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 Quarter Ended Commission File No. 0-16761
---------
June 30, 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 June 30, 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 - Six Months
Ended June 30, 2000 and 1999 2
Consolidated Statements of Income - Three Months
Ended June 30, 2000 and 1999 3
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999 4
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8K 19
SIGNATURES 21
2
Part I Financial Information
Item 1 Financial Statements
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Six Months Ended
June 30,
2000 1999
---------- -------
Interest Income
Interest and fees on loans $ 7,417 $ 6,625
Interest on federal funds sold 131 269
Interest on time deposits 85 110
Interest and dividends on investment securities
Taxable 832 904
Nontaxable 83 86
------- ------
Total Interest Income 8,548 7,994
------- ------
Interest Expense
Interest on time deposits over $100,000 839 740
Interest on other deposits 3,136 3,026
Interest on borrowed money 68 68
------- ------
Total Interest Expense 4,043 3,834
------- ------
Net Interest Income 4,505 4,160
Provision for Loan Losses 220 135
------- ------
Net Interest Income After Provision for Loan Losses 4,285 4,025
------- ------
Noninterest Income
Service charges 285 171
Other 262 201
Investment security gains 3
------- ------
Total Noninterest Income 547 375
------- ------
Noninterest Expense
Salaries and employee benefits 1,763 1,539
Occupancy expense 149 137
Equipment expense 280 215
Data processing 251 221
Other 767 691
------- ------
Total Noninterest Expense 3,210 2,803
------- ------
Income Before Income Taxes 1,622 1,597
Provision for Income Taxes 583 556
------- ------
Net Income $ 1,039 $ 1,041
======= ======
Per Share Data
Net Income $ 2.07 $ 2.07
======= ======
Cash Dividends $ .62 $ .58
======= ======
Weighted Average Common Shares Outstanding 501,898 501,898
======= =======
The accompanying notes are an integral part of these statements.
3
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Three Months Ended
June 30,
2000 1999
---------- -------
Interest Income
Interest and fees on loans $ 3,784 $ 3,341
Interest on federal funds sold 70 140
Interest on time deposits 53 65
Interest and dividends on investment securities
Taxable 420 456
Nontaxable 41 44
------- ------
Total Interest Income 4,368 4,046
------- ------
Interest Expense
Interest on time deposits over $100,000 434 368
Interest on other deposits 1,616 1,527
Interest on borrowed money 33 33
------- ------
Total Interest Expense 2,083 1,928
------- ------
Net Interest Income 2,285 2,118
Provision for Loan Losses 100 75
------- ------
Net Interest Income After Provision for Loan Losses 2,185 2,043
------- ------
Noninterest Income
Service charges 143 90
Other income 125 120
Investment security gains 3
------- ------
Total Noninterest Income 268 213
------- ------
Noninterest Expense
Salaries and employee benefits 889 782
Occupancy expense 76 70
Equipment expense 144 106
Data processing expense 121 110
Other 409 357
------- ------
Total Noninterest Expense 1,639 1,425
------- ------
Income Before Income Taxes 814 831
Provision for Income Taxes 313 295
------- ------
Net Income $ 501 $ 536
======= ======
Per Share Data
Net Income $ 1.00 $ 1.07
======= ======
Cash Dividends $ .31 $ .29
======= ======
Weighted Average Common Shares Outstanding 501,898 501,898
======= =======
The accompanying notes are an integral part of these statements.
4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
2000 1999
------------ --------
ASSETS
Cash and due from banks - noninterest bearing $ 5,451 $ 7,312
Time deposits in other banks 3,431 2,436
Federal funds sold 5,038 2,703
Securities held to maturity (note 2) 2,956 3,176
Securities available for sale (note 3) 25,589 25,893
Other investments 763 746
Loans, net of unearned interest (note 4) 173,649 166,614
Less allowance for loan losses (note 5) (1,459) (1,318)
Bank premises and equipment 5,755 5,691
Interest receivable 1,753 1,628
Investment in insurance contracts (note 6) 4,752 4,662
Other assets 906 938
------- -------
Total Assets $228,584 $220,481
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 22,143 $ 21,085
Interest bearing
Money market and checking 18,438 18,102
Money market savings 12,200 13,391
Savings 21,667 21,330
Time deposits over $100,000 30,739 28,529
All other time deposits 92,364 89,908
------- -------
Total Deposits 197,551 192,345
Borrowed money 4,435 2,568
Accrued expenses and other liabilities 1,684 1,344
------- -------
Total Liabilities 203,670 196,257
------- -------
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 21,795 21,067
Accumulated other comprehensive loss (284) (246)
------- -------
25,907 25,217
Treasury stock (at cost, 44,866 shares in 2000
and 1999) (993) (993)
------- -------
Total Stockholders' Equity 24,914 24,224
------- -------
Total Liabilities and Stockholders' Equity $228,584 $220,481
======= =======
The accompanying notes are an integral part of these statements.
