UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended Commission File No. 0-16761
March 31, 2000
HIGHLANDS BANKSHARES, INC.
West Virginia 55-0650793
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 929
Petersburg, West Virginia 26847
(304) 257-4111
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes ..X. No ....
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at March 31, 2000
- ---------------------------------------- -----------------------------
Common Stock, par value - $5 501,898 shares
1
HIGHLANDS BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2000 and 1999 2
Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8K 17
SIGNATURES 19
2
Part I Financial Information
Item 1. Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
March 31,
2000 1999
-------- ------
Interest Income
Interest and fees on loans $ 3,633 $ 3,284
Interest on federal funds sold 61 129
Interest on time deposits 32 45
Interest and dividends on investment securities
Taxable 412 448
Nontaxable 42 42
------- ------
Total Interest Income 4,180 3,948
------- ------
Interest Expense
Interest on time deposits over $100,000 405 372
Interest on other deposits 1,520 1,499
Interest on borrowed money 35 35
------- ------
Total Interest Expense 1,960 1,906
------- ------
Net Interest Income 2,220 2,042
Provision for Loan Losses 120 60
------- ------
Net Interest Income After Loan Losses 2,100 1,982
------- ------
Noninterest Income
Service charges 142 81
Other 137 81
------- ------
Total Noninterest Income 279 162
------- ------
Noninterest Expense
Salaries and employee benefits 874 757
Occupancy expense 73 67
Equipment expense 136 109
Data processing 130 111
Other 358 334
------- ------
Total Noninterest Expense 1,571 1,378
------- ------
Income Before Income Taxes 808 766
Provision for Income Taxes 270 261
------- ------
Net Income $ 538 $ 505
======= ======
Per Share Data
Net Income $ 1.07 $ 1.01
====== ======
Cash Dividends $ .31 $ .29
====== ======
Weighted Average Common Shares Outstanding 501,898 501,898
======= =======
The accompanying notes are an integral part of these statements.
3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
2000 1999
-------- ------
ASSETS
Cash and due from banks - noninterest bearing $ 5,043 $ 7,312
Time deposits in other banks 3,461 2,436
Federal funds sold 5,296 2,703
Securities held to maturity (note 2) 3,019 3,176
Securities available for sale (note 3) 26,030 25,893
Other investments (note 4) 746 746
Loans, net of unearned interest (note 5) 167,629 166,614
Less allowance for loan losses (note 6) (1,389) (1,318)
------- -------
Net Loans 166,240 165,296
Bank premises and equipment 5,721 5,691
Interest receivable 1,644 1,628
Investments in insurance contracts 4,707 4,662
Other assets 960 938
------- -------
Total Assets $222,867 $220,481
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 21,209 $ 21,085
Interest bearing
Money market and checking 18,871 18,102
Money market savings 12,995 13,391
Savings 21,582 21,330
Time deposits over $100,000 29,091 28,529
All other time deposits 90,258 89,908
------- -------
Total Deposits 194,006 192,345
Borrowed money 2,480 2,568
Accrued expenses and other liabilities 1,826 1,344
------- -------
Total Liabilities 198,312 196,257
------- -------
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 1,000,000 shares
authorized, 546,764 shares issued) 2,734 2,734
Surplus 1,662 1,662
Retained earnings 21,450 21,067
Accumulated other comprehensive loss (298) (246)
------- -------
25,548 25,217
Treasury stock (at cost, 44,866 shares in 2000 and
1999) (993) (993)
Total Stockholders' Equity 24,555 24,224
------- -------
Total Liabilities and Stockholders' Equity $222,867 $220,481
======= =======
The accompanying notes are an integral part of these statements.
