposits in the banks' service area is quite intense and all banks have been
forced to pay rates on deposits which exceed the national averages.
The banks' secondary trade area includes portions of Hampshire County in
West Virginia and Frederick County in Virginia. In addition, the banks compete
with money market mutual funds and investment brokerage firms for deposits in
their service area.
Regulation and Supervision
Highlands is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934. These include, but are not limited to, the
filing of annual, quarterly and other current reports with the Securities and
Exchange Commission.
<PAGE> 4
Regulation and Supervision (Continued)
Highlands, as a bank holding company, is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Act"). It is registered as
such and is supervised by the Federal Reserve Board. The Act requires Highlands
to secure the prior approval of the Federal Reserve Board before Highlands
acquires ownership or control of more than five percent of the voting shares, or
substantially all of the assets of any institution, including another bank.
As a bank holding company, Highlands is required to file with the Federal
Reserve Board an annual report and such additional information as it may require
pursuant to the Act. The Federal Reserve Board may also conduct examinations of
Highlands and any or all of its subsidiaries. Under Section 106 of the 1970
Amendments to the Act and the regulations of the Federal Reserve Board, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit, provision of
credit, sale, or lease of property or furnishing of services.
Federal Reserve Bank regulations permit bank holding companies to engage in
nonbanking activities closely related to banking or to managing or controlling
banks. These activities include the making or servicing of loans, performing
certain data processing services, and certain leasing and insurance agency
activities. HBI Life acts as reinsurer of the credit life insurance coverage
sold by the Banks to bank customers. Approval of the Federal Reserve Board is
necessary to engage in any of these activities or to acquire corporations
engaging in these activities.
The operations of the Banks are subject to federal and state statutes which
apply to state chartered banks. Bank operations are also subject to the
regulations of the Federal Deposit Insurance Corporation (the "FDIC"), which
insures the banks' deposits. In addition, the Capon Valley Bank is a member of
the Federal Reserve Bank System and is subject to the regulations of the Federal
Reserve Bank Board.
The supervisory authorities regularly examine such areas as reserves, loans,
investments, management practices, and other aspects of the banks' operations.
These examinations are designed primarily for the protection of depositors. In
addition to these regular examinations, the banks must furnish the various
regulatory authorities quarterly reports containing a full and accurate
statement of its affairs.
The operations of the insurance subsidiary are subject to the oversight and
review of State of Arizona Department of Insurance.
Item 2. Description of Properties
The Grant County Bank's main office is located on Main Street in Petersburg,
West Virginia. In late 1999, the Bank opened a full service branch in Moorefield
to serve customers in this area. This facility is owned by the Bank and features
state-of-the-art drive-up facilities and an automated teller machine. The Bank
also has branch facilities in Keyser and Riverton, West Virginia which provide
banking services in Mineral County and northwest Pendleton County, respectively.
The Riverton branch building is leased while all other locations are owned by
the Bank.
Capon Valley Bank has its main office in Wardensville, West Virginia and
branch offices located in Moorefield and Baker, West Virginia. The facilities
include state-of-the-art drive in and automated teller operations. All
facilities are owned by the Bank and considered adequate for current operations.
<PAGE> 5
Item 3. Legal Proceedings
Management is not aware of any material pending or threatened litigation in
which Highlands or its subsidiaries may be involved as a defendant. In the
normal course of business, the banks periodically must initiate suits against
borrowers as a final course of action in collecting past due loans.
Item 4. Submission of Matters to a Vote of Security Holders
Highlands has not submitted any matters to the vote of security holders for
the quarter ending December 31, 1999.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company had approximately 828 stockholders of record as of March 1,
2000. The Company's stock is not traded on any national or regional stock
exchange although brokers in Cumberland, Maryland or Winchester and
Harrisonburg, Virginia may occasionally initiate or be a participant in a trade.
Terms of an exchange between individual parties may not be known to the Company.
The following outlines the dividends paid and market prices of the Company's
stock based on prices disclosed to management. Such prices may not include
retail mark-ups, mark-downs or commissions.
Dividends Market Price Range
1999 Per Share High Low
---- --------- ---- ---
First Quarter $.29 $62.50 $62.50
Second Quarter .29 59.00 59.00
Third Quarter .29 60.00 57.00
Fourth Quarter .29 60.00 58.00
1998
First Quarter $ .27 $ 63.00 $ 50.00
Second Quarter .27 62.75 58.25
Third Quarter .27 69.00 63.00
Fourth Quarter .27 63.25 62.25
1997
First Quarter $ .25 $ 44.25 $ 41.00
Second Quarter .25 45.00 43.00
Third Quarter .25 46.86 44.00
Fourth Quarter .25 46.50 44.75
<PAGE> 6
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's 1999 net income of $2,325,369 represents a 15.58% increase in
net income and earnings per share compared to 1998. This represented a return on
average equity of 9.94% for 1999 compared to 9.12% for 1998. Returns on average
assets for 1999 and 1998 were 1.08% and 1.01%, respectively. The increase in
earnings was due to an increase in the volume of earning assets, a stable
interest environment, and an unusual gain on an investment.
The tax equivalent interest income increased by $490,000 in 1999 to
$16,379,000 as compared to 1998. A 6.95% increase in the level of earning assets
offsets a decrease in the yield and resulted in the earnings improvement. The
increase in earning assets is attributable to an 8.31% increase in average loans
outstanding which were primarily real estate loans. The funding of the asset
growth was from deposits of local customers (primarily time deposits) and
declines in federal funds sold and securities available for sale.
Noninterest income increased 39.70% in 1999 compared to 1998 due to an
increase in service charge income and an unusual gain from a demutualization of
an insurance company which provides insurance coverage. Noninterest expenses
increased 9.96% in 1999 due mainly to the higher cost of data processing, year
2000 compliance expenses and the opening of a new branch in Moorefield.
Net Interest Margin
1999 compared to 1998
The Company's net interest margin on a tax equivalent basis was $8,716,000
for 1999 compared to $8,144,000 for 1998. The increase was due to an increase in
average earning assets (6.95%) and an increased spread (the difference in rates
earned on assets and paid on liabilities) from 3.60% in 1998 to 3.70% in 1999.
Average loans outstanding grew by 8.31% from 1998 to 1999. This growth reflected
good local and national economic conditions, stable interest rates and expanded
banking facilities. The overall costs of funds reflected 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 represented growth in money market savings and time deposit
accounts and was obtained primarily from customers in the immediate service
areas.
Loans outstanding at December 31, 1999 increased 12.29% over amounts at
December 31, 1998. The loan increase was the result of opening branches in new
market areas and continued efforts to increase lending in existing markets. Loan
growth was funded primarily by deposit growth and a decline in the level of
federal funds sold and investments. The increase in the dollar amount of tax
equivalent net interest margin for 1999 over the 1998 amounts is the result of
slight declines in the costs of funds and an annualized growth in earning assets
of 6.95%. The Company anticipates its net interest margin remaining stable or
declining slightly in view of future increases in interest rates by the Federal
Reserve Bank. Rates paid on deposits are expected to increase over the next
twelve months as the result of recent and anticipated Federal Reserve Bank's
increases in rates. Returns on most loans have repricing opportunities within
the next twelve months and the Company should be able to maintain its net
interest margin.
A summary of the net interest margin analysis is shown as Table II on page
20.
<PAGE> 7
Net Interest Margin (Continued)
1998 Compared to 1997
The Company's net interest margin on a tax equivalent basis was $8,144,000
for 1998 compared to $7,740,000 for 1997. The increase was due to an increase in
average earning assets (5.43%) and an increased spread (the difference in rates
earned on assets and paid on liabilities) from 3.52% in 1997 to 3.60% in 1998.
Average loans outstanding grew by 9.44% from 1997 to 1998. This growth reflected
good local and national economic conditions, moderate interest rates and
expanded banking facilities. The deposit increase represented growth in all
types of accounts (particularly time deposits) and was obtained primarily from
customers in the immediate service areas.
Loans outstanding at December 31, 1998 increased 8.23% over amounts at
December 31, 1997. The loan increase was the result of opening branches in new
market areas and continued efforts to increase lending in existing markets. Loan
growth was funded primarily by deposit growth with a slight decline in the level
of security investments. The increase in the tax equivalent net interest margin
for 1998 over the 1997 amounts was the result of slight declines in the costs of
funds on all types of deposit accounts and an annualized growth in earning
assets of 5.43%.
A summary of the net interest margin analysis is shown as Table II on Page
20.
Provision for Loan Losses
The Company's provision for loan losses were $320,000 for 1999, $355,000 for
1998 and $190,000 for 1997. Net loan losses were $357,000 in 1999 compared to
$370,000 in 1998 and $78,000 in 1997. The Company's three year charge off rate
of .19% of average loans outstanding compares closely with its peer group. The
1999 charge off percentage of .23% of average loans is only slightly above the
peer group average for the year. (See the following discussion relating to the
allowance for loan losses.)
Noninterest Income
1999 Compared to 1998
Overall noninterest income increased in 1999 by 39.70% when compared with
1998 operations. Increases in service charge income was the result of volume
increases and an increase in rates for not sufficient funds (NSF) checks. Other
operating income increased due to a $165,000 gain from the demutualization of an
insurance company with which the Company has investments in insurance contracts.
The Company also recognized greater income from investments in insurance
contracts due to a larger volume of investment in these assets. Losses from the
sale of mutual funds in 1999 of $65,000 tempered the overall gain in noninterest
income as no such losses were incurred in 1998.
1998 Compared to 1997
Noninterest income (before losses on securities) for 1998 increased 7.07%
from 1997. Increases in service charge income of 12.08% and other operating
income of 37.19% were the result of an increase in volume of transactions.
Insurance income decreased $67,000 due to significantly higher mortality claims.
Losses on security transactions declined from $117,000 in 1997 to $2,000 in
1998. The 1997 figures included a loss of $123,000 on a mutual fund that was not
repeated in 1998.
<PAGE> 8
Noninterest Expenses
1999 Compared to 1998
Total noninterest expenses increased 9.96% in 1999 when compared with 1998
operations. Salaries and benefits increased 10.76% due to the increase in staff
at the new branch, merit and inflationary raises and higher benefit costs.