5
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Accumulated
Other
Common Treasury Retained Comprehensive
Stock Surplus Stock Earnings Income(Loss) Total
Balance,
December 31, 1999 $2,734 $ 1,662 $ (993) $ 21,067 $ (246) $24,224
Comprehensive Income
Net Income 1,039 1,039
Net change in unrealized
depreciation on
investment securities
available for sale,
net of taxes (38) (38)
----- ------ ------ ------ ------ ------
Total Comprehensive Income 1,001
Dividends paid (311) (311)
----- ------ ------ ------ ------ ------
Balances,
June 30, 2000 $2,734 $ 1,662 $ (993) $ 21,795 $ (284) $24,914
===== ====== ====== ========= ====== ======
Accumulated
Other
Common Treasury Retained Comprehensive
Stock Surplus Stock Earnings Income (Loss) Total
Balance,
December 31, 1998 $2,734 $ 1,662 $ (993) $ 19,324 $ 119 $22,846
Comprehensive Income
Net Income 1,041 1,041
Net change in unrealized
depreciation on
investment securities
available for sale,
net of taxes (259) (259)
----- ------ ------ ------ ------ ------
Total Comprehensive
Income 782
Dividends paid (290) (290)
----- ------ ------ ------ ------ ------
Balances,
June 30, 1999 $2,734 $ 1,662 $ (993) $ 20,075 $ (140) $23,338
===== ====== ====== ========= ====== ======
The accompanying notes are an integral part of these statements.
6
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Six Months Ended
June 30,
2000 1999
---------- -------
Cash Flows from Operating Activities:
Net income $ 1,039 $ 1,041
Adjustments to reconcile net income to net
cash provided by operating activities:
Investment security gains (3)
Depreciation 232 178
Net securities amortization 23 92
Provision for loan losses 220 135
Income from insurance investments (90) (53)
Increase in interest receivable (125) (130)
Decrease in other assets 54 5
Increase in accrued expenses 340 77
------- ------
Net Cash Provided by Operating Activities 1,693 1,342
------- ------
Cash Flows from Investing Activities:
Net change in time deposits in other banks (995) (1,685)
Net change in federal funds sold (2,335) 4,430
Proceeds from maturities of securities
available for sale 3,239 7,034
Proceeds from maturities of securities
held to maturity 224 50
Purchase of securities available for sale (3,022) (8,846)
Purchase of other investments (17) (15)
Net change in loans (7,114) (5,506)
Proceeds from sale of property and equipment 11
Purchase of property and equipment (307) (596)
Investment in insurance contracts (2,397)
------- ------
Net Cash Consumed by Investing Activities (10,316) (7,531)
------- ------
Cash Flows from Financing Activities:
Net increase in deposits 5,206 5,427
Dividends paid in cash (311) (290)
Repayment of borrowed money (133) (83)
Advances of borrowed money 2,000 307
------- ------
Net Cash Provided by Financing Activities 6,762 5,361
------- ------
Net Decrease in Cash and Cash Equivalents (1,861) (828)
Cash and Cash Equivalents, Beginning of Period 7,312 5,112
------- ------
Cash and Cash Equivalents, End of Period $ 5,451 $ 4,284
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 502 $ 622
Interest 3,985 3,834
The accompanying notes are an integral part of these statements.