4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
Balances, December 31, 1998 $ 2,734 $ 1,662 $ 19,324 $ 119 $ (993) $ 22,846
Comprehensive Income
Net income 505 505
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes (81) (81)
-----
Total Comprehensive Income 424
Dividends paid (146) (146)
------ ------ ------ ------ ------ ------
Balances, March 31, 1999 $ 2,734 $ 1,662 $ 19,683 $ 38 $ (993) $ 23,124
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Loss Stock Total
Balances, December 31, 1999 $ 2,734 $ 1,662 $ 21,067 $ (246) $ (993) $ 24,224
Comprehensive Income
Net income 538 538
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes (52) (52)
------
Total Comprehensive Income 486
Dividends paid (155) (155)
------ ------ ------ ------ ------ ------
Balances, March 31, 2000 $ 2,734 $ 1,662 $ 21,450 $ (298) $ (993) $ 24,555
The accompanying notes are an integral part of these statements.
5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Three Months Ended
March 31,
2000 1999
-------- ------
Cash Flows from Operating Activities:
Net income $ 538 $ 505
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 116 89
Income from insurance contracts (45) (15)
Net amortization 12 48
Provision for loan losses 120 60
Increase in interest receivable (16) (85)
Decrease in other assets 9 33
Increase in accrued expenses 482 351
------- ------
Net Cash Provided by Operating Activities 1,216 986
------- ------
Cash Flows from Investing Activities:
Net change in federal funds sold (2,593) (483)
Proceeds from maturities of securities available
for sale 2,286 3,672
Proceeds from maturities of securities held to
maturity 158
Purchase of securities available for sale (2,519) (3,124)
Net change in time deposits in other banks (1,025) (241)
Net change in loans (1,064) (1,636)
Purchase of property and equipment (146) (43)
------- ------
Net Cash Used in Investing Activities (4,903) (1,855)
------- ------
Cash Flows from Financing Activities:
Net increase in deposits 1,661 1,775
Dividends paid in cash (155) (146)
Other borrowed money 307
Repayment of borrowed money (88) (41)
------- ------
Net Cash Provided by Financing Activities 1,418 1,895
------- ------
Net Increase (Decrease) in Cash and Cash Equivalents (2,269) 1,026
Cash and Cash Equivalents, Beginning of Period 7,312 5,112
------- ------
Cash and Cash Equivalents, End of Period $ 5,043 $ 6,138
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 4 $ 18
Interest 1,871 1,885
The accompanying notes are an integral part of these statements.
6
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally accepted
accounting principles and to general industry practices. In the
opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2000, and the results of operations for the
three month periods ended March 31, 2000 and 1999. The notes included
herein should be read in conjunction with the notes to financial
statements included in the 1999 annual report to stockholders of
Highlands Bankshares, Inc.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and market value of securities held to maturity
as of March 31, 2000 and December 31, 1999, are as follows:
2000 1999
-----------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US Government
corporations and agencies $ 282 $ 283 $ 340 $ 340
Obligations of states and
political subdivisions 2,737 2,714 2,836 2,836
------ ------ ----- ------
Total $3,019 $ 2,997 $ 3,176 $ 3,176
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of March 31, 2000 and December 31, 1999 are as follows:
2000 1999
-----------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US Government
corporations and agencies $25,581 $25,158 $25,350 $25,008
Obligations of states and
political subdivisions 255 245 255 243
Other investments 665 627 679 642
------ ------ ----- ------
Total $26,501 $26,030 $26,284 $25,893
====== ====== ====== ======
7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS:
Other investments totaling $746,000 include investments in the
Federal Home Loan Bank and other governmental entities whose
transferability is restricted.
NOTE 5 LOANS OUTSTANDING:
A summary of loans outstanding as of March 31, 2000 and December
31, 1999, is as follows:
2000 1999
---- ----
Commercial $ 31,134 $ 31,567
Real estate - construction 2,719 3,296
- mortgages 94,674 93,391
Consumer installment 40,419 39,994
------- -------
Total 168,946 168,248
Unearned interest (1,317) (1,634)
------- -------
Net loans outstanding $167,629 $166,614
======= =======
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2000 and 1999, follows:
2000 1999
---- ----
Balance, beginning of period $ 1,318 $ 1,356
Provisions charged to operating expenses 120 60
Loan recoveries 38 31
Loan charge-offs (87) (144)
------- -------
Balance, end of period $ 1,389 $ 1,303
======= =======
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's net income was $538,000 in the first quarter of 2000, an
increase of 6.53% compared to the first quarter of 1999. Earnings per share were
$1.07 for the first quarter of 2000 compared to $1.01 per share for the same
quarter in 1999. The Company's annualized return on average equity was 8.82% in
the first quarter of 2000 compared to 8.79% for the first quarter of 1999.