Average full time equivalent employees increased 7.75% in 1999 and staffing the
new branch was a major reason for this increase. The costs of occupancy and
equipment increased 8.93% due to the branch openings and depreciation associated
with the new facility and equipment upgrades to insure year 2000 compliance.
Data processing expenses increased by 3.64% due to new communication lines,
general asset growth and expanded locations. Other operating expenses increased
10.91% in 1999 for all of the reasons cited above. Noninterest expense as a
percentage of average assets was 2.74% in 1999 compared to 2.69% in 1998 and
2.73% in 1997. This ratio continues to compare favorably to the Company's peer
group. The overall increase in noninterest expenses is in line with the increase
in assets and is in line with management's expectations.
1998 Compared to 1997
Overall, noninterest expense increased 5.11% in 1998 when compared to 1997.
Personnel expenses increased 3.80% as the result of merit and inflationary
raises. Occupancy and equipment expenses increased 2.35% as the result of asset
growth and inflation. Data processing expenses increased by 4.46% as a result of
increased transaction volume and rate increases. Other noninterest expenses
increased by 9.94% due to asset growth and costs in preparing for the year 2000.
Financial Condition
Loan Portfolio
The Company is an active residential mortgage and construction lender and
generally extends commercial loans to small and medium sized businesses within
its primary service area. The Company's commercial lending activity extends
across its primary service areas of Grant, Hardy, Hampshire, Mineral and
northern Pendleton counties. Consistent with its focus on providing
community-based financial services, the Company does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels, consumer
confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based upon
the strength and activity of the local economies of the Company's market areas.
The risk associated with real estate construction loans varies based upon the
supply of and demand for the type of real estate under construction.
Loans outstanding increased $18,230,000 or 12.29% in 1999. The bulk of this
increase was in real estate and consumer loans. The loan to deposit ratio was
86.62% at December 31, 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
satisfactory in the near future with any growth a function of local and national
economic conditions.
<PAGE> 9
Financial Condition (Continued)
Loan Portfolio (Continued)
The following table summarizes the Company's loan portfolio, net of
unearned income:
At December 31,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Real Estate:
Mortgage $ 93,391 $ 83,446 $ 75,221
Construction 3,296 2,969 2,189
Commercial 31,567 30,718 30,716
Installment 39,994 33,464 31,492
------- ------- -------
168,248 150,597 139,618
Less unearned discount (1,634) (2,213) (2,513)
------- ------- -------
166,614 148,384 137,105
Allowance for loan losses (1,318) (1,355) (1,369)
------- ------- -------
Loans, net $165,296 $147,029 $135,736
======= ======= =======
The following table shows the maturity of loans outstanding (in thousands
of dollars) as of December 31, 1999, 1998 and 1997.
Maturity Range 1999 1998 1997
-------------- ---- ---- ----
Predetermined Rates:
0 - 12 months $ 91,080 $ 73,878 $ 63,117
13 - 60 months 61,193 53,765 54,070
More than 60 months 14,147 20,702 19,918
Nonaccrual Loans 194 39
------- ------- -------
Total Loans $166,614 $148,384 $137,105
======= ======= =======
The following table shows the Company's loan maturity distribution (in
thousands of dollars) as of December 31, 1999:
Maturity Range
Less Than 1-5 Over
Loan Type 1 Year Years 5 Years Total
--------- ------- ----- ------- -----
Commercial and
Agricultural Loans $ 23,353 $ 5,860 $ 2,354 $ 31,567
Real Estate-mortgage 55,924 27,500 9,967 93,391
Real Estate-construction 3,296 3,296
Consumer - installment 8,542 27,891 1,927 38,360
------- ------- ------- -------
Total $ 91,115 $ 61,251 $ 14,248 $166,614
======= ======= ======= =======
<PAGE> 10
Financial Condition (Continued)
Loan Portfolio (Continued)
Nonperforming loans include nonaccrual loans, loans 90 days or more past
due and restructured loans. Nonaccrual loans are loans on which interest
accruals have been discontinued. Loans which reach nonaccrual status may not be
restored to accrual status until all delinquent principal and interest has been
paid or the loan becomes both well secured and in the process of collection.
Restructured loans are loans with respect to which a borrower has been granted a
concession on the interest rate or the original repayment terms because of
financial difficulties. Nonperforming loans do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources. Nonperforming
loans are listed in the table below.
Real estate acquired through foreclosure was $121,000 at December 31, 1999,
$95,000 at December 31, 1998 and $174,000 at December 31, 1997. All foreclosed
property held at December 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.
Nonperforming loans increased 20.94% at December 31, 1999 compared to 1998.
Nonaccrual loans, which had been minimal in 1997 and 1998, increased as the
result of a few workout situations. Loans 90 and more days past due increased
11.30% compared to a 12.29% increase in total loans outstanding. The increase in
delinquent real estate loans includes a large loan that is primarily guaranteed
by the State of West Virginia. Management does not anticipate any material
losses from the current level of nonperforming assets.
The following table summarizes the nonperforming loans:
At December 31,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Loans accounted for on a
nonaccrual basis $ 194 $ 39 $
Loans contractually past due
90 days or more as to interest
or principal payments (not
included in nonaccrual loans above)
Commercial 89 41 17
Real estate 1,465 1,339 938
Installments 140 142 292
------ ----- ------
Total Delinquent Loans 1,694 1,522 1,247
------ ----- ------
Total Nonperforming Loans $ 1,888 $1,561 $ 1,247
====== ===== ======
<PAGE> 11
Financial Condition (Continued)
Loan Portfolio (Continued)
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 December 31, 1999,
management is not aware of any significant potential problem loans for which the
debtor is currently meeting their obligations as stated in the loan agreement
but which may change in future periods.
As of December 31, 1999, the Company did not have any potential problem
loans as defined in Guide 3 that would require disclosure.
Allowance for Loan Losses
Management has analyzed the potential risk of loss on the Company's loan
portfolio given the loan balances and the value of the underlying collateral and
has recognized losses where appropriate. Nonperforming loans are closely
monitored on an ongoing basis as part of the Company's loan review process.
Management reviews the loan loss allowance at the end of each quarter. Based
primarily on the Company's loan classification system, which classifies problem
credits as substandard, doubtful or loss, additional provisions for losses are
made monthly. The ratio of the allowance for loan losses to total loans
outstanding was .79% at December 31, 1999 compared to .91% at December 31, 1998
and 1.00% at December 31, 1997. At December 31, 1999, the ratio of the allowance
for loan losses to nonperforming loans was 69.83% compared to 86.83% at December
31, 1998 and 109.78% at December 31, 1997.
Charge offs for 1999 were .23% of average loans outstanding and about the
same as the Company's peer group over the last three years. Losses on mortgage
lending were higher in 1999 primarily due to an individual loss. The Company
anticipates some recoveries due to pending legal actions but reflects these only
when the recovery is actually realized.
Management continues to monitor the economic health of the poultry
industry. The Company has direct loans to poultry growers and the industry is a
large employer in the Company's trade area. Operating results for the industry
have improved since 1997 due to a dramatic decline in grain prices and better
turkey pricing. However, the industry has not fully recovered due to a decline
in chicken prices and profitability in this industry is still quite volatile.
<PAGE> 12
Allowance for Loan Losses (Continued)
The following table summarizes changes in the allowance for loan losses:
Year Ending December 31,
1999 1998 1997
---- ---- ----
(In Thousands of Dollars)
Balance at beginning of period $1,355 $1,370 $1,257
----- ----- -----
Loan Losses:
Commercial and agricultural 107 135 34
Real estate - mortgage 87 53 20
Installment loans to individuals 254 289 170
----- ----- -----
Total loan losses 448 477 224
----- ----- -----
Recoveries:
Commercial and agricultural 16 6 9
Real estate - mortgage 1 1 25
Installment loans to individuals 74 100 113
----- ----- -----
Total recoveries 91 107 147
----- ----- -----
Net loan losses 357 370 77
----- ----- -----
Additions charged to operations 320 355 190
----- ----- -----
Balance at end of period $1,318 $1,355 $1,370
===== ===== =====
The Company has allocated the allowance for loan losses according to the
amounts deemed to be reasonably necessary to provide for the possibility of
losses incurred within each of the above categories of loans. The allocation of
the allowance as shown in the table below should not be interpreted as an
indication that loan losses in future years will occur in the same proportions
or that the allocation indicates future loan loss trends. Furthermore, the
portion allocated to each loan category is not the total amount available for
future losses that might occur within such categories since the total allowance
is a general allowance applicable to the entire portfolio.
The following table shows the balance and percentage of the Company's
allowance for loan losses allocated to each major category of loans:
At December 31,
1999 1998 1997
Percent Percent Percent
of of of
Loans Loans Loans
Percent in Percent in Percent in
of Category of Category of Category
Allow-to Total Allow-to Total Allow-to Total
Amount ance Loans Amount ance Loans Amount ance Loans
------ ------------- ------------ ------- ------ ------------
(Dollars in Thousands)
Commercial $ 395 30% 19% $ 379 28% 23% $ 343 25% 22%
Real estate
mortgage 211 16 58 434 32 56 548 40 56
Installment 580 44 23 406 30 21 343 25 22
Unallocated 132 10 136 10 136 10
------ --- ---- ----- --- --- ----- --- ---
$1,318 100% 100% $1,355 100% 100% $1,370 100% 100%
===== === === ===== === === ===== === ===
<PAGE> 13
Allowance for Loan Losses (Continued)
For each period presented, the provision for loan losses charged to
operations is based on management's judgment after taking into consideration all
factors connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include internally generated loan review reports, previous
loan loss experience with the borrower, the status of past due interest and
principal payments on the loan, the quality of financial information supplied by
the borrower and the general financial condition of the borrower.
The provision for loan losses charged to operations was $320,000 for 1999,
$355,000 for 1998 and $190,000 for 1997. In the opinion of management, the
provision charged to operations over this three year period has been sufficient
to maintain an adequate allowance for loan losses.
