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, 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 June 30, 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 - Six Months
Ended June 30, 2001 and 2000 2
Consolidated Statements of Income - Three Months
Ended June 30, 2001 and 2000 3
Consolidated Balance Sheets - June 30, 2001 and
December 31, 2000 4
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2001 and 2000 5
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2001 and 2000 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 20
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,
2001 2000
---------- --------
Interest Income
Interest and fees on loans $ 8,923 $ 7,417
Interest on federal funds sold 248 131
Interest on time deposits 132 85
Interest and dividends on investment securities
Taxable 735 832
Nontaxable 79 83
------- ------
Total Interest Income 10,117 8,548
------- ------
Interest Expense
Interest on time deposits over $100,000 1,276 839
Interest on other deposits 3,655 3,136
Interest on borrowed money 105 68
------- ------
Total Interest Expense 5,036 4,043
------- ------
Net Interest Income 5,081 4,505
Provision for Loan Losses 255 220
------- ------
Net Interest Income After Provision for Loan Losses 4,826 4,285
------- ------
Noninterest Income
Service charges 290 285
Other 253 262
------- ------
Total Noninterest Income 543 547
------- ------
Noninterest Expense
Salaries and employee benefits 1,888 1,763
Occupancy expense 181 149
Equipment expense 289 280
Data processing 262 251
Other 868 767
------- ------
Total Noninterest Expense 3,488 3,210
------- ------
Income Before Income Taxes 1,881 1,622
Provision for Income Taxes 640 583
------- ------
Net Income $ 1,241 $ 1,039
======= ======
Per Share Data
Net Income $ 2.47 $ 2.07
======= ======
Cash Dividends $ .68 $ .62
======= ======
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,
2001 2000
---------- ----------
Interest Income
Interest and fees on loans $ 4,550 $ 3,784
Interest on federal funds sold 116 70
Interest on time deposits 73 53
Interest and dividends on investment securities
Taxable 380 420
Nontaxable 42 41
------- -------
Total Interest Income 5,161 4,368
------- -------
Interest Expense
Interest on time deposits over $100,000 697 434
Interest on other deposits 1,792 1,616
Interest on borrowed money 48 33
------- -------
Total Interest Expense 2,537 2,083
------- -------
Net Interest Income 2,624 2,285
Provision for Loan Losses 135 100
------- -------
Net Interest Income After Provision for Loan Losses 2,489 2,185
------- -------
Noninterest Income
Service charges 149 143
Other income 120 125
------- -------
Total Noninterest Income 269 268
------- -------
Noninterest Expense
Salaries and employee benefits 954 889
Occupancy expense 94 76
Equipment expense 147 144
Data processing expense 122 121
Other 451 409
------- -------
Total Noninterest Expense 1,768 1,639
------- -------
Income Before Income Taxes 990 814
Provision for Income Taxes 343 313
------- -------
Net Income $ 647 $ 501
======= =======
Per Share Data
Net Income $ 1.29 $ 1.00
======= =======
Cash Dividends $ .34 $ .31
======= =======
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,
2001 2000
------------ ------------
ASSETS
Cash and due from banks - noninterest bearing $ 6,396 $ 7,062
Time deposits in other banks 5,920 6,361
Federal funds sold 7,645 7,040
Securities held to maturity (note 2) 1,831 2,228
Securities available for sale (note 3) 29,169 22,835
Other investments 792 763
Loans, net of unearned interest (note 4) 199,385 189,268
Less allowance for loan losses (note 5) (1,700) (1,493)
Bank premises and equipment 7,171 6,810
Interest receivable 2,136 1,901
Investment in insurance contracts (note 6) 4,950 4,854
Other assets 757 971
------- -------
Total Assets $264,452 $248,600
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 27,519 $ 26,370
Interest bearing
Money market and checking 16,312 17,678
Money market savings 10,966 12,281
Savings 25,674 23,334
Time deposits over $100,000 43,500 34,884
All other time deposits 106,972 102,024
------- -------
Total Deposits 230,943 216,571
Borrowed money 4,187 4,009
Accrued expenses and other liabilities 2,015 1,752
------- -------
Total Liabilities 237,145 222,332
------- -------
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 23,725 22,826
Accumulated other comprehensive loss 179 39
------- -------
28,300 27,261
Treasury stock (at cost, 44,866 shares