Return on average assets was .98% for 2000 and .95% for 1999.
The increase in earnings per share for the first quarter was due primarily
to an 8.72% increase in net interest income. Growth in average earning assets
(3.74%) and interest bearing liabilities (3.76%) within the last twelve months
and an improved net interest spread were responsible for this increase. The
increase in the tax equivalent net interest income was 8.61% for the period. The
provision for loan losses of $120,000 was an increase over 1999 of $60,000 and
is reflective of a higher level of loans outstanding and management's desire to
increase the reserve should recent Federal Reserve Bank actions result in higher
loan losses. Noninterest income increased 72.22% due to increased rates on and
volume of overdraft fees and higher income from insurance operations. Other
noninterest expenses increased 14.01%, mainly the result of operating expenses
at the new branch in Moorefield.
Net Interest Income
The Company's net interest income on a tax equivalent basis was 4.41% in the
first quarter of 2000 compared to 4.21% for the first quarter of 1999.
Commercial rates increased from 8.40% in 1999 to 8.49% in 2000 due to rising
market rates. The volume of mortgage and installment lending substantially
increased in the last year due to a strong economy and additional branch
locations. Rates on installment loans dropped seventy-five basis points and
rates on real estate loans were unchanged. The overall decline of eleven basis
points in returns on loans outstanding was offset by declines in the rates paid
on deposits and borrowed money (see below) and increases in short-term
investment rates.
For the first quarter of 2000, the Company saw an overall decline of five
basis points in the yields on investment securities compared to 1999 results.
The slight decline is reflective of lower rates on taxable investments purchased
three and four years ago and recent reinvestments of maturities at slightly
higher rates. Average investments in securities has declined over the last
twelve months as maturities were used to fund loan demand. Interest rates earned
on federal funds sold and interest bearing deposits increased ninety-five basis
points as rates in the overall market increased in 1999 and early 2000. The
sharp decrease in the average balance of federal funds outstanding reflects the
Company's strong loan demand and a slower rate of deposit growth.
Interest rates paid on transaction and savings amounts increased a combined
twenty basis points due to higher rates resulting from Federal Reserve Bank
action. With market rates low on transaction accounts, customers have moved
additional savings to instruments yielding higher rates, i.e. time deposits. The
average balance in time deposits grew 4.94% in 2000 compared to 1999 and was a
source of funding for the loan growth discussed earlier. A nineteen point basis
point drop in rates paid on time deposits between 1999 and 2000 reflects older
certificates maturing and renewing at rates in line with current market
conditions.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Within 1999, the Company borrowed amounts from the FHLB at fixed rates of
interest and loaned these monies to customers on a fixed rate basis. The Company
anticipates continuing to use this approach as a mechanism to provide long-term
financing to customers and limit market rate risk. The cost of this money
increased eighteen basis points due to rate increases implemented by the Federal
Reserve Bank.
A complete yield analysis is shown as Table I on page 15.
Noninterest Income
Noninterest income for 2000 increased substantially from 1999. Increases in
service charge income of 75.31% was due to volume increases and an increase in
rates charged on overdrafts. Increased income from insurance operations and
income from additional investments in insurance contracts were mainly
responsible for a 69.14% increase in other noninterest income.
Noninterest Expenses
Overall noninterest expense increased 14.01% in 2000 as the result of
operating expense increases at Grant County Bank's new Moorefield Branch which
opened in October 1999. Personnel expense increases of 15.46% were the result of
a 11.11% increase in full time equivalent employees and a 3.92% increase in
average wages. Expenses for occupancy, equipment and data processing expenses
increased 18.12% due to costs of upgrading data processing equipment and higher
depreciation on 1999 equipment acquistions. Other noninterest expenses increased
due to asset growth and additional branch locations. The overall increase in
nonoperating expense of 14.01% is in line with management estimates for the
first quarter of the year.