7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally accepted
accounting principles and to general industry practices. In the
opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2000, and the results of operations for the
six month periods ended June 30, 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.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and fair value of securities held to maturity as
of June 30, 2000 and December 31, 1999, are as follows:
2000 1999
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities and
obligations of US
Government corporations
and agencies $ 216 $ 216 $ 340 $ 340
Obligations of states and
political subdivisions 2,740 2,713 2,836 2,836
------ ------ ----- ------
Total $ 2,956 $ 2,929 $3,176 $ 3,176
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of June 30, 2000 and December 31, 1999, are as follows:
2000 1999
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities and
obligations of US
Government corporations
and agencies $25,119 $24,720 $25,350 $25,008
Obligations of states and
political subdivisions 255 245 255 243
Other investments 664 624 679 642
------ ------ ----- ------
Total $26,038 $25,589 $26,284 $25,893
====== ====== ====== ======
8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of June 30, 2000 and December 31,
1999, is as follows:
2000 1999
---- ----
Commercial $ 33,620 $ 31,567
Real estate- construction 3,878 3,296
- mortgages 95,026 93,391
Consumer installment 42,136 39,994
------- -------
Total 174,660 168,248
Unearned interest (1,011) (1,634)
------- -------
Net loans outstanding $173,649 $166,614
======= =======
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
six months ended June 30, 2000 and 1999, follows:
2000 1999
---- ----
Balance, beginning of period $ 1,318 $ 1,356
Provisions charged to operating expenses 220 135
Loan recoveries 60 50
Loan charge-offs (139) (215)
------- -------
Balance, end of period $ 1,459 $ 1,326
======= =======
NOTE 6 INVESTMENT IN INSURANCE CONTRACTS:
Investment in insurance contracts consist of single premium
insurance contracts which have the dual purposes of providing a rate
of return to the Company which approximately equals the rate of return
on one year Treasury obligations and providing life insurance and
retirement benefits to employees. The carrying value of these
investments was $4,752,000 at June 30, 2000 and $4,662,000 at December
31, 1999.
9
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 STATE INCOME TAX AUDIT:
In the second quarter of 2000, the Company was selected for audit by
the state of West Virginia for the years ended 1997 - 1999. The audit
covered the areas of sales and use taxes, income taxes and franchise
taxes. Management has received the auditor's report showing sales and
uses tax deficiencies of $21,000 and has charged this amount to
operations in the quarter ending June 30, 2000. The income and
franchise tax proposed assessments total $100,000 and stem from the
agent's reclassification of certain loans from West Virginia resident
home mortgages to commercial and/or nonresident home mortgages.
Management believes that West Virginia state law is unclear on the
definition of resident mortgages and has arranged a meeting with state
officials to discuss the matter. Management accrued and charged to
operations its estimate of the correct liability of $69,000 in the
second quarter of 2000. This estimate of liability will be adjusted
when the matter is settled, hopefully, in the third quarter of 2000.
NOTE 8 BUSINESS COMBINATIONS:
On May 3, 2000, The Grant County Bank ("Grant") and The Stockmans Bank
of Harman ("Stockmans") entered into an agreement and plan of merger
whereby Grant would purchase the remaining shares of Stockmans not
already owned by Highlands Bankshares, Inc. The agreement calls for
cash to be paid for outstanding shares and will be accounted for as a
purchase under generally accepted accounting principles. Closing took
place on July 26, 2000 and Grant paid stockholders $7,850 per share
for each of the 229 shares not owned by Highlands. The total purchase
cost of $1,798,000 will be funded with short-term investments
currently held as federal funds and short-term borrowings from the
Federal Home Loan Bank. The purchase will increase total assets and
deposits by approximately $9,000,000. Immediately subsequent to the
closing, Stockmans was merged into the operations of Grant and will
operate as a branch of Grant.
10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Year to Date Operations
The Company's six month income of $1,039,000 was a decrease of $2,000 over
1999 amounts and represents a .19% decrease in net income and earnings per share
compared to 1999 operations. Earnings represented an annualized return on equity
of 8.46% for the first six months of 2000 compared to 9.02% for the same period
in 1999. The annualized return on average assets was .93% in the first six
months of 2000 compared with .97% in the first six months of 1999.
The tax equivalent net interest income increased by $343,000 in 2000 as the
result of an increased level of income earning assets. Returns on loans declined
three basis points, yields on fed funds and cash equivalents increased by 85
basis points and yields on investments increased by four basis points. An
increase of fifteen basis points in the overall cost of funds was the result of
higher costs of transaction and saving accounts and borrowed money. The net
interest margin was 4.41% of average earning assets for the first six months of
2000 compared to 4.24% for the same period in 1999.
Noninterest income increased 45.87% in 2000 compared to 1999 due mainly to
an increase in income from service charges and returns earned on investments in
insurance contracts. Noninterest expenses increased 14.52% in 2000 due to
earning asset growth and costs relating to the opening of a new branch in
Moorefield in October of 1999.