Securities
The Company's securities portfolio serves several purposes. Portions of the
portfolio are used to secure certain public and trust deposits. The remaining
portfolio is held as investments or used to assist the Company in liquidity and
asset liability management. During 1999, total securities decreased to $29.8
million or 13.52% of total assets at December 31, 1999. Total securities were
$34.0 million or 16.11% of total assets at December 31, 1998.
The securities portfolio consists of three components: securities held to
maturity, securities available for sale and restricted securities. 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 securities are those investments purchased
as a requirement of membership in certain loan banks and cannot be transferred
without the issuer's permission. The Company's purchases of securities have
generally been limited to securities of high credit quality with short to medium
term maturities.
The Company identifies at the time of acquisition those securities that are
available for sale. These securities are valued at their market value with any
difference in market value and amortized cost shown as an adjustment in
stockholders' equity. Changes within the year in market values are reflected as
changes in stockholders' equity, net of the deferred tax effect. As of December
31, 1999, cost of the securities available for sale exceeded their market value
by $580,000 ($366,000 after the related tax effect).
<PAGE> 14
Securities (Continued)
The following table summarizes the carrying value of the Company's
securities at the dates indicated:
Held to Maturity Available for Sale
Carrying Value Carrying Value
----------------------------------------------------------
December 31, December 31,
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
U.S. treasuries, agencies
and corporations $ $ $ 751 $21,160 $22,129 $20,349
Obligations of states and
political subdivisions 2,837 2,987 3,295 243 262 101
Mortgage-backed securities 340 517 531 4,339 6,821 10,665
------ ----- ----- ------ ------ ------
Total Debt Securities 3,177 3,504 4,577 25,742 29,212 31,115
Other securities 151 546 567
------ ------ ----- ------ ------ ------
Total $ 3,177 $ 3,504 $4,577 $25,893 $29,758 $31,682
====== ====== ===== ====== ====== ======
The carrying amount and estimated market value of debt securities (in
thousands of dollars) at December 31, 1999 by contractual maturity are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Securities Held to Maturity Amortized Fair Average
Cost Value Yield
Due in one year or less $ 1,030 $ 1,047 10.31%
Due after one year through five years 977 974 7.15%
Due after five years through ten years 1,170 1,155 7.46%
Total Held to Maturity $ 3,177 $ 3,176 8.29%
======== ======= =====
Securities Available for Sale Amortized Fair Average
Cost Value Yield
Due in one year or less $ 7,438 $ 7,380 5.76%
Due after one year through five years 17,370 17,064 5.90%
Due after five years through ten years 482 483 5.89%
Due after ten years 255 244 7.34%
------- -------- -----
Total Fixed Rate Securities 25,545 25,171 5.95%
Variable Rate Securities 572 571
Equities 167 151 5.87%
-------- -------- -----
Total Available for Sale $ 26,284 $ 25,893 5.95%
======== ======== =====
Yields on tax exempt securities are stated at tax equivalent yields.
Management has generally kept the maturities of investments relatively
short providing for flexibility in investing. Such a philosophy allows the
Company to better match deposit maturities with investment maturities and thus
react more quickly to interest rate changes.
<PAGE> 15
Deposits
The Company's predominant source of funds is local deposits. The Company's
deposit base is comprised of demand deposits, savings and money market accounts
and other time deposits. The Company's deposits are provided by individuals and
businesses located within the communities served.
The average balance of interest bearing deposits increased by 7.07% in 1999
over average levels in 1998. The average rate paid on deposits declined to 4.47%
in 1999 from 4.88% in 1998 and 5.04% in 1997. The majority of the Company's
deposits are higher yielding time deposits as most of its customers are
individuals who seek higher yields than savings accounts or don't wish to accept
the risks of the stock market.
The Company does not actively solicit large certificates of deposit (those
more than $100,000) due to the unstable nature of these deposits. Increases in
1999 are the result of overall deposit growth and higher than average rates
offered by the Company. A summary of the maturity of large deposits is as
follows:
December 31,
--------------------
Maturity Range 1999 1998 1997
-------------- ---- ---- ----
(In Thousands of Dollars)
Three months or less $ 6,341 $ 5,883 $ 6,086
Four to twelve months 12,342 11,391 8,497
One year to five years 9,846 8,449 8,744
------- ------- --------
Total $ 28,529 $ 25,723 $ 23,327
======= ======= ========
Borrowed Money
The Company will occasionally borrow funds from the Federal Home Loan Bank
to reduce market rate risks. Such borrowings have fixed repayment terms and are
amortized over a ten to twenty year life. Borrowings from this institution
allows the banks to offer long-term, fixed rate loans to their customers and
match the interest rate exposure of the receivable and the liability. The
Company had additional borrowings in 1999 of $395,000 and repayments within the
year of $147,000.
Capital Resources
The assessment of capital adequacy depends on a number of factors such as
asset quality, liquidity, earnings performance and changing competitive
conditions and economic forces. The Company seeks to maintain a strong capital
base to support its growth and expansion activities, to provide stability to
current operations and to promote public confidence.
The Company's capital position continues to exceed regulatory minimums. The
primary indicators relied on by the Federal Reserve Board and other bank
regulators in measuring strength of capital position are the Tier 1 Capital,
Total Capital and Leverage ratios. Tier 1 Capital consists of common
stockholders' equity. Total Capital consists of Tier 1 Capital and a portion of
the allowance for loan losses. Risk-based capital ratios are calculated with
reference to risk-weighted assets which consist of both on and off-balance sheet
risks.
The following table shows risk-based capital ratios and stockholders'
equity to total assets:
Regulatory December 31,
Minimum 1999 1998
----------- ---- ----
Capital Ratios
Risk-based capital to risk-weighted assets
Tier 1 8.00% 16.60% 17.00%
Total 4.00% 17.35% 18.02%
Stockholders' equity to total assets 5.00% 10.99% 10.83%
<PAGE> 16
Capital Resources (Continued)
The capital management function is an ongoing process. Central to this
process is internal equity generation accomplished by earnings retention. During
1999, 1998 and 1997, total stockholders' equity increased by $1,378,000,
$1,550,000 and $1,068,000, respectively, as a result of earnings retention and
changes in the unrealized gains (losses) on securities available for sale. The
return on average equity was 9.94% in 1999 compared to 9.12% for 1998 and 8.80%
for 1997. Total cash dividends declared represent 25.04% of net income for 1999
compared to 26.94% of net income for 1998 and 26.84% for 1997. Book value per
share was $48.26 at December 31, 1999 compared to $45.52 at December 31, 1998
and $42.43 at December 31, 1997.
In April of 1997, the Company repurchased 12,168 shares of common stock for
$499,000. The repurchased stock is being held as treasury stock and may be used
in future periods for a variety of business purposes. The stock was repurchased
from the estate of William G. VanMeter for whom the Company's chairman, John
VanMeter, is the executor.
The Company's principal source of cash income is dividend payments from the
Banks. Certain limitations exist under applicable law and regulation by
regulatory agencies regarding dividend payments to a parent by its subsidiaries.
As of January 1, 2000, the Banks had $3,362,000 of retained earnings available
for distribution to the Company as dividends without prior regulatory approval.
Liquidity and Interest Rate Sensitivity
Liquidity. Liquidity is the ability to meet present and future financial
obligations through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. The Company's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of the Company's management of liquid assets and the
ability to generate liquidity through liability funding, management believes
that the Company maintains overall liquidity sufficient to satisfy its
depositors' requirements and meet its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions, the Federal Reserve Bank of Richmond and
the Federal Home Loan Bank of Pittsburgh. In the past, growth in deposits and
proceeds from the maturity of investment securities have been sufficient to fund
the net increase in loans.
The investing activity saw a net increase in loans of $18,597,000 and an
investment of $2,400,000 in single premium life insurance policies used to fund
deferred compensation. New equipment and facility additions were $1,338,000 in
1999 compared with $337,000 in 1998. Funding these investments was an increase
in deposits of $7,758,000, a decline in interest bearing deposits in other banks
of $995,000, a decline in federal funds sold of $9,700,000, a decline in
investments of $4,178,000 and retained operating income of $1,743,000.
In the year ending December 31, 1999, cash and due from banks increased
$2,200,000 as cash provided by operations and financing activities exceeded cash
used in investing activities. The Banks increased currency reserves at all
branches at year end in anticipation of larger cash requirements resulting from
the year 2000 changeover. Cash provided by operations consists primarily of
earnings from operations and noncash expenses such as the provision for loan
losses, deferred income taxes and depreciation. The dividends paid of $582,000
in 1999 was an increase of 7.41 percent over 1998 amounts.
<PAGE> 17
Liquidity and Interest Rate Sensitivity (Continued)
The Company is not aware of any trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations. The Company is not aware of any
proposals from any regulatory authority which, if implemented, would have such
an effect.
Interest Rate Sensitivity. In conjunction with maintaining a satisfactory
level of liquidity, management must also control the degree of interest rate
risk assumed on the balance sheet. Managing this risk involves regular
monitoring of the interest sensitive assets relative to interest sensitive
liabilities over specific time intervals.
At December 31, 1999, the Company had a negative gap position through the
third year. This liability sensitive position typically produces a favorable
contribution to earnings during periods of decreasing rates and an unfavorable
contribution to earnings during a period of increasing rates. The Company
expects an increase in the overall cost of money in 2000 due to the renewal of
certificates to be issued at higher rates and a slight increase in other deposit
rates.
With the largest amount of interest sensitive assets and liabilities
repricing within three years, the Company monitors these areas closely. Early
withdrawal of deposits, prepayments of loans and loan delinquencies are some of
the factors that could affect actual versus expected cash flows. In addition,
changes in rates on interest sensitive assets and liabilities may not be equal,
which could result in a change in net interest margin. While the Company does
not match each of its interest sensitive assets against specific interest
sensitive liabilities, it does periodically review its cumulative position of
interest sensitive assets and liabilities.
The majority of the Company's commercial and real estate loans are made
with repricing frequencies of three months to three years. For this reason, 79%
of all loans will reprice within three years of December 31, 1999. Installment
loans generally have a fixed rate of interest but have limited amortization
periods. These loans have an average life to maturity of less than two years.
