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, 2001
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, 2001
- ---------------------------------------- ------------------------------
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, 2001 and 2000 2
Consolidated Balance Sheets - March 31, 2001 and
December 31, 2000 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2001 and 2000 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 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibit and Reports on Form 8K 16
SIGNATURES 17
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,
2001 2000
-------- --------
Interest Income
Interest and fees on loans $ 4,373 $ 3,633
Interest on federal funds sold 132 61
Interest on time deposits 59 32
Interest and dividends on investment securities
Taxable 355 412
Nontaxable 37 42
------- ------
Total Interest Income 4,956 4,180
------- ------
Interest Expense
Interest on time deposits over $100,000 579 405
Interest on other deposits 1,863 1,520
Interest on borrowed money 57 35
------- ------
Total Interest Expense 2,499 1,960
------- ------
Net Interest Income 2,457 2,220
Provision for Loan Losses 120 120
------- ------
Net Interest Income After Loan Losses 2,337 2,100
------- ------
Noninterest Income
Service charges 141 142
Other 133 137
------- ------
Total Noninterest Income 274 279
------- ------
Noninterest Expense
Salaries and employee benefits 934 874
Occupancy expense 87 73
Equipment expense 142 136
Data processing 140 130
Other 417 358
------- ------
Total Noninterest Expense 1,720 1,571
------- ------
Income Before Income Taxes 891 808
Provision for Income Taxes 297 270
------- ------
Net Income $ 594 $ 538
======= ======
Per Share Data
Net Income $ 1.18 $ 1.07
====== ======
Cash Dividends $ .34 $ .31
====== ======
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,
2001 2000
-------- --------
ASSETS
Cash and due from banks - noninterest bearing $ 5,326 $ 7,062
Time deposits in other banks 6,283 6,361
Federal funds sold 12,296 7,040
Securities held to maturity (note 2) 2,164 2,228
Securities available for sale (note 3) 24,528 22,835
Other investments (note 4) 763 763
Loans, net of unearned interest (note 5) 193,964 189,268
Less allowance for loan losses (note 6) (1,595) (1,493)
------- -------
Net Loans 192,369 187,775
Bank premises and equipment 6,860 6,810
Interest receivable 1,874 1,901
Investments in insurance contracts 4,902 4,854
Other assets 884 971
------- -------
Total Assets $258,249 $248,600
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 26,345 $ 26,370
Interest bearing
Money market and checking 17,352 17,678
Money market savings 11,517 12,281
Savings 25,532 23,334
Time deposits over $100,000 39,246 34,884
All other time deposits 105,437 102,024
------- -------
Total Deposits 225,429 216,571
Borrowed money 3,903 4,009
Accrued expenses and other liabilities 2,096 1,752
------- -------
Total Liabilities 231,428 222,332
------- -------
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 23,249 22,826
Accumulated other comprehensive loss 169 39
------- -------
27,814 27,261
Treasury stock (at cost, 44,866 shares in
2001 and 2000) (993) (993)
------- -------
Total Stockholders' Equity 26,821 26,268
------- -------
Total Liabilities and Stockholders' Equity $258,249 $248,600
======= =======
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
Comprehen-
Common Retained sive Treasury
Stock Surplus Earnings Income Stock Total
Balances, December 31,
2000 $2,734 $1,662 $22,826 $ 39 $ (993) $26,268
Comprehensive Income
Net income 594 594
Net change in unrealized
appreciation on investment
securities available for
sale, net of taxes 130 130
-----
Total Comprehensive Income 724
Dividends paid (171) (171)
----- ----- ----- ----- ----- -----
Balances, March 31,
2001 $2,734 $1,662 $23,249 $ 169 $ (993) $26,821
===== ===== ====== ===== ===== ======
Accumulated
Other
Comprehen-
Common Retained sive Treasury
Stock Surplus Earnings Income 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,
2001 2000
-------- --------
Cash Flows from Operating Activities:
Net income $ 594 $ 538
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 126 116
Income from insurance contracts (48) (45)
Net amortization 4 12
Provision for loan losses 120 120
(Increase) decrease in interest receivable 27 (16)
Decrease in other assets 10 9
Increase in accrued expenses 344 482
------- ------
Net Cash Provided by Operating Activities 1,177 1,216
------- ------
Cash Flows from Investing Activities:
Net change in federal funds sold (5,256) (2,593)
Proceeds from maturities of securities available
for sale 6,071 2,286
Proceeds from maturities of securities held
to maturity 65 158
Purchase of securities available for sale (7,562) (2,519)
Net change in time deposits in other banks 78 (1,025)