Quarter Ending June 30 Operations
Overall net income and earnings per share for the quarter ending June 30,
2000 declined 6.53% to $501,000 when compared to 1999 income of $536,000.
Increases in the net interest margin and noninterest income were offset by
increases in operating expenses during the period. In addition, a state tax
audit was conducted in the second quarter of 2000, resulting in an after tax
charge to earnings of $58,000.
Net Interest Income
Year to Date Operations
The Company's net interest income on a tax equivalent basis was $4,554,000
in the first six months of 2000 compared to $4,211,000 for 1999. The 8.16%
increase was due to an increase in the yield on short-term investments that was
substantially larger than the increase in the cost of short-term deposits. Also
contributing to the margin increase was a 3.85% increase in average earning
assets. Average loans outstanding grew by 12.40% from 1999 to 2000. This growth
reflects good local economic conditions, moderate interest rates and expanded
banking facilities. The overall costs of funds reflects the high level of
competition for deposits in the Company's service areas which have traditionally
paid higher rates on deposits than larger statewide financial institutions. The
deposit increase of 2.18% represents growth in certificates of deposits and has
been obtained from customers in the immediate service areas.
Loans outstanding at June 30, 2000 increased 12.96% over amounts at June 30,
1999 and 8.44% on annualized basis since December 31, 1999. The increase in
loans has been the result of opening branches in new market areas and a
concerted effort to increase lending in existing markets. Loan growth has been
funded by deposit growth and declines in the level of federal funds sold and
security investments. The 2.85% increase in the tax equivalent net interest
margin for the second quarter of 2000 over the first quarter of 2000 is the
result of growth in earning assets. Barring any dramatic increases in interest
rates by the Federal Reserve Bank, the Company anticipates its net interest
margin remaining stable or increasing slightly as changes in the rates paid on
deposits are matched against increases in returns on investments and loans.
11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Quarter Ending June 30 Operations
The Company's net interest income on a tax equivalent basis of $2,309,000
was 4.41% of average earning assets for the quarter ending June 30, 2000
compared to net interest income of $2,144,000 (4.26% of average earning assets)
for the same period in 1999. Increased income from loans was the result of
increases in volume as the level of average loans outstanding rose in the period
and market rates remained virtually unchanged. Yields on investment securities
rose twelve basis points and yields on short-term investments increased 76 basis
points from 1999 to 2000. Tempering the increase in the net interest margin was
an increase in rates paid on interest bearing liabilities from 4.39% in 1999 to
4.72% in 2000. The increase was the result of increased costs on all types of
deposit accounts. The Company expects future deposit rates to remain stable or
increase slightly in the second half of 2000 as higher market conditions seen in
the last twelve months have a greater impact on the cost of time deposits.
A complete yield analysis is shown as Table I on page 17.
Noninterest Income
Year to Date Operations
Noninterest income for the period ending June 30, 2000 increased 45.87% from
amounts at June 30, 1999. An increase in service charge income of $114,000 was
the result of increased rates on NSF returned checks and increased volume of
returns. Income from investments in insurance contracts entered into in 1998 and
June of 1999 increased by $45,000 in 2000 compared to 1999 operations.
Quarter Ending June 30 Operations
Noninterest interest income for the quarter ending June 30, 2000 increased
25.82% as the result of items discussed in the preceding paragraph.
Noninterest Expenses
Year to Date Operations
Overall, noninterest expense increased 14.52% in the first six months of
2000 when compared to the same period in 1999. Personnel expenses increased
14.56% as the result of asset growth, a new branch in Moorefield and additional
officer compensation funded through life insurance contracts. Occupancy and
equipment expenses increased 21.88% as the result of higher depreciation on
equipment acquired as part of the year 2000 readiness program. Data processing
expenses increased 13.58% as a result of changes in the data processing
contract. Other noninterest expenses increased by 11.00% due to asset growth and
expenses relating to a state use tax audit. The overall increase in noninterest
expenses of 14.52% is higher than the increase in assets but is in line with
management's expectations.
Quarter Ending June 30 Operations
Overall, noninterest expenses increased 15.02% for the quarter ending June
30, 2000 compared to the quarter ending June 30, 1999. The reasons for the
quarterly increase are the same as for the year-to-date increases and the
percentage increases for the quarters are relatively the same as the
year-to-date increases. The Company recognized an expense for use taxes in the
second quarter of 2000 of $21,000 as the result of an audit conducted by the
state of West Virginia.