Management believes that its philosophy of generally requiring loan repricing
within a three to five year period to be the most prudent approach to
asset/liability management.
In the area of investments, the Company employs a management technique
known as "laddering" to minimize interest rate exposures and provide a constant
flow of maturities subject to repricing at current market rates. To assist in
the management of investments, the Company employs an independent investment
counsel that advises it in planning and risk diversification. The Company
utilizes many forms of investment with a significant use of mortgage-backed
securities issued by federally chartered institutions. The Company does not
employ the use of derivatives in its approach to controlling market risk.
Although the majority of its investments are classified as available for sale,
the Company rarely sells securities except in unusual circumstances.
Table IV (page 22) shows the maturity of liabilities and assets in future
periods. Table III (page 21) shows the effects of rate and volume changes on the
net interest margin for the past three year period.
<PAGE> 18
Effects of Inflation
Inflation significantly affects industries having high levels of property,
plant and equipment or inventories. Although the Company is not significantly
affected in these areas, inflation does have an impact on the growth of assets.
As assets grow rapidly, it becomes necessary to increase equity capital at
proportionate levels to maintain the appropriate equity to asset ratios.
Traditionally, the Company's earnings and high capital retention levels have
enabled the Company to meet these needs.
The Company's reported earnings results have been affected by inflation,
but isolating the effect is difficult. The different types of income and expense
are affected in various ways. Interest rates are affected by inflation, but the
timing and magnitude of the changes may not coincide with changes in the
consumer price index. Management actively monitors interest rate sensitivity, as
illustrated by the Gap Analysis (Table IV, page 22) 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 Discussion
The Company and its subsidiary banks began preparing for the year 2000
changeover in 1997. Plans were developed to update equipment and software and
contingency plans were instituted to address problems that may have occurred due
to suppliers inability to perform as expected. Some of the equipment purchases
replaced outdated property and would have been made in the normal course of
business. All phases of the Company's major operations were addressed and the
plans were heavily reviewed by federal and state regulators. The result of this
effort is that all aspects of the Bank's operations have performed without major
interruption and entering the new millennium has had a negligible impact on
customer service, correspondent banking or 2000 profitability.
Securities and Exchange Commission WEB Site
The Securities and Exchange Commission maintains a WEB site that contains
reports, proxy and information statements and other information regarding
registrants (including the Company) that file electronically with the
Commission. That address is (http: //www.sec.gov)
<PAGE> 19
TABLE I
SUMMARY OF OPERATIONS
(Dollar amounts in thousands)
Years Ending December 31,
(In Thousands Except for Share Amounts)
1999 1998 1997 1996 1995
Total Interest Income $16,243 $15,772 $15,084 $14,182 $12,758
Total Interest Expense (7,663) (7,745) (7,474) (7,103) (6,219)
------ ------ ------ ------ ------
Net Interest Income 8,580 8,027 7,610 7,079 6,539
Provision for Loan Losses 320 355 190 135 120
------ ------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 8,260 7,672 7,420 6,944 6,419
Other Income 1,026 735 571 592 581
Other Expenses 5,912 5,377 5,115 4,570 4,191
------ ------ ------ ------ ------
Income before Income Taxes 3,374 3,030 2,876 2,966 2,809
Income Tax Expense 1,049 1,018 996 953 956
------ ------ ------ ------ ------
Net Income $ 2,325 $ 2,012 $ 1,880 $ 2,013 $ 1,853
====== ====== ====== ====== ======
Net Income Per Share $ 4.63 $ 4.01 $ 3.73 $ 3.92 $ 3.60
Dividends Per Share $ 1.16 $ 1.08 $ 1.00 $ .94 $ .83
Total Assets at Year End $220,481 $210,981 $190,770 $178,847 $167,884
======= ======= ======= ======= =======
Return on Average Assets 1.08% 1.01% 1.00% 1.15% 1.16%
Return on Average Equity 9.94% 9.12% 8.80% 9.99% 10.15%
Dividend Payout Ratio 25.04% 26.94% 26.80% 24.00% 23.03%
Year End Equity to Assets Ratio 10.99% 10.83% 11.16% 11.31% 11.24%
<PAGE> 20
TABLE II
<TABLE>
NET INTEREST MARGIN AND AVERAGE BALANCE ANALYSIS
(Dollar amounts in thousands)
<CAPTION>
1999 1998 1997
------------------ ------------------- ------------
Income/ Yield/ Income/ Yield/ Income/ Yield/
EARNING ASSETS Average Expense Rate Average Expense Rate Average Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans 1,3 $155,102 $ 13,699 8.81 $143,197 $ 13,163 9.18 $130,848 $ 12,249 9.36
Investment securities:
Taxable 4 29,235 1,755 6.00 31,402 1,952 6.22 37,032 2,315 6.25
Nontaxable 1,4 3,192 271 8.49 3,316 270 8.14 3,568 298 8.35
------- ------- ---- ------- ------- ---- ------- ------- ----
Total Investment
Securities 32,427 2,026 6.25 34,718 2,222 6.40 40,600 2,613 6.44
Interest bearing deposits
in banks 4,161 222 5.33 1,215 64 5.27 685 37 5.40
Federal funds sold 8,685 432 4.97 8,216 440 5.36 5,561 314 5.65
------- ------- ---- ------- ------- ---- ------- ------- ----
Total Earning Assets 200,375 16,379 8.17 187,346 15,889 8.48 177,694 15,213 8.56
------- ---- ------- ---- ------- ----
Allowance for loan
losses (1,322) (1,319) (1,314)
Nonearnings assets 16,931 13,636 10,860
------- ------- --------
Total Assets $215,984 $199,663 $187,240
======= ========= =======
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 32,971 $ 809 2.45 $ 29,187 $ 808 2.77 $ 27,823 $ 799 2.87
Savings 21,250 583 2.74 20,135 671 3.33 18,684 659 3.53
Time deposits 114,632 6,133 5.35 108,382 6,213 5.73 100,444 5,930 5.90
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Deposits 168,853 7,525 4.46 157,704 7,692 4.88 146,951 7,388 5.03
Other borrowed money 2,560 138 5.39 974 53 5.44 1,443 85 5.89
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Interest Bearing
Liabilities 171,413 7,663 4.47 158,678 7,745 4.88 148,394 7,473 5.04
------ ---- ------ ---- ------ ----
Noninterest bearing
deposits 20,319 17,744 16,100
Other liabilities 856 1,186 1,370
----- ----- ------
Total Liabilities 192,588 177,608 165,864
Stockholders'
Equity 23,396 22,055 21,376
------ ------ ------
Total Liabilities
and Equity $215,984 $199,663 $187,240
======= ======= =======
Net Interest Earnings $ 8,716 $8,144 $ 7,740
======= ===== =======
Net Yield on Interest Earning Assets 4.35% 4.35% 4.36%
==== ==== ====
</TABLE>
1 Yields are computed on a taxable equivalent basis using a 37% income tax
rate.
2 Average balances are based on daily balances.
3 Includes loans in nonaccrual status.
4 Average balances for securities available for sale are based on amortized
carrying values and do not reflect changes in market values.
<PAGE> 21
TABLE III
EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
(On a fully taxable equivalent basis)
(In thousands of dollars)
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
Due to Change in: Total Due to Change in: Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Interest Income:
Loans 2 $1,093 $(557) $ 536 $1,155 $(241) $ 914
Investment Securities:
Taxable (135) (62) (197) (352) (11) (363)
Nontaxable (10) 11 1 (21) (7) (28)
----- ---- ---- ---- ---- ----
Total Investment
Securities (145) (51) (196) (373) (18) (391)
Interest bearing deposits
in banks 155 3 158 29 (2) 27
Federal funds sold 25 (33) (8) 144 (18) 126
----- ---- ---- ---- ---- ----
Total Interest Income 1,128 (638) 490 955 (279) 676
----- ---- ---- ---- ---- ----
Interest Expense:
Deposits:
Demand 105 (104) 1 39 (30) 9
Savings 37 (125) (88) 51 (39) 12
All other time deposits 358 (438) (80) 468 (185) 283
Other borrowed money 86 (1) 85 (28) (4) (32)
----- ---- ---- ---- ---- ----
Total Interest Expense 586 (668) (82) 530 (258) 272
----- ---- ---- ---- ---- ----
Net Interest Income $ 542 $ 30 $ 572 $ 425 $ (21) $ 404
===== ==== ==== ==== ==== ====
1 Changes in volume are calculated based on the difference in average balance
multiplied by the prior year average rate. Rate change differences are the
difference in the volume changes and the actual dollar amount of interest
income or expense changes.
2 Nonaccrual loans have been included in average asset balances.
<PAGE> 22
TABLE IV
INTEREST RATE SENSITIVITY ANALYSIS
(In thousands of dollars)
DECEMBER 31, 1999
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 $24,041 $67,074 $39,741 $21,510 $14,248 $166,614
Fed funds sold 2,703 2,703
Securities 4,483 5,816 15,581 1,152 2,783 29,815
Interest bearing time
deposits 783 600 1,053 2,436
------ ------ ------ ------ ----- ------
Total 32,010 73,490 56,375 22,662 17,031 201,568
-------- -------- -------- -------- ------- -------
INTEREST BEARING LIABILITIES
Transaction accounts 18,102 18,102
Money market accounts 13,391 13,391
Savings accounts 21,330 21,330
Time deposits more than
$100,000 6,341 12,342 7,218 2,628 28,529
Time deposits less than
$100,000 17,296 43,902 22,994 5,675 41 89,908
Other borrowed money 88 136 392 407 1,545 2,568
------ ------ ------ ------ ----- ------
Total 76,548 56,380 30,604 8,710 1,586 173,828
------ ------ ------ ------ ----- -------
Discrete interest
sensitivity GAP (44,538) 17,110 25,771 13,952 15,445 27,740
Cumulative interest
sensitivity GAP (44,538) (27,428) (1,657) 12,295 27,740
Ratio of cumulative
interest sensitive
assets to cumulative
interest sensitive
liabilities 41.82% 79.37% 98.99% 107.14% 115.96%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
<PAGE> 23
Item 7. Financial Statements
Index to Financial Statements
Page
Consolidated Balance Sheets as of December 31, 1999 and 1998 24
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997 25
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 27
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 46
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
HIGHLANDS BANKSHARES, INC.
