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, 2002
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, 2002
- ---------------------------------------- ------------------------------
Common Stock, par value - $5 501,898 shares
1
HIGHLANDS BANKSHARES, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2002 and 2001 2
Consolidated Balance Sheets - March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8K 17
SIGNATURES 18
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,
2002 2001
-------- --------
Interest Income
Interest and fees on loans $ 4,279 $ 4,373
Interest on federal funds sold 54 132
Interest on time deposits 33 59
Interest and dividends on investment securities
Taxable 319 355
Nontaxable 52 37
------- ------
Total Interest Income 4,737 4,956
------- ------
Interest Expense
Interest on time deposits over $100,000 580 579
Interest on other deposits 1,523 1,863
Interest on borrowed money 53 57
------- ------
Total Interest Expense 2,156 2,499
------- ------
Net Interest Income 2,581 2,457
Provision for Loan Losses 120 120
------- ------
Net Interest Income After Loan Losses 2,461 2,337
------- ------
Noninterest Income
Service charges 129 141
Other 150 133
------- ------
Total Noninterest Income 279 274
------- ------
Noninterest Expense
Salaries and employee benefits 1,049 934
Equipment and occupancy expense 252 229
Data processing 145 140
Other 434 417
------- ------
Total Noninterest Expense 1,880 1,720
------- ------
Income Before Income Taxes 860 891
Provision for Income Taxes 260 297
------- ------
Net Income $ 600 $ 594
======= ======
Per Share Data
Net Income $ 1.20 $ 1.18
====== ======
Cash Dividends $ .37 $ .34
====== ======
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,
2002 2001
-------- --------
ASSETS
Cash and due from banks - noninterest bearing $ 6,634 $ 6,492
Time deposits in other banks 5,423 6,334
Federal funds sold 12,877 13,284
Securities held to maturity (note 2) 1,602 1,603
Securities available for sale (note 3) 29,708 29,460
Other investments (note 4) 792 792
Loans, net of unearned interest (note 5) 209,599 205,469
Less allowance for loan losses (note 6) (1,623) (1,602)
-------- --------
Net Loans 207,976 203,867
Bank premises and equipment 7,012 7,056
Interest receivable 2,062 1,818
Investments in insurance contracts 5,143 5,100
Other assets 1,105 972
------- -------
Total Assets $280,334 $276,778
======= =======
LIABILITIES
Deposits:
Noninterest bearing
Demand deposits $ 31,612 $ 29,279
Interest bearing
Money market and checking 19,276 17,936
Money market savings 12,345 11,407
Savings 28,950 26,782
Time deposits over $100,000 44,094 45,182
All other time deposits 108,631 111,456
------- -------
Total Deposits 244,908 242,042
Borrowed money 4,401 4,523
Accrued expenses and other liabilities 2,371 1,903
------- -------
Total Liabilities 251,680 248,468
------- -------
STOCKHOLDERS' EQUITY
Common stock ($5 par value, 3,000,000 shares
authorized, 546,764 shares issued) 2,734 2,734
Surplus 1,662 1,662
Retained earnings 25,038 24,624
Accumulated other comprehensive income 213 283
------- -------
Treasury stock (at cost, 44,866 shares
in 2002 and 2001) (993) (993)
-------- --------
Total Stockholders' Equity 28,654 28,310
------- -------
Total Liabilities and Stockholders' Equity $280,334 $276,778
======= =======
The accompanying notes are an integral part of these statements.
4
HIGHLANDS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
Balances, December 31, 2001 $ 2,734 $ 1,662 $ 24,624 $ 283 $ (993) $ 28,310
Comprehensive Income
Net income 600 600
Net change in unrealized
appreciation on investment
securities available for sale,
net of taxes (70) (70)
------
Total Comprehensive Income 530
Dividends paid (186) (186)
-------- ------ -------- ----- ----- -------
Balances, March 31, 2002 $ 2,734 $ 1,662 $ 25,038 $ 213 $ (993) $ 28,654
======== ====== ========= ===== ===== ========
Accumulated
Other
Common Retained Comprehensive 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
====== ====== ======== ==== ===== =======
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,
2002 2001
-------- --------
Cash Flows from Operating Activities:
Net income $ 600 $ 594
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 132 126
Income from insurance contracts (43) (48)
Net amortization 68 4
Provision for loan losses 120 120
(Increase) decrease in interest receivable (244) 27
(Increase) decrease in other assets (93) 10
Increase in accrued expenses 468 344
------- ------
Net Cash Provided by Operating Activities 1,008 1,177
------- ------
Cash Flows from Investing Activities:
Net change in federal funds sold 408 (5,256)
Proceeds from maturities of securities
available for sale 2,636 6,071
Proceeds from maturities of securities
held to maturity 1 65
Purchase of securities available for sale (3,063) (7,562)
Net change in time deposits in other banks 911 78
Net change in loans (4,229) (4,714)
Purchase of property and equipment (89) (176)
-------- ------
Net Cash Used in Investing Activities (3,425) (11,494)
-------- -------
Cash Flows from Financing Activities:
Net increase in deposits 2,867 8,858
Dividends paid in cash (186) (171)
Repayment of borrowed money (122) (106)
-------- ------
Net Cash Provided by Financing Activities 2,559 8,581
------- ------
Net Increase (Decrease) in Cash and Cash Equivalents 142 (1,736)
Cash and Cash Equivalents, Beginning of Period 6,492 7,062
------- ------
Cash and Cash Equivalents, End of Period $ 6,634 $ 5,326
======= ======
Supplemental Disclosures:
Cash Paid For:
Income taxes $ 0 $ 5
Interest 2,116 2,424
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 U. S. 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, 2002 and the results of operations for the
three month periods ended March 31, 2002 and 2001. The notes included
herein should be read in conjunction with the notes to financial
statements included in the 2001 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, 2002 and December 31, 2001, are as follows:
2002 2001