in 2001 and 2000) (993) (993)
------- -------
Total Stockholders' Equity 27,307 26,268
------- -------
Total Liabilities and Stockholders' Equity $264,452 $248,600
======= =======
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,
2000 $ 2,734 $ 1,662 $ (993) $22,826 $ 39 $ 26,268
Comprehensive Income
Net Income 1,241 1,241
Net change in unrealized
appreciation on
investment securities
available for sale,
net of taxes 140 140
------ ------ ------ ------ ------- -------
Total Comprehensive
Income 1,381
Dividends paid (342) (342)
------ ------ ------ ------ ------- -------
Balances, June 30,
2001 $ 2,734 $ 1,662 $ (993) $23,725 $ 179 $ 27,307
====== ====== ====== ====== ======= =======
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
====== ====== ====== ====== ====== =======
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,
2001 2000
---------- ----------
Cash Flows from Operating Activities:
Net income $ 1,241 $ 1,039
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 254 232
Net securities amortization 33 23
Provision for loan losses 255 220
Income from insurance investments (96) (90)
Increase in interest receivable (235) (125)
Decrease in other assets 131 54
Increase in accrued expenses 263 340
------- ------
Net Cash Provided by Operating Activities 1,846 1,693
------- ------
Cash Flows from Investing Activities:
Net change in time deposits in other banks 441 (995)
Net change in federal funds sold (605) (2,335)
Proceeds from maturities of securities
available for sale 9,792 3,239
Proceeds from maturities of securities
held to maturity 395 224
Purchase of securities available for sale (15,934) (3,022)
Purchase of other investments (29) (17)
Net change in loans (10,165) (7,114)
Proceeds from sale of property and equipment 11
Purchase of property and equipment (615) (307)
------- ------
Net Cash Consumed by Investing Activities (16,720) (10,316)
------- -------
Cash Flows from Financing Activities:
Net increase in deposits 14,372 5,206
Dividends paid in cash (342) (311)
Repayment of borrowed money (422) (133)
Advances of borrowed money 600 2,000
------- ------
Net Cash Provided by Financing Activities 14,208 6,762
------- ------
Net Decrease in Cash and Cash Equivalents (666) (1,861)
Cash and Cash Equivalents, Beginning of Period 7,062 7,312
------- ------
Cash and Cash Equivalents, End of Period $ 6,396 $ 5,451
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 1,002 $ 502
Interest 4,970 3,985
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, 2001, and the results of operations for the
three and six month periods ended June 30, 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.
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, 2001 and December 31, 2000, are as follows:
2001 2000
---- ----
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of US
Government corporations
and agencies $ 7 $ 8 $ 97 $ 97
Obligations of states and
political subdivisions 1,824 1,860 2,131 2,137
------ ------ ----- ------
Total $ 1,831 $ 1,868 $2,228 $ 2,234
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of June 30, 2001 and December 31, 2000, are as follows:
2001 2000
---- ----
Amortized Fair Amortized Fair
Cost Value Cost Value
US Treasury securities
and obligations of US
Government corporations
and agencies $19,849 $20,058 $21,436 $21,495
Obligations of states and
political subdivisions 3,374 3,422 772 789
Corporate debt securities 5,603 5,637 508 500
Other investments 58 52 58 51
------ ------ ----- ------
Total $28,884 $29,169 $22,774 $22,835
====== ====== ====== ======
8
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS OUTSTANDING:
A summary of loans outstanding as of June 30, 2001 and December 31,
2000, is as follows:
2001 2000
---- ----
Commercial $ 42,588 $ 37,682
Real estate - construction 4,762 4,061
- mortgages 104,159 101,890
Consumer installment 48,195 46,191
------- -------
Total 199,704 189,824
Unearned interest (319) (556)
------- -------
Net loans outstanding $199,385 $189,268
======= =======
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
six months ended June 30, 2001 and 2000, follows:
2001 2000
---- ----
Balance, beginning of period $ 1,493 $ 1,318
Provisions charged to operating expenses 255 220
Loan recoveries 139 60
Loan charge-offs (187) (139)
------- -------
Balance, end of period $ 1,700 $ 1,459
======= =======
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 $4,950,000 at June 30, 2001 and $4,854,000 at December
31, 2000.