December 31,
ASSETS 1999 1998
Cash and due from banks (notes 2, 3 and 15) $ 7,312,241 $ 5,111,863
Interest bearing deposits in banks 2,436,271 3,431,523
Federal funds sold 2,702,633 12,374,283
Investments:
Securities held to maturity (note 4) 3,176,547 3,503,965
(fair value of $3,175,918 and $3,621,218
at December 31, 1999 and 1998, respectively)
Securities available for sale (note 4) 25,892,783 29,757,841
Other investments 745,550 730,950
Loans (notes 5, 13, 14 and 15) 166,614,055 148,383,904
Less allowance for loan losses (note 6) (1,318,332) (1,355,377)
---------- ----------
Net Loans 165,295,723 147,028,527
Bank premises and equipment (note 7) 5,690,860 4,759,710
Interest receivable 1,627,874 1,556,347
Investment in insurance contracts 4,661,662 2,122,432
Other assets 938,901 603,501
---------- ----------
Total Assets $220,481,045 $210,980,942
=========== ===========
LIABILITIES
Deposits:
Noninterest bearing $21,085,145 $22,043,509
Interest bearing
Money market and interest checking 18,101,823 18,353,696
Money market savings 13,391,006 11,393,244
Savings accounts 21,330,208 20,849,433
Certificates of deposit over $100,000 (note 8) 28,528,959
25,722,913
All other time deposits (note 8) 89,907,847 86,224,570
---------- ----------
Total Deposits 192,344,988 184,587,365
Accrued expenses and other liabilities 1,344,052 1,227,486
Long-term debt (note 9) 2,567,958 2,319,544
---------- ----------
Total Liabilities 196,256,998 188,134,395
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 1,000,000 shares
authorized, 546,764 shares issued 2,733,820 2,733,820
Surplus 1,661,987 1,661,987
Retained earnings (note 12) 21,067,191 19,324,019
Other accumulated comprehensive income (loss) (246,250) 119,422
---------- ----------
25,216,748 23,839,248
Treasury stock (at cost, 44,866 shares in 1999
and 1998) (992,701) (992,701)
Total Stockholders' Equity 24,224,047 22,846,547
---------- ----------
Total Liabilities and Stockholders' Equity $220,481,045 $210,980,942
=========== ===========
The accompanying notes are an integral part of this statement.
<PAGE> 25
CONSOLIDATED STATEMENTS OF INCOME
HIGHLANDS BANKSHARES, INC.
Years Ended December 31,
1999 1998 1997
INTEREST INCOME:
Loans, including fees $13,663,857 $13,144,542 $12,229,824
Federal funds sold 431,670 440,293 314,382
Interest bearing deposits 221,724 64,230 36,915
Investment securities - taxable 1,754,509 1,952,454 2,314,849
Investment securities - nontaxable 171,192 170,115 187,667
--------- -------- --------
Total Interest Income 16,242,952 15,771,634 15,083,637
---------- ---------- ----------
INTEREST EXPENSE:
Time deposits over $100,000 1,524,334 1,428,100 1,374,899
Other deposits 6,000,044 6,263,489 6,013,147
--------- --------- ---------
Total Interest on Deposits 7,524,378 7,691,589 7,388,046
Borrowed money 138,313 52,937 85,224
--------- -------- --------
Total Interest Expense 7,662,691 7,744,526 7,473,270
--------- --------- ---------
NET INTEREST INCOME 8,580,261 8,027,108 7,610,367
PROVISION FOR LOAN LOSSES (note 6) 320,000 355,000 190,000
--------- -------- --------
Net Interest Income after Provision
for Loan Losses 8,260,261 7,672,108 7,420,367
--------- --------- ---------
NONINTEREST INCOME:
Service charges 409,052 339,289 302,726
Insurance commissions and income 112,339 107,482 174,061
Other operating income 568,903 290,221 211,546
Loss on security transactions (note 4) (63,590) (2,071) (117,036)
--------- -------- --------
Total Noninterest Income 1,026,704 734,921 571,297
--------- -------- --------
NONINTEREST EXPENSES:
Salaries and benefits (note 11) 3,230,973 2,916,970 2,810,116
Occupancy expense 269,483 269,469 241,478
Equipment expense 472,441 411,660 424,032
Data processing expense 473,392 456,740 437,232
Other operating expenses 1,466,016 1,321,750 1,202,271
--------- --------- ---------
Total Noninterest Expenses 5,912,305 5,376,589 5,115,129
--------- --------- ---------
Income before Income Tax Expense 3,374,660 3,030,440 2,876,535
INCOME TAX EXPENSE (note 10) 1,049,291 1,018,558 996,390
--------- --------- --------
NET INCOME $2,325,369 $2,011,882 $1,880,145
========= ========= =========
Net Income Per Share $ 4.63 $ 4.01 $ 3.73
========== ========= =========
Cash Dividends Paid Per Share $ 1.16 $ 1.08 $ 1.00
========== ========= =========
Weighted Average Shares Outstanding 501,898 501,898 504,330
========= ======== ========
The accompanying notes are an integral part of this statement.
<PAGE> 26
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
HIGHLANDS BANKSHARES, INC.
<CAPTION>
Accumulated
Other
Capital Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1996 $ 2,733,820 $ 1,661,987 $16,478,655 $(151,192) $(493,813) $20,229,457
Comprehensive Income
Net income 1,880,145 1,880,145
Change in unrealized loss
on securities available
for sale, net of tax
effect of $112,119 (see note 2(l)) 190,902 190,902
---------
Total Comprehensive
Income 2,071,047
Cash dividends (504,615) (504,615)
Purchase of treasury stock
(12,168 shares) (498,888) (498,888)
---------- ---------- ---------- --------- -------- ---------
BALANCE
DECEMBER 31, 1997 2,733,820 1,661,987 17,854,185 39,710 (992,701) 21,297,001
Comprehensive Income
Net income 2,011,882 2,011,882
Change in unrealized gain
on securities available
for sale, net of tax
effect of $46,814 (see note 2(l)) 79,712 79,712
----------
Total Comprehensive
Income 2,091,594
Cash dividends (542,048) (542,048)
--------- --------- ---------- --------- -------- ----------
BALANCE
DECEMBER 31, 1998 2,733,820 1,661,987 19,324,019 119,422 (992,701) 22,846,547
Comprehensive Income
Net income 2,325,369 2,325,369
Change in unrealized gain
on securities available
for sale, net of tax
effect of $214,757 (see note 2(l)) (365,672) (365,672)
----------
Total Comprehensive
Income 1,959,697
Cash dividends (582,197) (582,197)
--------- --------- ---------- ---------- --------- -----------
BALANCE
DECEMBER 31, 1999 $2,733,820 $1,661,987 $21,067,191 $ (246,250) $(992,701) $24,224,047
========= ========= ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
HIGHLANDS BANKSHARES, INC.
Years Ended December 31,
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,325,369 $2,011,882 $1,880,145
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on sale of securities 63,590 2,071 117,036
Depreciation 407,147 350,429 359,740
Increase in insurance contracts (139,230) (52,432)
Net amortization of security premiums 151,150 15,062 25,000
Provision for loan losses 320,000 355,000 190,000
Deferred income tax expense (15,192) (6,441) (1,768)
Change in other assets and liabilities:
Interest receivable (71,527) (8,743) (186,171)
Other assets (105,451) 127,550 (42,801)
Accrued expenses 116,566 (83,512) (56,201)
--------- --------- --------
Net Cash Provided by Operating
Activities 3,052,422 2,710,866 2,284,980
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of securities
held to maturity 332,027 1,068,833 3,354,000
Proceeds from maturities of
securities available for sale 15,000,285 12,719,231 9,291,964
Proceeds from sales of securities
available for sale 377,499 501,000
Purchases of securities available
for sale (12,312,504) (10,681,150) (7,630,000)
Net change in other investments (14,600) (15,700) (76,065)
Net change in deposits in other banks 995,252 (2,604,887) 6,990
Net increase in loans (18,587,196) (11,647,875)(12,582,234)
Change in federal funds sold 9,671,650 (5,479,168) (4,401,038)
Purchase of property and equipment (1,338,297) (337,341) (607,000)
Investment in insurance contracts (2,400,000) (2,070,000)
---------- ---------- ----------
Net Cash Used in Investing Activities (8,275,884) (19,048,057)(12,142,383)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in time deposits 6,489,323 7,306,146 8,048,939
Net change in other deposit accounts 1,268,300 9,345,508 2,777,665
Additional long-term debt 394,922 2,145,532 2,603,924
Repayment of long-term debt (146,508) (52,140) (2,519,388)
Dividends paid in cash (582,197) (542,048) (504,615)
Purchase of treasury stock (498,888)
--------- --------- --------
Net Cash Provided by Financing
Activities 7,423,840 18,202,998 9,907,637
---------- ---------- ---------
CASH AND CASH EQUIVALENTS:
Net increase in cash and
due from banks 2,200,378 1,865,807 50,234
Cash and due from banks,
beginning of year 5,111,863 3,246,056 3,195,822
--------- --------- ---------
Cash and Due from Banks, End of Year $7,312,241 $5,111,863 $3,246,056
========= ========= =========
Supplemental Disclosures:
Cash paid for:
Interest expense $7,688,056 $7,798,847 $7,525,000
Income taxes 1,152,533 1,013,250 939,000
The accompanying notes are an integral part of this statement.
<PAGE> 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
HIGHLANDS BANKSHARES, INC.
NOTE 1 NATURE OF OPERATIONS:
Highlands Bankshares, Inc. (the "Company") is a bank holding company
and operates under a charter issued by the state of West Virginia.
The Company owns all of the outstanding stock of The Grant County
Bank, the Capon Valley Bank and HBI Life Insurance Company, Inc.
which operate under charters issued in West Virginia and Arizona.