12
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Income Taxes
Year to Date Operations
Net income taxes as a percentage of pretax income increased from 34.82% in
1999 to 35.94% in 2000. The increase was the result of the state tax audit
discussed in the footnotes. Absent this adjustment, the income tax expense as a
percentage of pretax income would have been 33.14%.
Quarter Ending June 30 Operations
Net income taxes as a percentage of pretax income increased from 35.50% in
1999 to 38.45% in 2000. The increase was the result of the state tax audit.
Absent this adjustment, the income tax expense as a percentage of pretax income
would have been 33.66%.
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, northern Pendleton
and southeastern Hampshire counties. Consistent with its focus on providing
community-based financial services, the Company does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels, consumer
confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based upon
the strength and activity of the local economies of the Company's market areas.
The risk associated with real estate construction loans varies based upon the
supply of and demand for the type of real estate under construction.
Loans outstanding increased $7,035,000 or 4.22% in the first six months in
2000. Loan increases in all types of loans were noted. The loan to deposit ratio
was 87.90% at June 30, 2000 compared to 86.62% at December 31, 1999. 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.
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 $184,000 at June
30, 2000 compared to $214,000 at March 31, 2000 and $194,000 at December 31,
1999.
13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Asset Quality and Risk Elements (Continued)
Real estate acquired through foreclosure was $121,000 at June 30, 2000 and
December 31, 1999. All foreclosed property held at June 30, 2000 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 June 30, 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.
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and local
economic changes, changes in the nature and value of the portfolio and industry
standards. The Company's loan classification system, which rates existing loans,
provides the basis for adjusting the allowance for loan losses. Management
reviews these classification totals, along with internally generated loan review
reports, past due reports, historical loan loss experience and individual
borrower's financial health to determine the necessary amount to be provided in
the allowance for loan losses. Management evaluates nonperforming loans relative
to their collateral value and makes the appropriate adjustments to the allowance
when needed.
The additional provision for loan losses in 2000 is due to a rapid increase
in loans outstanding and the prospects of slightly larger credit losses if the
actions of the Federal Reserve Bank slow down the expanding economy.
The provision for credit losses and changes in the allowance for credit
losses are shown below (in thousands of dollars).
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------
Allowance for credit losses 2000 1999 2000 1999
--------------------------- -------- ------- ------- ------
Balance, beginning of period $ 1,389 $ 1,303 $ 1,318 $ 1,356
Net charge-offs (recoveries)
Charge-offs (52) (71) (139) (215)
Recoveries 22 19 60 50
------ ------ ------ ------
Total net charge-offs * (30) (52) (79) (165)
Provision for credit losses 100 75 220 135
------ ------ ------ ------
Balance, End of Period $ 1,459 $ 1,326 $ 1,459 $ 1,326
====== ====== ====== ======
14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
Quarter Ended Six Months Ended
June 30, June 30,
------------------ ---------------
2000 1999 2000 1999
---- ---- ---- ----
* Components of net charge-offs:
Real estate $ $ $ (30) $
Commercial (6) (3) (17) (75)
Installment (24) (49) (32) (90)
------ ------ ------ ------
Total $ (30) $ (52) $ (79) $ (165)
====== ====== ====== ======
The allowance for credit losses of $1,459,000 at June 30, 2000, was up
$70,000 from its level at March 31, 2000, and up $141,000 from December 31, 1999
levels. The allowance was equal to .84%, .83% and .79% of total loans at June
30, 2000, March 31, 2000 and December 31, 1999, respectively.
Securities
The Company's securities portfolio serves numerous purposes. Portions of
the portfolio may secure certain public and trust deposits. The remaining
portions are held as investments or used to assist the Company in liquidity and
asset/liability management. Total securities at June 30, 2000 were $29,308,000
compared to $29,815,000 at December 31, 1999. Securities as a percentage of
total assets were 12.82% at June 30, 2000 compared to 13.52% at December 31,
1999. The level of securities relative to total assets has remained steady
throughout 2000.