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. 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. The
Company requested a hearing as required by state law. The case will
be heard in October, 2001 and the estimate of liability will be
adjusted to the actual liability when a ruling is made.
NOTE 8 BUSINESS COMBINATIONS:
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 and is located in Randolph County, West
Virginia which is about thirty miles from Grant's main branch. The
addition increased total deposits and assets by about $9 million
dollars.
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 $1,241,000 was an increase of $202,000
over 2000 amounts and represents a 19.32% increase in net income and earnings
per share compared to 2000 operations. Earnings represented an annualized return
on equity of 9.17% for the first six months of 2001 compared to 8.46% for the
same period in 2000. The annualized return on average assets was .94 % in the
first six months of 2001 compared with .93% in the first six months of 2000.
The tax equivalent net interest income increased by $573,000 in 2001 as the
result of an increased level of income earning assets. Returns on loans
increased 34 basis points, yields on fed funds and cash equivalents declined by
85 basis points and yields on investments increased by 23 basis points. An
increase of 33 basis points in the overall cost of funds was the result of
higher costs of certificates of deposit. The net interest margin was 4.32% of
average earning assets for the first six months of 2001 compared to 4.41% for
the same period in 2000.
Noninterest income declined .73% in 2001 compared to 2000 due to lower
income from insurance operations. Noninterest expenses increased 8.66% in 2001
due to asset growth and costs relating to the purchase of a new branch
in Harman in July of 2000.
Quarter Ending June 30 Operations
Overall net income and earnings per share for the quarter ending June 30,
2001 increased 29% to $647,000 when compared to 2000 income of $501,000.
Increases in the net interest income of 14.84% were offset by increases in
operating expenses of 7.88% during the period. A state tax audit was conducted
in the second quarter of 2000, resulting in an after tax charge to earnings of
$58,000. Such expense was not repeated in 2001.
Net Interest Income
Year to Date Operations
The Company's net interest income on a tax equivalent basis was
$5,127,000 in the first six months of 2001 compared to $4,554,000 for 2000. The
12.58% increase was due to an increase in the yield on loans and taxable
investments that was larger than the increase in the cost of certificates of
deposits and the decline in returns on short term investments. Also
contributing to the margin increase was a 14.85% increase in average earning
assets. Average loans outstanding grew by 15.81% from 2000 to 2001. This growth
reflects good local economic conditions, moderate interest rates and a purchased
banking facility. The overall costs of funds reflects the high level of
competition for deposits in the Company's service areas and higher costing
certificates entered into in 1999 and 2000. The deposit increase of 15.72%
represents growth in certificates of deposits and has been obtained from
customers in the immediate service areas. About 40% of the deposit growth is
attributable to the branch acquisition in Harman.