State chartered banks are subject to regulation by the West Virginia
Division of Banking, Federal Reserve Bank and the Federal Deposit
Insurance Corporation while the insurance company is regulated by the
Arizona Department of Insurance. The Banks provide services to
customers located mainly in Grant, Hardy, Hampshire, Mineral and
Pendleton counties of West Virginia, including the towns of
Petersburg, Keyser, Moorefield and Wardensville through seven branch
offices. The insurance company sells life and accident coverage
exclusively through the Company's subsidiary banks.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Highlands Bankshares, Inc.
("Company") and its subsidiaries conform to generally accepted
accounting principles and to accepted practice within the banking
industry.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of The
Grant County Bank, the Capon Valley Bank and HBI Life Insurance
Company. All significant intercompany accounts and transactions
have been eliminated.
(b) Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts
in those statements; actual results could differ significantly
from those estimates. A material estimate that is particularly
susceptible to significant changes is the determination of the
allowance for loan losses, which is sensitive to changes in local
economic conditions.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and noninterest
bearing funds at correspondent institutions.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Securities
Securities that the Company has both the positive intent and
ability to hold to maturity (at time of purchase) are classified
as held to maturity securities. All other securities are
classified as available for sale. Securities held to maturity are
carried at historical cost and adjusted for amortization of
premiums and accretion of discounts, using the effective interest
method. Securities available for sale are carried at fair value
with any valuation adjustments reported, net of deferred taxes, as
other accumulated comprehensive income. Also included in
securities available for sale are marketable equity securities.
Other investments consist of investments in the Federal Home Loan
Bank of Pittsburgh and the Federal Reserve Bank of Richmond. Such
investments are required as members of these institutions and
these investments cannot be sold without a change in the members'
borrowing or service levels.
Interest and dividends on securities and amortization of premiums
and discounts on securities are reported as interest income using
the effective interest method. Gains (losses) realized on sales
and calls of securities are determined using the specific
identification method.
(e) Loans
Loans are carried on the balance sheet net of any unearned
interest and the allowance for loan losses. Interest income on
loans is determined using the effective interest method on the
daily amount of principal outstanding except where serious doubt
exists as to collectibility of the loan, in which case the accrual
of income is discontinued.
(f) Allowance For Loan Losses
The allowance for loan losses is based upon management's knowledge
and review of the loan portfolio. Estimation of an adequate
allowance for loan losses involves the exercise of judgement, the
use of assumptions with respect to present economic conditions and
knowledge of the environment in which the Banks operate. Among the
factors considered in determining the level of the allowance are
the changes in composition of the loan portfolio, the amount of
delinquent and nonaccrual loans, past loan loss experience and the
value of collateral securing the loans.
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
HIGHLANDS BANKSHARES, INC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Impaired Loans
Accounting standards require that impaired loans be presented in
the financial statements at the present value of expected future
cash flows or at the fair value of the loan's collateral. A
valuation allowance is required to the extent that such
measurement is less than the recorded investment. Under this
standard a loan is considered impaired based on current
information and events, if it is probable that the Company will be
unable to collect the scheduled payments of principal and interest
when due under the contractual terms of the loan agreement.
Charge-offs for impaired loans occur when the loan, or portion of
the loan, is determined to be uncollectible.
(h) Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is charged to income over the estimated
useful lives of the assets using a combination of the
straight-line and accelerated methods. The ranges of the useful
lives of bank premises and equipment are as follows:
Buildings and Improvements 15 - 40 years
Furniture and fixtures 5 - 15 years
Maintenance, repairs, renewals, and minor improvements are charged
to operations as incurred. Gains and losses on routine
dispositions are reflected in other income or expense.
(i) Income Taxes
Amounts provided for income tax expense are based on income
reported for financial statement purposes rather than amounts
currently payable under federal and state tax laws. Deferred
taxes, which arise principally from differences between the period
in which certain income and expenses are recognized for financial
accounting purposes and the period in which they affect taxable
income, are included in the amounts provided for income taxes.
(j) Earnings Per Share
Earnings per share are based on the weighted average number of
shares outstanding.
(k) Foreclosed Real Estate
The components of foreclosed real estate are adjusted to the lower
of cost or fair value less estimated costs of disposal. The
current year provision for a valuation allowance has been recorded
as an expense to current operations.
<PAGE>31
CONSOLIDATED STATEMENTS OF CASH FLOWS
HIGHLANDS BANKSHARES, INC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(l) Comprehensive Income
The Corporation adopted SFAS 130, Reporting Comprehensive Income,
as of January 1, 1998. Accounting principles generally require
that recognized revenue, expenses, gains and losses be included in
net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity
section of the balance sheet. Such items, along with net income,
are components of comprehensive income. The adoption of SFAS 130
had no effect on the Corporation's net income or shareholders'
equity.
The components of other comprehensive income and related tax
effects are as follows:
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Unrealized holding gains (losses)
on available-for-sale
securities $(644,019) $124,455 $185,985
Reclassification adjustment for
losses realized in income 63,590 2,071 117,036
-------- -------- --------
Net Unrealized Gains (Losses) (580,429) 126,526 303,021
Tax effect 214,757 (46,814) (112,119)
Net Change $(365,672) $ 79,712 $190,902
======== ======= =======
NOTE 3 CASH AND DUE FROM BANKS:
The Banks are required to maintain average reserve balances based on a
percentage of deposits. The Banks have generally met this requirement
through average cash on hand and balances with their correspondent
institutions.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 4 SECURITIES:
The carrying amount and estimated fair value of securities are as
follows:
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
Held to Maturity
December 31, 1999
Mortgage-backed $ 339,877 $ 406 $ 590 $ 339,693
State and municipals 2,836,670 21,575 22,020 2,836,225
--------- -------- -------- ---------
Total Securities
Held to Maturity $3,176,547 $ 21,981 $ 22,610 $3,175,918
========= ======== ======== =========
December 31, 1998
Mortgage-backed $ 516,905 $ 5,870 $ $ 522,775
State and municipals 2,987,060 111,383 3,098,443
--------- -------- -------- ---------
Total Securities
Held to Maturity $3,503,965 $ 117,253 $ $3,621,218
========= ======== ======== =========
Available for Sale
December 31, 1999
U. S. Treasuries
and Agencies $20,923,302 $ 6,971 $ 260,709 $20,669,564
Mortgage-backed 4,426,672 5,988 93,779 4,338,881
State and municipals 255,000 12,112 242,888
Marketable equities 167,211 15,711 151,500
Corporate obligations 511,466 21,516 489,950
---------- -------- -------- ----------
Total Securities
Available for
Sale $26,283,651 $ 12,959 $ 403,827 $25,892,783
========== ======== ======== ==========
December 31, 1998
U. S. Treasuries
and Agencies $21,428,019 $ 189,692 $ 578 $21,617,133
Mortgage-backed 6,751,620 69,812 6,821,432
State and municipals 255,000 7,319 262,319
Marketable equities 618,708 72,951 545,757
Corporate obligations 514,934 3,734 511,200
---------- -------- -------- ----------
Total Securities
Available for
Sale $29,568,281 $ 266,823 $ 77,263 $29,757,841
========== ======== ======== ==========
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 4 SECURITIES (CONTINUED):
The carrying amount and fair value of debt securities at December 31,
1999, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Securities Held to Maturity Fair
Cost Value
Due in one year or less $1,030,007 $1,047,066
Due after one year through five years 964,503 961,609
Due after five years through ten years 1,170,057 1,154,857
Mortgage-backed securities 11,980 12,386
--------- ---------
Total Held to Maturity $3,176,547 $3,175,918
========= =========
Securities Available for Sale Fair
Cost Value
Due in one year or less $6,428,680 $6,387,222
Due after one year through five years 15,058,464 14,824,870
Due after ten years 255,000 242,888
Mortgage-backed securities 4,374,296 4,286,303
--------- ---------
Total Fixed Rate Securities 26,116,440 25,741,283
Equities 167,211 151,500
--------- ---------
Total Available for Sale $26,283,651 $25,892,783
========== ==========
The carrying amount (which approximates market value) of securities
pledged by the banks to primarily secure deposits amounted to
$10,326,168 at December 31, 1999 and $8,036,529 at December 31, 1998.
There were no holdings totaling more than 10% of stockholders' equity
with any issuer as of December 31, 1999 and 1998.
All gains or losses in 1998 are from calls or early payoffs of
securities designated as held to maturity. Losses in 1999 and 1997
include losses on mutual fund investments as well as gains/losses on
calls and redemptions. Realized gains or losses for the years ending
December 31 are as follows:
1999 1998 1997
------------ ------------ --------
Gains $ 4,259 $ 9,438 $ 6,982
Losses (67,849) (11,509) (124,018)
-------- --------- ---------
Total $ (63,590) $ (2,071) $ (117,036)
======== =========- =========
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 5 LOANS:
Loans outstanding as of December 31 are summarized as follows:
1999 1998
------------------------
Commercial $31,566,793 $30,717,977
Real estate construction 3,296,000 2,969,000
Real estate mortgages 93,391,419 83,446,041
Consumer installment 39,993,963 33,463,853
---------- ----------
Subtotal 168,248,175 150,596,871
Unearned interest (1,634,120) (2,212,967)
---------- ----------
Total Loans $166,614,055 $148,383,904
=========== ===========
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses for the years
ended December 31 is shown in the following schedule:
1999 1998 1997
Balance at beginning of year $1,355,377 $1,369,566 $1,257,454
Provision charged to
operating expenses 320,000 355,000 190,000
Loan recoveries 90,544 107,051 146,855
Loans charged off (447,589) (476,240) (224,743)
--------- --------- ----------
Balance at end of year $1,318,332 $1,355,377 $1,369,566
========= ========= ==========
Percentage of outstanding
loans .79% .91% 1.00%
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
HIGHLANDS BANKSHARES, INC.
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment as of December 31 are summarized as
follows:
1999 1998
----------------------
Land $ 917,139 $ 553,652
Buildings and improvements 5,019,994 5,176,923
Furniture and equipment 2,925,284 2,375,983
--------- ---------
Total cost 8,862,417 8,106,558
Less - accumulated depreciation (3,171,557) (3,346,848)
---------- ----------
Net Book Value $5,690,860 $4,759,710
========= =========
Provisions for depreciation of $407,147 in 1999, $350,429 in 1998 and
$359,740 in 1997 were charged to operations.