Loan Portfolio
The Company is an active residential mortgage and construction lender and
generally extends commercial loans to small and medium sized businesses within
its primary service area. The Company's commercial lending activity extends
across its primary service areas of Grant, Hardy, Mineral and northern Pendleton
counties. Consistent with its focus on providing community-based financial
services, the Company does not attempt to diversify its loan portfolio
geographically by making significant amounts of loans to borrowers outside of
its primary service area.
The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels, consumer
confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based upon
the strength and activity of the local economies of the Company's market areas.
The risk associated with real estate construction loans varies based upon the
supply of and demand for the type of real estate under construction.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Loan Portfolio (Continued)
Loans outstanding increased $1,015,000 or .61% in the first quarter in 2000
compared to levels at December 31, 1999. The first quarter of any year is
traditionally slow as farming and logging operations are limited by weather
conditions and retail borrowing in the first quarter is put on hold until the
spring. A 1.37% rise in mortgage loans was primarily responsible for the first
quarter increase and modest gains in consumer lending and declines in commercial
lending were also experienced. The loan to deposit ratio was 86.40% at March 31,
2000 compared to 86.62% at December 31, 1999. Loan demand is expected to remain
satisfactory in the near future barring any significant tightening of credit by
the Federal Reserve Bank.
Asset Quality and Risk Elements
Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have been changed due to
financial hardship of the borrower. Nonaccrual loans totaled $214,000 at March
31, 2000 compared to $194,000 in nonaccrual loans at December 31, 1999.
Real estate acquired through foreclosure was $121,000 at March 31, 2000 and
$121,000 at December 31, 1999. All foreclosed property held was in the Company's
primary service area. The Company's practice is to value real estate acquired
through foreclosure at the lower of (i) an independent current appraisal or
market analysis less anticipated costs of disposal, or (ii) the existing loan
balance. The Company is actively marketing all foreclosed real estate and does
not anticipate material write-downs in value before disposition.
An inherent risk in the lending of money is that the borrower will not be
able to repay the loan under the terms of the original agreement. The allowance
for loan losses (see subsequent section) provides for this risk and is reviewed
periodically for adequacy. This review also considers concentrations of loans in
terms of geography, business type or level of risk. While lending is
geographically diversified within the service area, the Company does have some
concentration of loans in the area of agriculture (primarily poultry farming),
timber and related industries. Management recognizes these concentrations and
considers them when structuring its loan portfolio. As of March 31, 2000,
management is not aware of any significant potential problem loans in which the
debtor is currently meeting their obligations as stated in the loan agreement
but which may change in future periods.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and local
economic conditions, changes in the nature of the portfolio and industry
standards. The Company's loan classification system, which rates existing loans,
provides the basis for adjusting the allowance for loan losses. Management
reviews these classification totals, along with internally generated loan review
reports, past due reports, historical loan loss experience and individual
borrower's financial health to determine the necessary amount to be provided in
the allowance for loan losses. Management evaluates nonperforming loans relative
to their collateral value and makes the appropriate adjustments to the allowance
when needed.
The provision for credit losses and changes in the allowance for credit
losses are shown below (in thousands of dollars).
Quarter Ended
March 31,
---------------
2000 1999
-------- ------
Balance, beginning of period $ 1,318 $ 1,356
Net charge-offs (recoveries)
Charge-offs (87) (144)
Recoveries 38 31
------ ------
Total net charge-offs * (49) (113)
Provision for credit losses 120 60
------ ------
Balance, End of Period $ 1,389 $ 1,303
====== ======
* Components of net charge-offs:
Real estate (30)
Commercial (11) (72)
Installment (8) (41)
---- ---
Total $ (49) $ (113)
====== ======
The allowance for credit losses of $1,389,000 at March 31, 2000, was up
$71,000 from its level at December 31, 1999. The increase was due to an
increased provision for loan losses and moderate net credit losses. The
allowance was equal to .83% and .79% of total loans outstanding at March 31,
2000 and December 31, 1999, respectively. The Company believes that its
allowance must be viewed in its entirety and, therefore, is available for
potential credit losses in its entire portfolio, including loans, credit-related
commitments and other financial instruments. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb reasonably estimated
credit losses inherent in the Company's portfolio.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Securities
The Company's securities portfolio serves several purposes. Portions of the
portfolio secure certain public and trust deposits while the remaining portions
are held as investments or used to assist the Company in liquidity and asset
liability management. Total securities and other investments at March 31, 2000
were $29,795,000 compared to $29,815,000 at December 31, 1999. Total securities
and other investments as a percentage of total assets were 13.37% at March 31,
2000 compared to 13.52% at December 31, 1999. The negligible decline in
securities is due to good loan demand and unenticing investment security
returns.