The securities portfolio consists of three components, specifically,
securities held to maturity, securities available for sale and other
investments. Securities are classified as held to maturity when management has
the intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Held to maturity securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts. Securities to
be held for indefinite periods of time are classified as available for sale and
accounted for at market value. Securities available for sale include securities
that may be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity needs
and other similar factors. Other investments consist of investments in insurance
products which are designed to provide a rate of return similar to one year
Treasury obligations. These products may provide additional employee benefits
based on their annualized performance. Other investments also include restricted
securities whose ownership is required to participate in certain governmental
programs. The Company's recent purchases of all securities have generally been
limited to securities of high credit quality with short to medium term
maturities. Changes in the market values of securities available for sale are
reflected as changes in stockholders' equity, net of the deferred tax effect. As
of June 30, 2000, the cost of the securities available for sale exceeded their
market value by $451,000 ($284,000 after tax considerations).
Deposits
The Company's main source of funds remains deposits received from
individuals, governmental entities and businesses located within the Company's
service area. Deposit accounts include demand deposits, savings, money market
and certificates of deposit.
15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Deposits (Continued)
Total deposits increased 2.71% between December 31, 1999 and June 30, 2000,
in all deposit areas except money market savings accounts. The cost of funds for
the first six months of 2000 was 4.63% compared to 4.48% for the same period in
1999. The costs on all saving and demand deposits increased during the period
while costs on certificates remained unchanged. 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 but saw moderate increases in these deposits in the first
half of 2000.
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 June 30, 2000, the Company's total risk based capital ratio was
17.00% which is far above the regulatory minimum of 8.0%. The ratio of total
capital to total assets was 10.90% at June 30, 2000.
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liquidity exposure. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions and the Federal Reserve Bank of Richmond.
Both subsidiary banks have lines of credit with the Federal Home Loan Bank of
Pittsburgh although utilization has been insignificant. In the past, growth in
deposits and proceeds from the maturity of investment securities have been
sufficient to fund the net increase in loans and investment securities.
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on the
balance sheet. Managing this risk involves regular monitoring of the interest
sensitive assets relative to interest sensitive liabilities over specific time
intervals.
16
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Interest Rate Sensitivity (Continued)
At June 30, 2000 the Company had a negative gap position. This liability
sensitive position typically produces an unfavorable contribution to earnings
during a period of increasing rates. With the largest amount of interest
sensitive assets and liabilities repricing within three years, the Company
monitors these areas very closely. Early withdrawal of deposits, prepayments of
loans and loan delinquencies are some of the factors that could affect actual
versus expected cash flows. In addition, changes in rates on interest sensitive
assets and liabilities may not be equal, which could result in a change in net
interest margin. While the Company does not match each of its interest sensitive
assets against specific interest sensitive liabilities, it does review its
positions regularly and takes actions to reposition itself when necessary.
Subsequent Event
As discussed in the footnotes to the financial statements, The Grant County
Bank purchased the stock of the Stockmans Bank of Harman on July 26, 2000 and
immediately merged it into Grant to be operated as a branch of the Bank.
Stockmans operates a single location in Harman, West Virginia. Stockmans is
located in Randolph County, West Virginia which is about thirty miles from
Grant's main branch. The addition will increase total deposits and assets by
about $9 million dollars. The current loan/deposit ratio for this branch is
below the Company's target and immediate efforts will be made to expand lending
in this locality. Management believes the acquisition will be only marginally
profitable until loans outstanding can be increased and overhead costs brought
into line with costs experienced at other branches.
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).
17
Table I
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------ ---------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Interest Income