NOTE 8 DEPOSITS:
At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows:
2000 $79,984,589
2001 20,648,211
2002 9,359,494
2003 3,925,004
2004 4,519,508
----------
Total $118,436,806
===========
NOTE 9 LONG-TERM DEBT:
The Company has borrowed money from the Federal Home Loan Bank of
Pittsburgh (FHLB). The interest rates on the notes payable are fixed
at the time of the advance and range from 2.50% to 6.60%; the weighted
average interest rate is 5.37% at December 31, 1999. The long-term
debt is secured by the assets of The Grant County Bank.
Repayments of long-term debt are due either monthly or quarterly.
Interest expense of $138,313, $52,937, and $53,181 was incurred on
these debts in 1999, 1998, and 1997, respectively. The maturities of
long-term debt as of December 31, 1999 are as follows:
2000 $ 224,204
2001 190,744
2002 201,580
2003 208,726
2004 198,226
Thereafter 1,544,478
-----------
Total $ 2,567,958
===========
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 10 INCOME TAX EXPENSE:
The components of income tax expense for the years ended December 31,
are summarized as follows:
1999 1998 1997
--------------------------------
Current Expense
Federal $ 930,223 $ 899,787 $883,728
State 134,260 125,212 114,430
-------- ------- -------
Total Current Expense 1,064,483 1,024,999 $998,158
--------- --------- -------
Deferred Expense
Federal (13,961) (5,919) (1,625)
State (1,231) (522) (143)
-------- ------- -------
Total Deferred Expense (15,192) (6,441) (1,768)
-------- ------- -------
Income Tax Expense $1,049,291 $1,018,558 $996,390
========= ========= =======
Income expense (benefits) relating
to losses on security transactions
are as follows: $ (23,528) $ (766) $ 2,040
The deferred tax effects of temporary differences for the years ended
December 31 are as follows:
1999 1998 1997
--------------------------------
Tax effect of temporary differences:
Provision for loan losses $ (10,937) $(24,887) $(42,793)
Sale of loans 7,192 32,612 (7,744)
Pension expense (26,626) (18,030) (10,404)
Depreciation 23,945 30,497 51,675
Deferred compensation (24,797)
Miscellaneous 16,031 (26,633) 7,498
------- ------- -------
Net increase in deferred
income tax benefit $ (15,192) $ (6,441) $ (1,768)
======== ======= =======
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 10 INCOME TAX EXPENSE (CONTINUED):
The net deferred tax assets arising from temporary differences as of
December 31 are summarized as follows:
1999 1998
--------------------
Deferred Tax Assets:
Provision for loan losses $ 316,232 $ 305,295
Insurance commissions 30,663 29,908
Sale of loans 6,581 13,773
Unrealized loss on securities available
for sale 144,618
Deferred compensation 50,860 26,063
Capital loss carryforward 45,343
Other 4,215 3,090
-------- --------
Subtotal 553,169 423,472
Less valuation allowance (45,343)
-------- --------
Total Assets 553,169 378,129
-------- --------
Deferred Tax Liabilities:
Pension prepaids 25,039
Unrealized gain on securities
available for sale 70,138
Accretion income 41,840 23,173
Accelerated depreciation 156,768 135,167
-------- --------
Total Liabilities 198,608 253,517
-------- --------
Net Tax Asset $ 354,561 $ 124,612
======== ========
The following table summarizes the difference between income tax
expense and the amount computed by applying the federal statutory
income tax rate of 34 percent for the years ended December 31:
1999 1998 1997
------------------------------------
Amounts at federal statutory rates $1,147,384 $1,030,351 $ 978,023
Additions (reductions) resulting
from:
Tax-exempt income (71,484) (61,331) (69,759)
Partially exempt income (30,125) (27,497) (39,429)
State income taxes, net 100,227 90,004 80,113
Income from life insurance
contracts (51,515) (15,096)
Capital losses incurred (utilized) (53,346) 45,343
Other 8,150 2,127 2,099
-------- -------- --------
Income tax expense $1,049,291 $1,018,558 $ 996,390
========= ========= ========
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 11 EMPLOYEE BENEFITS:
The Company's two subsidiary banks each have separate retirement and
profit sharing plans which cover substantially all full time employees
at each bank. The Capon Valley Bank has a defined contribution pension
plan with 401(k) features that is funded with discretionary
contributions by the Company. The Company matches on a limited basis
the contributions of the employees. Investment of employee balances is
done through the direction of each employee.
The Grant County Bank is a member of the West Virginia Bankers'
Association Retirement Plan. Benefits under the plan are based on
compensation and years of service with 100% vesting after seven years
of service. The Plan's assets are in excess of the projected benefit
obligations and thus the Bank was not required to make contributions
to the Plan in 1999, 1998 or 1997. The amounts of the prepaid expense
or accrued liability and the net pension expense reflected in
operations are insignificant. In addition, The Grant County Bank also
maintains a profit sharing plan covering substantially all employees
to which contributions are made at the discretion of the Board of
Directors.
The Company has established an employee stock ownership plan which
will provide stock ownership to all employees of the Company. The Plan
provides total vesting upon the attainment of seven years of service.
Contributions to the plan are made at the discretion of the Board of
Directors and are allocated based on the compensation of each employee
relative to total compensation paid by the Company. All shares held by
the Plan will be considered outstanding in the computation of earnings
per share. Shares of Company stock when distributed will have
restrictions on transferability.
Deferred compensation expenses for the above benefits charged to
operations totaled $244,743 in 1999, $196,172 in 1998 and $189,595 in
1997.
NOTE 12 RESTRICTIONS ON DIVIDENDS OF SUBSIDIARY BANKS:
The principal source of funds of Highlands Bankshares, Inc. is
dividends paid by subsidiary banks. The various regulatory authorities
impose restrictions on dividends paid by a state bank. A state bank
cannot pay dividends (without the consent of state banking
authorities) in excess of the total net profits of the current year
and the combined retained profits of the previous two years. As of
January 1, 2000, the banks could pay dividends to the Company of
approximately $3,362,000 without permission of the regulatory
authorities.
NOTE 13 TRANSACTIONS WITH RELATED PARTIES:
During the year, officers and directors (and companies controlled by
them) were customers of and had transactions with the subsidiary Banks
in the normal course of business. These transactions were made on
substantially the same terms as those prevailing for other customers
and did not involve any abnormal risk. The aggregate amount of loans
to related parties of $1,352,558 at December 31, 1998, was increased
$1,301,834 by new loans and reduced $960,604 by payments, resulting in
an ending balance of $1,693,788 at December 31, 1999.
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 14 COMMITMENTS AND GUARANTEES:
The Banks make commitments to extend credit in the normal
course of business and issues standby letters of credit to meet the
financing needs of its customers. The amount of the commitments
represents the Banks' exposure to credit loss that is not included in
the balance sheet. As of the balance sheet dates, the Banks had
outstanding the following commitments:
1999 1998
Commitments to extend credit $6,212,000 $6,516,000
Standby letters of credit 215,000 541,000
The Banks use the same credit policies in making commitments and
issuing letters of credit as it does for the loans reflected in the
balance sheet.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Banks evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies
but may include accounts receivable, inventory, property, plant and
equipment.
NOTE 15 CONCENTRATIONS:
The Banks grant commercial, residential real estate and consumer loans
to customers located primarily in the eastern portion of the State of
West Virginia. Although the Banks have a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts
is dependent upon the agribusiness economic sector. Collateral
required by the Banks is determined on an individual basis depending
on the purpose of the loan and the financial condition of the
borrower. The ultimate collectibility of the loan portfolios is
susceptible to changes in local economic conditions. Approximately 58%
of the loan portfolio is secured by real estate. See note 5 for a
complete breakdown of loans by type.
The Bank has cash deposited in and federal funds sold to other
commercial banks totaling $6,669,749 and $15,178,758 at December 31,
1999 and 1998, respectively.
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 16 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's assets and liabilities is influenced
heavily by market conditions. Fair value applies to both assets and
liabilities, either on or off the balance sheet. Fair value is defined
as the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash, Due from Banks and Money Market Investments
The carrying amount of cash, due from bank balances, interest bearing
deposits and federal funds sold is a reasonable estimate of fair
value.
Securities
Fair values of securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities, taking into consideration the credit risk in various loan
categories.
Deposits
The fair value of demand, interest checking, regular savings and money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Interest Payable and Receivable
The carrying value of amounts of interest receivable and payable is a
reasonable estimate of fair value.
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 16 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
Off-Balance-Sheet Items
The carrying amount and estimated fair value of off-balance-sheet
items were not material at December 31, 1999.
The carrying amount and estimated fair values of financial instruments
as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 7,312,241 $ 7,312,241 $ 5,111,863 $ 5,111,863
Interest bearing deposits 2,436,271 2,436,271 3,431,523 3,431,523
Federal funds sold 2,702,633 2,702,633 12,374,283 12,374,283
Securities held to maturity 3,176,547 3,175,918 3,503,965 3,621,218
Securities available for sale 25,892,783 25,892,783 29,757,841 29,757,841
Other investments 745,550 745,550 730,950 730,950
Loans, net 165,295,723 164,368,631 147,028,527 150,145,023
Interest receivable 1,627,874 1,627,874 1,556,347 1,556,347
Financial Liabilities:
Demand and savings
deposits 73,908,182 73,908,182 72,639,882 72,639,882
Term deposits 118,436,806 117,846,983 111,947,483 112,041,093
Borrowed money 2,567,958 2,346,150 2,319,544 2,287,194
Interest payable 663,522 663,522 688,888 688,888
</TABLE>
NOTE 17 REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier
I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999, that the Company meets all capital
adequacy requirements to which it is subject.
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 17 REGULATORY MATTERS (CONTINUED):
To be categorized as well capitalized the Company must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events
that management believes have changed the Company's category from a
well capitalized status.