The securities portfolio consists of three components, specifically,
securities held to maturity, securities available for sale and other
investments. Securities are classified as held to maturity when management has
the intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Held to maturity securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts. Securities to
be held for indefinite periods of time are classified as available for sale and
accounted for at market value. Securities available for sale include securities
that may be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity needs
and other similar factors. Other investments include restricted securities whose
ownership is required for participation in certain governmental programs. The
Company's recent purchases of all securities have generally been limited to
securities of high credit quality with short to medium term maturities. Changes
in the market values of securities available for sale net of the deferred tax
effect are reflected as changes in accumulated other comprehensive income. As of
March 31, 2000, the cost of the securities available for sale exceeded their
market value by $471,000 ($298,000 after tax considerations).
Deposits
The Company's main source of funds is customer deposits received from
individuals, governmental entities, and businesses located within the Company's
service area. Deposit accounts include demand deposits, savings, money market
and certificates of deposit.
Total deposits increased .86% between December 31, 1999 and March 31, 2000.
The cost of funds for the first quarter of 2000 was 4.54% compared to 4.58% for
the same quarter in 1999. With the exception of time deposits, the cost of all
types of liabilities increased within the period. The majority of the Company's
deposits are time deposits which are attractive to persons seeking high yields
on their deposits but without the need for liquidity. The Company has not
actively pursued deposits in excess of $100,000 due to the volatile nature of
these relationships.
Capital
The Company seeks to maintain a strong capital base to expand facilities,
promote public confidence, support current operations and grow at a manageable
level. As of March 31, 2000, the Company's total risk based capital ratio was
17.43% which is far above the regulatory minimum of 8.0%. The ratio of total
capital to total assets was 11.02% at March 31, 2000 which is in line with the
Company's peer group.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liability liquidity. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions and the Federal Reserve Bank of Richmond.
Both subsidiary banks have lines of credit with the Federal Home Loan Bank of
Pittsburgh although utilization has been quite limited. In the past, growth in
deposits and proceeds from the maturity of investment securities have been
sufficient to fund the net increase in loans.
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on the
balance sheet. Managing this risk involves regular monitoring of the interest
sensitive assets relative to interest sensitive liabilities over specific time
intervals.
At March 31, 2000 the Company had a negative gap position through the first
twelve months. This liability sensitive position typically produces an
unfavorable contribution to earnings during a period of increasing rates. With
the largest amount of interest sensitive assets and liabilities repricing within
three years, the Company monitors these areas very closely. Early withdrawal of
deposits, prepayments of loans and loan delinquencies are some of the factors
that could affect actual versus expected cash flows. In addition, changes in
rates on interest sensitive assets and liabilities may not be equal, which could
result in a change in net interest margin. While the Company does not match each
of its interest sensitive assets against specific interest sensitive
liabilities, it does review its positions regularly and takes actions to
reposition itself when necessary.
Effects of Inflation
Inflation significantly affects industries having high proportions of
property, plant and equipment or high levels of inventories. Although the
Company is not significantly affected in these areas, inflation does have an
impact on the growth of assets. As assets grow rapidly, it becomes necessary to
increase equity capital at proportionate levels to maintain the appropriate
equity to asset ratios. Traditionally, the Company's earnings and high capital
retention levels have enabled the Company to meet these needs.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Effects of Inflation (Continued)
The Company's reported earnings results have been affected by inflation,
but isolating the effect is difficult. The different types of income and expense
are affected in various ways. Interest rates are affected by inflation, but the
timing and magnitude of the changes may not coincide with changes in the
consumer price index. Management actively monitors interest rate sensitivity, as
illustrated by the Gap Analysis (Table II, page 16) in order to minimize the
effects of inflationary trends on interest rates. Other areas of noninterest
expenses may be more directly affected by inflation.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including Highlands
Bankshares, Inc., and the address is (http://www.sec.gov).