Net change in loans (4,714) (1,064)
Purchase of property and equipment (176) (146)
------- ------
Net Cash Used in Investing Activities (11,494) (4,903)
------- ------
Cash Flows from Financing Activities:
Net increase in deposits 8,858 1,661
Dividends paid in cash (171) (155)
Repayment of borrowed money (106) (88)
------- ------
Net Cash Provided by Financing Activities 8,581 1,418
------- ------
Net Decrease in Cash and Cash Equivalents (1,736) (2,269)
Cash and Cash Equivalents, Beginning of Period 7,062 7,312
------- ------
Cash and Cash Equivalents, End of Period $ 5,326 $ 5,043
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 5 $ 4
Interest 2,424 1,871
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, 2001, and the results of operations for the
three month periods ended March 31, 2001 and 2000. The notes included
herein should be read in conjunction with the notes to financial
statements included in the 2000 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, 2001 and December 31, 2000, are as follows:
2001 2000
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US
Government corporations
and agencies $ 34 $ 34 $ 97 $ 97
Obligations of states and
political subdivisions 2,130 2,166 2,131 2,137
------ ------ ----- ------
Total $ 2,164 $ 2,200 $2,228 $ 2,234
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of March 31, 2001 and December 31, 2000 are as follows:
2001 2000
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US
Government corporations
and agencies $21,640 $21,862 $21,436 $21,495
Obligations of states and
political subdivisions 2,040 2,090 772 789
Other investments 580 576 566 551
------ ------ ----- ------
Total $24,260 $24,528 $22,774 $22,835
====== ====== ====== ======
7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS:
Other investments totaling $763,000 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, 2001 and December
31, 2000, is as follows:
2001 2000
---- ----
Commercial $ 41,166 $ 37,681
Real estate - construction 4,245 4,061
- mortgages 102,075 101,890
Consumer installment 46,893 46,191
------- -------
Total 194,379 189,823
Unearned interest (415) (555)
------- -------
Net loans outstanding $193,964 $189,268
======= =======
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2001 and 2000, follows:
2001 2000
---- ----
Balance, beginning of period $ 1,493 $ 1,318
Provisions charged to operating expenses 120 120
Loan recoveries 86 38
Loan charge-offs (104) (87)
------- -------
Balance, end of period $ 1,595 $ 1,389
======= =======
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's net income was $594,000 in the first quarter of 2001, an
increase of 10.41% compared to the first quarter of 2000. Earnings per share
were $1.18 for the first quarter of 2001 compared to $1.07 per share for the
same quarter in 2000. The Company's annualized return on average equity was
8.95% in the first quarter of 2001 compared to 8.82% for the first quarter of
2000. Return on average assets was .94% for 2001 and .98% for 2000,
respectively.
The increase in earnings per share for the first quarter was due primarily
to an 10.68% increase in net interest income. Growth in average earning assets
(14.05%) and interest bearing liabilities (15.47%) within the last twelve months
offset a declining net interest spread between quarters. The increase in the tax
equivalent net interest income was 10.42% for the period. The provision for loan
losses of $120,000 was the same as 2000 and is reflective of lower net charge
offs in 2001. Noninterest income declined 1.79% because a gain on the sale of
foreclosed real estate of $11,000 in 2000 was not repeated in 2001. Other
noninterest expenses increased 9.48%, mainly the result of operating expenses at
the new branch in Harman and general asset growth.
In March of 2001, the Capon Valley Bank entered into an agreement with an
unrelated party to purchase a building for a branch location in Gore, Virginia.
Final approval from the various regulatory authorities is expected in the second
quarter of 2001 and operations are expected to commence by June 15, 2001.
Net Interest Income
The Company's net interest income on a tax equivalent basis was 4.27% in the
first quarter of 2001 compared to 4.41% for the first quarter of 2000. The
volume of all lending increased substantially in the last twelve months due to a
strong economy and additional branch locations. Commercial rates increased from
8.49% in 2000 to 8.74% in 2001 due to rising market rates. Rates on installment
loans increased 48 basis points and rates on real estate loans increased 40
basis points. The overall increase of 40 basis points in returns on loans
outstanding was offset by increases in the rates paid on deposits and borrowed
money (see below) and declines in short-term investment rates.