Loans outstanding at June 30, 2001 increased 14.82% over amounts at June 30,
2000 and 10.69% on annualized basis since December 31, 2000. The increase in
loans has been the result of acquiring a branch in a new market area and efforts
to increase lending in existing markets. Loan growth has been funded by deposit
growth and a 25 percent increase in certificates more than $100,000. The 6.82%
increase in the tax equivalent net interest margin for the second quarter of
2001 over the first quarter of 2001 is the result of good growth in earning
assets and an increasing net interest margin. Barring any dramatic increases in
interest rates by the Federal Reserve Bank, the Company anticipates its net
interest margin remaining stable or increasing slightly in the next six
months as a slight decline in the rates paid on deposits are matched against
steady 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 $2,648,000
was 4.37% of average earning assets for the quarter ending June 30, 2001
compared to net interest income of $2,309,000 (4.41% of average earning assets)
for the same period in 2000. Increased income from loans was the result of
increases in volume and rates, as the level of average loans outstanding rose in
the period and yields increased by 28 basis points. Yields on investment
securities rose sixteen basis points but yields on short-term investments
declined 99 basis points from the previous year. Tempering the increase in the
net interest margin was an increase in average rates paid on interest bearing
liabilities from 4.72% in 2000 to 4.90% in 2001. The increase was the result of
increased costs of certificates of deposit. The Company expects future deposit
rates to remain stable or decrease slightly in the second half of 2001 as rates
on higher costing certificates mature and are replaced with rates in line with
current market rates.
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, 2001 decreased .73% from
amounts at June 30, 2000. Slight increases in service charge income were offset
by declines in life insurance income. The overall effect was limited change
between the periods on total noninterest income.
Quarter Ending June 30 Operations
Noninterest interest income for the quarter ending June 30, 2001
increased .37% as the result of items discussed in the preceding paragraph and
larger deposit volume.
Noninterest Expenses
Year to Date Operations
Overall, noninterest expense increased 8.66% in the first six months of 2001
when compared to the same period in 2000. Personnel expenses increased 7.09% as
the result of asset growth, a new branch in Harman and inflationary raises.
Occupancy and equipment expenses increased 9.56% as the result of higher
depreciation on facilities and increased operating expense. Data processing
expenses increased 4.38% as a result of asset and deposit growth. Other
noninterest expenses increased by 13.17% due to asset growth and expenses
relating to additional banking locations. The overall increase in noninterest
expenses of 8.67% is less than the increase in assets and is in line with
management's expectations.
Quarter Ending June 30 Operations
Overall, noninterest expenses increased 7.87% for the quarter ending June
30, 2001 compared to the quarter ending June 30, 2000. 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. Exclusive of this item, noninterest expenses would have
increased by 9.27% for the quarter.
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 decreased from 35.94% in
2000 to 34.02% in 2001. The decrease was the result of the 2000 state tax audit
discussed in the footnotes.
Quarter Ending June 30 Operations
Net income taxes as a percentage of pretax income decreased from 38.45% in
2000 to 34.65% in 2001. The decrease was the result of the state tax audit.
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, northern
Pendleton and southeastern Hampshire counties in West Virginia and Frederick
County in Virginia. 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 $10,117,000 or 5.35% in the first six months in
2001. Increases in all types of loans offered by the Bank were noted. The loan
to deposit ratio was 86.34% at June 30, 2001 compared to 87.39% at December 31,
2000. 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 $57,000 at June 30,
2001 compared to $437,000 at March 31, 2001 and $32,000 at December 31, 2000.
The increase at March 31, 2001 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.
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 $62,000 at June 30, 2001 and
$171,000 at December 31, 2000. All foreclosed property held at June 30, 2001 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, 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.
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 2001 is due to an increase in
loans outstanding and the prospects of slightly larger credit losses based on a
lethargic economy with lower than expected growth rates.
14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Allowance for Loan Losses (Continued)
The provision for credit losses and changes in the allowance for credit
losses are shown below (in thousands of dollars).