15
TABLE I
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------------- -----------------
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
Interest Income
Loans
Commercial $30,895 $ 656 8.49% $29,989 $ 630 8.40%
Consumer 38,581 976 10.12 31,614 859 10.87
Real estate 96,864 2,001 8.26 86,896 1,795 8.26
------ ------ ----- ------ ----- ------
Total Loans 166,340 3,633 8.74 148,499 3,284 8.85
Federal funds sold 4,372 61 5.58 11,557 129 4.46
Interest bearing
deposits 2,353 32 5.44 3,649 45 4.93
Investments
Taxable 27,299 412 6.04 29,226 448 6.13
Tax exempt 1 3,138 67 8.54 3,242 67 8.27
----- ------ ----- ------ ----- ------
Total Earning
Assets 1 203,502 4,205 8.27 196,173 3,973 8.10
Interest Expense
Demand deposits 30,543 204 2.67 30,135 181 2.40
Savings 21,091 146 2.77 20,744 138 2.66
Time deposits 118,536 1,575 5.31 112,960 1,552 5.50
Other borrowed
money 2,497 35 5.61 2,576 35 5.43
-------- -------- -------- -------- ----- ------
Total Interest
Bearing
Liabilities $172,667 1,960 4.54 $166,415 1,906 4.58
Net Interest Margin $ 2,245 $2,067
====== =====
Net Yield on Interest
Earning Assets 1 4.41% 4.21%
1 Yields are on a taxable equivalent basis.
2 Includes loans in nonaccrual status.
16
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31, 2000
(In Thousands of Dollars)
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or Without
Days Days Years Years Maturity Total
EARNINGS ASSETS
Loans $23,817 $66,973 $39,811 $22,136 $14,892 $167,629
Fed funds sold 5,296 5,296
Securities 4,020 5,955 14,318 1,574 3,928 29,795
Time deposits in
other banks 1,809 600 1,052 3,461
----- ------ ------ ------ ------ ------
Total 34,942 73,528 55,181 23,710 18,820 206,181
INTEREST BEARING LIABILITIES
Transaction accounts 18,871 18,871
Money market savings 12,995 12,995
Savings accounts 21,582 21,582
Time deposits more
than $100,000 6,572 9,502 9,620 3,397 29,091
Time deposits less
than $100,000 15,235 41,427 26,267 7,250 79 90,258
Other borrowed money 45 138 398 406 1,493 2,480
----- ------ ------ ------ ------ ------
Total 75,300 51,067 36,285 11,053 1,572 175,277
Rate sensitivity GAP (40,358) 22,461 18,896 12,657 17,248 30,904
Cumulative GAP (40,358) (17,897) 999 13,656 30,904
Ratio of cummulative
interest sensitive
assets to cummulative
interest sensitive
liabilities 46.40% 85.84% 100.61% 107.86% 117.63%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
17
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a) Exhibits
3 (i) Articles of Incorporation
of Highlands Bankshares,
Inc. are incorporated by
reference to Appendix C to
Highlands Bankshares, Inc.'s
Form S-4 filed October 20,
1986; amended on December 8,
1997 and incorporated in
1997 Form 10-KSB.
3(ii) Bylaws of Highlands
Bankshares, Inc. are
incorporated by reference to
Appendix D to Highland
Bankshares, Inc.'s Form
S-4 filed October 20, 1986;
amended on December 8, 1997
and incorporated in 1997
Form 10-KSB.
27 Financial Data Schedule
attached.
(b) Reports on Form 8-K filed during
the three months ended March 31,
2000
None
18
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
March 31, 2000 20
19
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
LESLIE A. BARR
Leslie A. Barr
President
CLARENCE E. PORTER
Clarence E. Porter
Secretary/Treasurer
Date May 9, 2000