For the first quarter of 2001, the Company saw an overall increase of 32
basis points in the yields on investment securities compared to 2000 results.
The increase is reflective of higher rates on taxable investments purchased in
previous years and recent reinvestments of maturities at higher rates. Average
investments in securities has declined over the last twelve months as maturities
were used to fund loan demand and increase fed funds sold. Interest rates earned
on fed funds sold and interest bearing deposits declined 66 basis points as
rates were cut three times in 2001 by the Federal Reserve Bank ("The Fed") by
one-half point each time. The sharp increase in the average balance of federal
funds outstanding reflects the Company's lower investments in securities for
which yields are almost the same as fed funds sold.
Interest rates paid on transaction and savings amounts declined a
combined 17 basis points due to lower rates resulting from Fed 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 19.88% in 2001 compared to 2000 and was a
source of funding for the loan growth discussed earlier. Approximately one
fourth of the time deposit growth was due to the acquisition of the Stockmans
Bank of Harman. A 62 point basis point increase in rates paid on time deposits
between 2000 and 2001 reflects increasing rates in early 2000 when the Fed
raised rates to slow what was perceived as a very strong economy.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Net Interest Income (Continued)
Beginning in 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. In addition,
monies were borrowed on a short-term basis in 2000 to fund the renovation and
expansion at the Capon Valley Bank which the Bank anticipates refinancing when
long-term interest rates are favorable. The cost of this money increased 17
basis points due to rate changes in market.
A complete yield analysis is shown as Table I on page 14.
Noninterest Income
Noninterest income for 2001 was virtually unchanged from 2000 levels.
Service charge income declined by .70% and other operating income declined by
2.92%. The Company recognized a gain of $11,000 in 2000 on the sale of
foreclosed real estate that was not repeated in 2001.
Noninterest Expenses
Overall noninterest expense increased 9.48% in 2001 as the result of
operating expense increases at the Grant County Bank's new Harman Branch which
opened in July 2000 and general asset growth. Personnel expense increases of
6.86% were the result of a 7.78% increase in full time equivalent employees and
a slight decline in average wages. Expenses for occupancy, equipment and data
processing expenses increased 8.85% due to costs of upgrading data processing
equipment, additional volume of deposits and loans and additional depreciation
costs. Other noninterest expenses increased 16.48% due to asset growth and
additional branch locations. The overall increase in interest expense of 9.48%
is in line with management estimates for the first quarter of the year and the
increase in average earning assets of 14.05%.
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, Randolph, Mineral, Hampshire
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 $4,696,000 or 2.48% in the first quarter in 2001
compared to levels at December 31, 2000. The first quarter of any year is
traditionally slow as farming and logging operations are hampered by weather
conditions and retail borrowing in the first quarter is put on hold until the
spring. Thus, the first quarter increase in the loan portfolio was not
anticipated but certainly welcomed. A 9.25% rise in commercial loans was
primarily responsible for the first quarter increase but modest gains in
consumer mortgage lending were also experienced. The loan to deposit ratio was
86.04% at March 31, 2001 compared to 87.39% at December 31, 2000. Loan demand is
expected to remain satisfactory in the near future barring any significant
declines in the local or national economies.
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 $437,000 at March
31, 2001 compared to $32,000 in nonaccrual loans at December 31, 2000. The
increase was the result of amounts due from a single borrower whose loan is
primarily guaranteed by the Small Business Administration. The loan
was brought current and removed from the nonaccrual status in April.
Real estate acquired through foreclosure was $62,000 at March 31, 2001 and
$171,000 at December 31, 2000. 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, 2001,
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,
---------------
2001 2000
Balance, beginning of period $ 1,493 $ 1,318
Net charge-offs (recoveries)
Charge-offs (104) (87)
Recoveries 86 38
------ ------
Total net charge-offs * (18) (49)
Provision for credit losses 120 120
------ ------
Balance, End of Period $ 1,595 $ 1,389
====== ======
* Components of net charge-offs:
Real estate $ $ (30)
Commercial (8) (11)
Consumer (10) (8)
------ ------
Total $ (18) $ (49)
====== ======
The allowance for credit losses of $1,595,000 at March 31, 2001, was up
$102,000 from its level at December 31, 2000. The increase was due to limited
net charge offs in the first quarter compared to the provision. The allowance
was equal to .82% and .79% of total loans outstanding at March 31, 2001 and
December 31, 2000, 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, 2001
were $27,455,000 compared to $25,826,000 at December 31, 2000. Total securities
and other investments as a percentage of total assets were 10.63% at March 31,
2001 compared to 10.39% at December 31, 2000. The modest increase in security
investments is due to overall asset growth.