Quarter Ended Six Months Ended
June 30, June 30,
------------------ --------------------
Allowance for credit losses 2001 2000 2001 2000
--------------------------- ---- ---- ---- ----
Balance, beginning of period $ 1,595 $ 1,389 $ 1,493 $ 1,318
Net charge-offs (recoveries)
Charge-offs (83) (52) (187) (139)
Recoveries 53 22 139 60
------ ------ ------ ------
Total net charge-offs * (30) (30) (48) (79)
Provision for credit losses 135 100 255 220
------ ------ ------ ------
Balance, End of Period $ 1,700 $ 1,459 $ 1,700 $ 1,459
====== ====== ====== ======
Quarter Ended Six Months Ended
June 30, June 30,
------------------ --------------------
2001 2000 2001 2000
---- ---- ---- ----
* Components of net charge-offs:
Real estate $ $ $ $ (30)
Commercial (6) (8) (17)
Installment (30) (24) (40) (32)
------ ------ ------ ------
Total $ (30) $ (30) $ (48) $ (79)
====== ====== ====== ======
The allowance for credit losses of $1,700,000 at June 30, 2001, was up
$105,000 from its level at March 31, 2001, and up $207,000 from December 31,
2000 levels. The allowance was equal to .85%, .82% and .79% of total loans at
June 30, 2001, March 31, 2001 and December 31, 2000, respectively. In the
opinion of management the allowance is adequate to absorb reasonably estimated
credit losses inherent in the Company's portfolio.
Securities
The Company's securities portfolio serves numerous purposes. Portions of
the portfolio may secure certain public 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, 2001 were $31,792,000
compared to $25,826,000 at December 31, 2000. Securities as a percentage of
total assets were 12.02% at June 30, 2001 compared to 10.39% at December 31,
2000. The level of securities relative to total assets has climbed slightly
throughout 2001 as the level of investments returns to more historical levels of
total assets.
15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Securities (Continued)
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 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, 2001,
the fair value of the securities available for sale exceeded their cost by
$285,000 ($179,000 after tax considerations).
Deposits
The Company's main source of funds remains deposits received from
individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit.
Total deposits increased 6.64% between December 31, 2000 and June 30, 2001,
in all deposit areas except money market checking and savings accounts.
The cost of funds for the first six months of 2001 was 4.96% compared to 4.63%
for the same period in 2000. The costs on all saving and demand deposits
decreased during the period while costs on certificates increased from 5.39% in
2000 to 5.93% in 2001. 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 seen a substantial increase in
deposits more than $100,000 as a result of slight premiums paid on larger
deposits, monies resulting from the cash sale of a local poultry company and
transfers from transaction accounts to certificates of deposit.
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, 2001, the Company's total risk based capital
ratio was 15.15% which is far above the regulatory minimum of 8.0%. The leverage
ratio of total capital to total assets was 10.21% at June 30, 2001 which is
comparable to the Company's peer group.
16
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liquidity exposure. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions and the Federal Reserve Bank of
Richmond. Both subsidiary banks have lines of credit with the Federal Home Loan
Bank of Pittsburgh although utilization has been insignificant. In the past,
growth in deposits has been sufficient to fund the net increase in loans and
investment securities.
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on the
balance sheet. Managing this risk involves regular monitoring of the interest
sensitive assets relative to interest sensitive liabilities over specific time
intervals.
At June 30, 2001 the Company had a 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 1