Loans
Commercial $ 31,379 $ 1,345 8.57% $ 29,866 $ 1,274 8.53%
Consumer 39,479 2,001 10.14% 32,262 1,731 10.73%
Real estate 97,537 4,071 8.35% 87,694 3,620 8.26%
------- -------------- ------- --------------
Total 168,395 7,417 8.81% 149,822 6,625 8.84%
Federal funds sold 4,493 131 5.83% 11,604 269 4.64%
Interest bearing
deposits 3,265 85 5.21% 4,467 110 4.93%
Investments
Taxable 27,229 832 6.11% 29,689 904 6.09%
Tax exempt 1 3,106 132 8.50% 3,242 137 8.45%
------- ------- ---- ------- -------- ----
Total Earning Assets 1 206,488 8,597 8.33% 198,824 8,045 8.09%
Interest Expense
Demand deposits 31,109 438 2.82% 32,828 395 2.41%
Savings 20,941 298 2.85% 21,085 285 2.70%
Time deposits 120,101 3,239 5.39% 114,572 3,086 5.39%
Other borrowed money 2,485 68 5.47% 2,568 68 5.30%
------- -------- ---- ------- -------- ----
Total Interest Bearing
Liabilities 174,636 4,043 4.63% 171,053 3,834 4.48%
------- -------- ---- ------- -------- ----
Net Interest Margin $ 4,554 $ 4,211
======== ========
Net Yield on Interest Earning
Assets 1 4.41% 4.24%
==== ====
1 On a taxable equivalent basis based on a tax rate of 37%.
17 (Continued)
Table I (Continued)
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------- ------------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Interest Income
Loans
Commercial $ 31,862 $ 689 8.65% $ 29,743 $ 644 8.66%
Consumer 40,376 1,025 10.15% 32,910 872 10.60%
Real estate 98,212 2,070 8.43% 88,491 1,825 8.25%
------- ------- ---- ------- ------- ----
Total 170,450 3,784 8.88% 151,144 3,341 8.84%
Federal funds sold 4,614 70 6.07% 11,650 140 4.81%
Interest bearing
deposits 4,177 53 5.08% 5,285 65 4.92%
Investments
Taxable 27,158 420 6.19% 30,151 456 6.05%
Tax exempt 1 3,074 65 8.46% 3,242 70 8.64%
------- ------- ---- ------- ------- ----
Total Earning Assets 1 209,473 4,392 8.39% 201,472 4,072 8.08%
Interest Expense
Demand deposits 31,674 234 2.96% 35,521 214 2.41%
Savings 20,790 152 2.92% 21,425 147 2.74%
Time deposits 121,666 1,664 5.47% 116,184 1,534 5.28%
Other borrowed money 2,473 33 5.34% 2,559 33 5.16%
------- ------- ---- ------- ------- ----
Total Interest Bearing
Liabilities 176,603 2,083 4.72% 175,689 1,928 4.39%
------- ------- ---- ------- ------- ----
Net Interest Margin $ 2,309 $ 2,144
======= =======
Net Yield on Interest Earning
Assets 1 4.41% 4.26%
==== ====
1 On a taxable equivalent basis based on a tax rate of 37%.
18
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 2000
(In Thousands of Dollars)
More than
5 Years
1 - 90 91 - 365 1 to 3 3 to 5 or no
Days Days Years Years Maturity Total
EARNINGS ASSETS
Loans $30,997 $63,907 $42,768 $21,122 $14,855 $173,649
Fed funds sold 5,038 5,038
Securities 5,729 7,437 11,141 2,020 2,981 29,308
Time deposits in other
banks 1,779 1,652 3,431
------ ------ ------ ------ ----- ------
Total 43,543 72,996 53,909 23,142 17,836 211,426
------ ------ ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Transaction accounts 18,438 18,438
Money market savings 12,200 12,200
Savings accounts 21,667 21,667
Time deposits more
than $100,000 3,676 11,092 12,197 3,774 30,739
Time deposits less
than $100,000 13,733 42,852 28,306 7,291 182 92,364
Other borrowed money 2,046 140 403 405 1,441 4,435
------ ------ ------ ------ ----- ------
Total 71,760 54,084 40,906 11,470 1,623 179,843
------ ------ ------ ------ ----- -------
Rate sensitivity GAP (28,217) 18,912 13,003 11,672 16,213
Cumulative GAP (28,217) (9,305) 3,698 15,370 31,583
Ratio of cumulative
interest sensitive assets to
cumulative interest
sensitive liabilities 60.68% 92.61% 102.22% 108.62% 117.56%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
19
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 - On April 11, 2000, the stockholders
held their annual meeting. The
following item was approved by the
shareholders by the required
majority:
1) Election of the Board of
Directors as proposed in the
proxy material without any
additions or exceptions.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a) Exhibits
3 (i) Articles of
Incorporation of
Highlands Bankshares,
Inc. are incorporated
by reference to
Appendix C to
Highlands Bankshares,
Inc.'s Form S-4 filed
October 20, 1986.
3 (ii) Bylaws of Highlands
Bankshares, Inc. are
incorporated by
reference to Appendix
D to Highland
Bankshares, Inc.'s
Form S-4 filed
October 20, 1986.
27 Financial Data
Schedule attached
(b) Reports on Form 8-K filed
during the six months ended
June 30, 2000.
None
20
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter ending
June 30, 2000 22
21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHLANDS BANKSHARES, INC.
LESLIE A. BARR
Leslie A. Barr
President
JOHN G. VANMETER
John G. VanMeter
Chairman
Date: August 14, 2000