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, 2001, the market value of the securities available for sale
exceeded their cost by $268,000 ($169,000 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 4.09% between December 31, 2000 and March 31,
2001, primarily in the form of time deposits. The cost of funds for the first
quarter of 2001 was 5.01% compared to 4.54% for the same quarter in 2000.
Primarily responsible for this increase was an increase in time deposits as
contracts entered into in 1999 and 2000 are reflected in 2001 operations. 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 did see a substantial increase in time deposits of more
than $100,000 as the result of slight premiums paid on large deposits and monies
resulting from the sale of a local poultry company.
Capital
The Company seeks to maintain a strong capital base to expand facilities,
promote public confidence, support current operations and grow at a manageable
level. As of March 31, 2001, the Company's total risk based capital ratio was
15.71% which is far above the regulatory minimum of 8.0%. The leverage ratio
of total capital to total assets was 10.46% at March 31, 2001 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 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, 2001 the Company had a slightly negative gap position through
the first twelve months. 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.
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).
14
TABLE I
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
-------------------- --------------------
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
Interest Income
Loans
Commercial $39,130 $ 855 8.74% $30,895 $ 656 8.49%
Consumer 45,735 1,212 10.60 38,581 976 10.12
Real estate 106,483 2,306 8.66 96,864 2,001 8.26
------- ------ ----- ------ ----- ------
Total Loans 191,348 4,373 9.14 166,340 3,633 8.74
Federal funds sold 10,321 132 5.12 4,372 61 5.58
Interest bearing
deposits 5,377 59 4.39 2,353 32 5.44
Investments
Taxable 21,937 355 6.47 27,299 412 6.04
Tax exempt 1 3,116 59 7.57 3,138 67 8.54
----- ------ ----- ------ ----- ------
Total Earning
Assets 1 232,099 4,978 8.58 203,502 4,205 8.27
------- ------ ----- ------- ----- ------
Interest Expense
Demand deposits 29,494 175 2.34 30,543 204 2.67
Savings 23,835 163 2.74 21,091 146 2.77
Time deposits 142,106 2,104 5.93 118,536 1,575 5.31
Other borrowed
money 3,947 57 5.78 2,497 35 5.61
----- ------ ----- ------ ----- ------
Total Interest
Bearing
Liabilities $199,382 2,499 5.01 $172,667 1,960 4.54
======= ------ ----- ======= ----- ------
Net Interest
Margin $ 2,479 $2,245
====== =====
Net Yield on Interest
Earning Assets 1 4.27% 4.41%
===== ======
1 Yields are on a taxable equivalent basis.
2 Includes loans in nonaccrual status.
15
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31, 2001
(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 $23,728 $84,943 $45,588 $30,421 $ 9,284 $193,964
Fed funds sold 12,296 12,296
Securities 4,901 7,677 5,981 1,849 7,047 27,455
Time deposits in
other banks 5,983 300 6,283
----- ------ ------ ------ ------ ------
Total 46,908 92,920 51,569 32,270 16,331 239,998
------ ------ ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Transaction accounts 17,352 17,352
Money market savings 11,517 11,517
Savings accounts 25,532 25,532
Time deposits more
than $100,000 4,102 17,680 14,136 3,328 39,246
Time deposits less
than $100,000 13,532 52,809 31,148 7,810 138 105,437
Other borrowed money 47 1,319 1,017 213 1,307 3,903
----- ------ ------ ------ ------ ------
Total 72,082 71,808 46,301 11,351 1,445 202,987
------ ------ ------ ------ ------ -------
Rate sensitivity GAP (25,174) 21,112 5,268 20,919 14,886
37,011
Cumulative GAP (25,174) (4,062) 1,206 22,125 37,011
Ratio of cummulative
interest sensitive
assets to cummulative
interest sensitive
liabilities 65.08% 97.18% 100.63% 110.98% 118.23%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
16
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.
(b) Reports on Form 8-K
filed during the three
months ended March 31,
2001
None
17
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 7, 2001
---------------