The Company's actual capital ratios are presented in the following
table:
Actual Regulatory Requirements
December Adequately Well
1999 1998 Capitalized Capitalized
Total risk-based ratio 17.35% 18.02% 8.00% 10.00%
Tier 1 risk-based ratio 16.60% 17.00% 4.00% 6.00%
Total assets leverage ratio 10.99% 10.83% 4.00% 5.00%
Capital ratios and amounts are applicable both at the individual bank
level and on a consolidated basis. At December 31, 1999, both
subsidiary banks had capital levels in excess of minimum requirements.
As such, both banks qualified as "well capitalized banks" for FDIC
insurance purposes and thus were charged the minimum rate for
insurance coverage.
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 18 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
Assets December 31,
-----------------------
1999 1998
Cash $ 34,476 $ 15,754
Investment in subsidiaries 24,028,470 22,681,509
Other investments 100,000 100,000
Other assets 1,115 1,740
Income taxes receivable 113,268
Due from subsidiaries 48,017
--------- ---------
Total Assets $24,277,329 $22,847,020
========== ==========
Liabilities
Income taxes payable $ $ 473
Due to subsidiaries 53,282
--------- ---------
Total Liabilities 53,282 473
--------- ---------
Stockholders' Equity
Common stock, par value $5 per share
authorized 1,000,000 shares; 546,764
shares issued $2,733,820 $2,733,820
Surplus 1,661,987 1,661,987
Retained earnings 21,067,191 19,324,019
Other accumulated comprehensive income (246,250) 119,422
--------- ---------
25,216,748 23,839,248
Less treasury stock (at cost, 44,866
shares in 1999 and 1998) (992,701) (992,701)
--------- ---------
Total Stockholders' Equity 24,224,047 22,846,547
---------- ----------
Total Liabilities and Stockholders'
Equity $24,277,329 $22,847,020
========== ==========
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 18 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31,
1999 1998 1997
-------------------------------------
Income
Dividends from subsidiaries $ 666,652 $ 623,525 $1,055,054
Other dividends 1,680 735 630
-------- -------- --------
Total 668,332 624,260 1,055,684
Expenses
Professional fees 34,056 27,032 37,980
Directors' fees 25,500 24,050 17,450
Other expenses 33,905 36,749 27,698
-------- -------- --------
Total 93,461 87,831 83,128
Net income before income tax benefit
and undistributed income of
subsidiaries 574,871 536,429 972,556
Income tax benefit 37,866 29,360 30,211
-------- -------- --------
Income before undistributed income
of subsidiaries 612,737 565,789 1,002,767
Undistributed income of
subsidiaries 1,712,632 1,446,093 877,378
--------- --------- --------
Net Income 2,325,369 2,011,882 1,880,145
Retained earnings,
Beginning of period 19,324,019 17,854,185 16,478,655
Dividends paid (582,197) (542,048) (504,615)
-------- -------- --------
Retained Earnings,
End of Period $21,067,191 $19,324,019 $17,854,185
========== ========== ==========
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HIGHLANDS BANKSHARES, INC.
NOTE 18 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
Cash Flows from Operating Activities:
Net income $2,325,369 $2,011,882 $1,880,145
Adjustments
Undistributed subsidiary
income (1,712,632) (1,446,093) (877,378)
Depreciation 624 583 181
Increase in payables 52,809 473
Increase in receivables (65,251) (25,413) (10,569)
Increase in other assets (2,325)
Net Cash Provided by Operating
Activities 600,919 539,107 992,379
-------- -------- --------
Cash Flows from Financing Activities:
Dividends paid (582,197) (542,048) (504,615)
Purchase of treasury stock (498,888)
Net Cash Used in Financing
Activities (582,197) (542,048)(1,003,503)
Net Increase (Decrease) in Cash 18,722 (2,941) (11,124)
Cash, Beginning of Year 15,754 18,695 29,819
-------- -------- --------
Cash, End of Year $ 34,476 $ 15,754 $ 18,695
======== ======== ========
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Highlands Bankshares, Inc.
Petersburg, West Virginia
We have audited the accompanying consolidated balance sheets of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Highlands
Bankshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
S. B. Hoover & Company, L.L.P.
January 14, 2000
Harrisonburg, Virginia
<PAGE> 47
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 13, 2000.
Item 10. Executive Compensation
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 13, 2000.
Item 11. Security Ownership of Certain Beneficial Owners and Management
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 13, 2000.
Item 12. Certain Relationships and Related Transactions
We are incorporating the Proxy Statement of Highlands Bankshares, Inc.
via Form DEF 14A filed March 13, 2000.
Most of the directors, partnerships of which they may be general partners
and corporations of which they are officers or directors, maintain normal
banking relationships with the Bank. Loans made by the Bank to such persons or
other entities were made only in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than normal risk of collectibility or present other unfavorable
features. See Note 13 of the consolidated financial statements.
John VanMeter is a partner with the law firm of VanMeter and VanMeter,
which has been retained by the Company as legal counsel and it is anticipated
that the relationship will continue. Jack H. Walters is a partner with the law
firm of Walters, Krauskopf & Roth, which provides legal counsel to the Company
and it is anticipated that the relationship will continue.
Part IV
Item 13. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
2 Not applicable
3 (i) Articles of Incorporation of Highlands
Bankshares, Inc. are incorporated by reference to
Appendix C to Highlands Bankshares, Inc.'s Form
S-4 filed October 20, 1986.
Amendments to the original Articles of Incorporation
are incorporated by reference; filed as Exhibit 3(i)
with 1997 10KSB.
<PAGE> 48
Item 13. Exhibits and Reports on Form 8-K (Continued)
a) Exhibits (Continued)
--------------------
Exhibit No. Description
3 (ii) Bylaws of Highlands Bankshares, Inc. are
incorporated by reference to Appendix D to Highland
Bankshares, Inc.'s Form S-4 filed October 20, 1986.
Amendments to the original Bylaws are
incorporated by reference; filed as Exhibit 3(ii)
with 1997 10KSB
4 Not applicable
9 Not applicable
10 Not applicable
11 Not applicable
12 Not applicable
16 Not applicable
18 Not applicable
21 Subsidiary listing of the Registrant is attached
on Page 50
22 Not applicable
23 Consent of Certified Public Accountant attached
on Page 51
24 Not applicable
27 Financial Data Schedule attached
28 Not applicable
b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1999.
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
By LESLIE A. BARR
Leslie A. Barr
President, Chief Executive Officer
Date March 28, 2000
--------------
By CLARENCE E. PORTER
Clarence E. Porter
Secretary/Treasurer,
Chief Financial Officer
and Chief Accounting Officer
Date March 28, 2000
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
Signature Title Date
LESLIE A. BARR March 28, 2000
- --------------------------- --------------
Leslie A. Barr President
& Chief Executive Officer
Director
THOMAS B. MCNEIL, SR. March 28, 2000
- --------------------------- --------------
Thomas B. McNeil, Sr. Director
GEORGE B. MOOMAU March 28, 2000
- --------------------------- --------------
George B. Moomau Director
CLARENCE E. PORTER March 28, 2000
- --------------------------- --------------
Clarence E. Porter Secretary/Treasurer
Chief Financial
and Accounting Officer
Director
COURTNEY R. TUSING March 28, 2000
- --------------------------- --------------
Courtney R. Tusing Director
JOHN G. VANMETER March 28, 2000
- --------------------------- --------------
John G. VanMeter Chairman of the Board
Director
JACK H. WALTERS March 28, 2000
- -------------------------- --------------
Jack H. Walters Director
L. KEITH WOLFE March 28, 2000
- --------------------------- --------------
L. Keith Wolfe Director
<PAGE> 50
Exhibit 21 - List of Subsidiaries of the Registrant
The following is a list of subsidiaries meeting the requirements of Exhibit
21.
a) The Grant County Bank (incorporated in West Virginia), doing business
as The Grant County Bank.
b) Capon Valley Bank (incorporated in West Virginia), doing business as
the Capon Valley Bank.
c) HBI Life Insurance Company, Inc. (incorporated in the state of
Arizona), doing business as HBI Life.
Exhibit 21
<PAGE> 51
Exhibit 23 - Consent of Certified Public Accountant
Board of Directors
Highlands Bankshares, Inc.
We consent to the use of our report, dated January 14, 2000, relating to the
consolidated balance sheets of Highlands Bankshares, Inc. as of December 31,
1999 and 1998, and the related statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1999, which report appears on page 24 in the December 31, 1999
Annual Report to Shareholders of Highlands Bankshares, Inc. and page 46 of this
10KSB.
S. B. Hoover & Company, L.L.P.
Harrisonburg, VA
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HIGHLANDS
BANKSHARES, INC. FORM 10KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000756862
<NAME> HIGHLANDS BANKSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,312
<INT-BEARING-DEPOSITS> 2,436
<FED-FUNDS-SOLD> 2,703
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,638
<INVESTMENTS-CARRYING> 3,177
<INVESTMENTS-MARKET> 3,176
<LOANS> 166,614
<ALLOWANCE> (1,318)
<TOTAL-ASSETS> 220,481
<DEPOSITS> 192,345
<SHORT-TERM> 224
<LIABILITIES-OTHER> 1,344
<LONG-TERM> 2,344
0
0
<COMMON> 2,734
<OTHER-SE> 21,490
<TOTAL-LIABILITIES-AND-EQUITY> 220,481
<INTEREST-LOAN> 13,664
<INTEREST-INVEST> 1,926
<INTEREST-OTHER> 653
<INTEREST-TOTAL> 16,243
<INTEREST-DEPOSIT> 7,524
<INTEREST-EXPENSE> 7,663
<INTEREST-INCOME-NET> 8,580
<LOAN-LOSSES> 320
<SECURITIES-GAINS> (64)
<EXPENSE-OTHER> 5,912
<INCOME-PRETAX> 3,375
<INCOME-PRE-EXTRAORDINARY> 2,325
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,325
<EPS-BASIC> 4.63
<EPS-DILUTED> 4.63
<YIELD-ACTUAL> 4.35
<LOANS-NON> 194
<LOANS-PAST> 1,694
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,355
<CHARGE-OFFS> 448
<RECOVERIES> 91
<ALLOWANCE-CLOSE> 1,318
<ALLOWANCE-DOMESTIC> 1,318
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