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
------------- -------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
------- ------- ----- ------- ------- -----
Interest Income
Loans
Commercial $ 40,804 $ 1,791 8.78% $ 31,379 $ 1,345 8.57%
Consumer 46,875 2,481 10.59% 39,479 2,001 10.14%
Real estate 107,332 4,651 8.67% 97,537 4,071 8.35%
------- -------- ------- ----- ------- ------- -----
Total 195,011 8,923 9.15% 168,395 7,417 8.81%
Federal funds sold 10,223 248 4.85% 4,493 131 5.83%
Interest bearing
deposits 5,830 132 4.53% 3,265 85 5.21%
Investments
Taxable 22,795 735 6.45% 27,229 832 6.11%
Tax exempt 1 3,290 125 7.60% 3,106 132 8.50%
------- ------ ----- ------- ------- -----
Total Earning
Assets 1 237,149 10,163 8.57% 206,488 8,597 8.33%
------- ------- ----- ------- ------- -----
Interest Expense
Demand deposits 29,096 310 2.13% 31,109 438 2.82%
Savings 24,498 307 2.51% 20,941 298 2.85%
Time deposits 145,614 4,314 5.93% 120,101 3,239 5.39%
Other borrowed
money 4,059 105 5.17% 2,485 68 5.47%
------- ------ ----- ------- ------- -----
Total Interest Bearing
Liabilities 203,267 5,036 4.96% 174,636 4,043 4.63%
------- ------- ----- ------- ------- -----
Net Interest Margin $ 5,127 $ 4,554
======= =======
Net Yield on Interest Earning
Assets 1 4.32% 4.41%
====== ======
1 On a taxable equivalent basis based on a tax rate of 37%.
17
Table 1 (Continued)
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
------------- -------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
------- ------- ----- ------- ------- -----
Interest Income
Loans
Commercial $ 42,478 $ 936 8.81% $ 31,862 $ 689 8.65%
Consumer 48,014 1,269 10.57% 40,376 1,025 10.15%
Real estate 108,182 2,345 8.67% 98,212 2,070 8.43%
------- ------- ----- ------- ------ -----
Total 198,674 4,550 9.16% 170,450 3,784 8.88%
Federal funds sold 10,124 116 4.58% 4,614 70 6.07%
Interest bearing
deposits 6,282 73 4.65% 4,177 53 5.08%
Investments
Taxable 23,653 380 6.43% 27,158 420 6.19%
Tax exempt 1 3,464 66 7.62% 3,074 65 8.46%
------- ------- ----- ------- ------ -----
Total Earning
Assets 1 242,197 5,185 8.56% 209,473 4,392 8.39%
------- ------- ----- ------- ------ -----
Interest Expense
Demand deposits 28,697 135 1.89% 31,674 234 2.96%
Savings 25,161 144 2.29% 20,790 152 2.92%
Time deposits 149,122 2,210 5.93% 121,666 1,664 5.47%
Other borrowed
money 4,171 48 4.60% 2,473 33 5.34%
------- ------- ----- ------- ------ -----
Total Interest Bearing
Liabilities 207,151 2,537 4.90% 176,603 2,083 4.72%
------- ------- ----- ------- ------ -----
Net Interest Margin $ 2,648 $ 2,309
======= ======
Net Yield on Interest Earning
Assets 1 4.32% 4.41%
====== ======
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, 2001
(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 $30,630 $82,852 $49,133 $27,245 $ 9,525 $199,385
Fed funds sold 7,645 7,645
Securities 4,519 5,200 13,219 2,057 6,797 31,792
Time deposits in
other banks 4,512 300 1,108 5,920
------ ------ ------ ------ ------ -------
Total 47,306 88,352 63,460 29,302 16,322 244,742
------ ------ ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Transaction
accounts 16,312 16,312
Money market
savings 10,966 10,966
Savings accounts 25,674 25,674
Time deposits more
than $100,000 3,687 26,308 9,822 3,683 43,500
Time deposits less
than $100,000 15,425 60,300 23,093 8,017 137 106,972
Other borrowed
money 46 1,271 970 994 906 4,187
------ ------ ------ ------ ------ -------
Total 72,110 87,879 33,885 12,694 1,043 207,611
------ ------ ------ ------ ------ -------
Rate sensitivity GAP (24,804) 473 29,575 16,608 15,279
Cumulative GAP (24,804) (24,331) 5,244 21,852 37,131
Ratio of cumulative
interest sensitive
assets to cumulative
interest sensitive
liabilities 65.60% 84.79% 102.70% 110.58% 117.88%
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 10, 2001, 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.
2) Ratification of S.B. Hoover &
Company, L.L.P. as auditors for
the year ending December 31, 2001.
3) Expansion of the Board of Directors
from eight to ten directors and the
appointment of Alan L. Brill and
Kathy Kimble to fill these
positions.
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.
(b) Reports on Form 8-K filed during
the three months ended June 30,
2001.
None
20
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 13, 2001