Amortized Market Amortized Market
Cost Value Cost Value
Mortgage-Backed
Securities $ 5 $ 6 $ 6 $ 6
Obligations of states and
political subdivisions 1,597 1,641 1,597 1,633
------ ------ ----- ------
Total $ 1,602 $ 1,647 $1,603 $ 1,639
====== ====== ===== ======
NOTE 3 SECURITIES AVAILABLE FOR SALE:
The amortized cost and fair value of securities available for sale
as of March 31, 2002 and December 31, 2001 are as follows:
2002 2001
Amortized Market Amortized Market
Cost Value Cost Value
US Treasury securities and
obligations of US
Government corporations
and agencies $12,089 $12,230 $10,563 $10,760
Mortgage-Backed 5,962 6,036 6,527 6,609
Obligations of states and
political subdivisions 5,738 5,802 6,319 6,381
Other investments 5,580 5,640 5,602 5,710
------ ------ ----- ------
Total $29,369 $29,708 $29,011 $29,460
====== ====== ====== ======
7
HIGHLANDS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 OTHER INVESTMENTS:
Other investments totaling $791,650 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, 2002 and December
31, 2001, is as follows:
2002 2001
---- ----
Commercial $ 41,120 $ 42,204
Real estate- construction 5,056 3,868
- mortgages 116,122 111,668
Consumer installment 47,439 47,927
------- -------
Total 209,737 205,667
Unearned interest (138) (198)
-------- --------
Net loans outstanding $209,599 $205,469
======= =======
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2002 and 2001 follows:
2002 2001
---- ----
Balance, beginning of period $ 1,602 $ 1,493
Provisions charged to operating expenses 120 120
Loan recoveries 23 86
Loan charge-offs (122) (104)
-------- -------
Balance, end of period $ 1,623 $ 1,595
======= =======
NOTE 7 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 $5,143,000 at March 31, 2002 and $5,100,000 at
December 31, 2001.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's net income was $600,000 in the first quarter of 2002, an
increase of 1.01% compared to the first quarter of 2001. Earnings per share were
$1.20 for the first quarter of 2002 compared to $1.18 per share for the same
quarter in 2001. The Company's annualized return on average equity was 8.43% in
the first quarter of 2002 compared to 8.95% for the first quarter of 2001.
Return on average assets was .86% for 2002 and .94% for 2001, respectively.
The increase in earnings per share for the first quarter was due primarily
to a 5.05% increase in net interest income. Growth in average earning assets
(8.13%) and interest bearing liabilities (8.38%) within the last twelve months
offset a declining net interest spread between quarters. The increase in the tax
equivalent net interest income was 5.32% for the period. The provision for loan
losses of $120,000 was the same as 2001 and is reflective of lower net charge
offs in 2002. Noninterest income increased 1.82% because of greater income on
investments in insurance contracts. Other noninterest expenses increased 9.30%,
mainly the result of operating expenses at the new branch in Gore, Virginia
which opened in June 2001 and salary/benefit increases.
Net Interest Income
The Company's net yield on interest earning assets on a tax equivalent basis
was 4.08% in the first quarter of 2002 compared to 4.27% for the first quarter
of 2001. 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 7.61% in 2001 to 8.19% in 2002 due to internal pricing. Rates on
consumer loans decreased 146 basis points and rates on real estate loans
declined 65 basis points. The overall decrease of 83 basis points in returns on
average loans was offset by decreases in the rates paid on deposits and borrowed
money (see below) and declines in short-term investment rates.
For the first quarter of 2002, the Company saw an overall decrease of 151
basis points in the yields on investment securities compared to 2001 results.
The increase is reflective of recent reinvestments at lower rates. Average
investments in securities have increased over the last twelve months as
deposit growth has outpaced loan demand creating excess cash to invest. Interest
rates earned on fed funds sold and interest bearing deposits declined 297 basis
points as rates were cut eleven times in 2001 by the Federal Reserve Bank ("The
Fed") by one-quarter to one-half point each time. The increase in federal funds
is intended to act as a source of funding should maturing, high rate
certificates leave the Banks. The Company experienced a $3.9 million decline
in the balance of certificates in the first quarter of 2002 due to repricing of
maturing certificates at much lower rates but this outflow has been met by
increased levels of demand and savings deposits.
Customers appear reluctant to commit to long-term, fixed rates on
certificates when rates are at historical lows and are instead placing their
deposits in accounts that are highly liquid and will allow them to respond
quickly when rates increase.
Interest rates paid on transaction and savings accounts declined a combined
117 basis points due to lower rates resulting from Fed action. The average
balance in time deposits grew 8.74% in 2002 compared to 2001 and was a source of
funding for the loan growth discussed earlier. A 99 point basis point decrease
in rates paid on time deposits between 2001 and 2002 reflects the declining rate
environment experienced throughout 2001, especially after the tragedies of
September 11.
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 has 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, variable rate basis to fund the
renovation and expansion at the Capon Valley Bank. The Bank anticipates
refinancing this variable rate debt when long-term interest rates are favorable.
The cost of all FHLB borrowings decreased 103 basis points from 2001 to 2002 due
to rate changes in market.
A complete yield analysis is shown as Table I on page 15.
Noninterest Income
Noninterest income for 2002 was virtually unchanged from 2001 levels.
Service charge income declined by 8.50% and other operating income increased by
12.78%. Service charge income declined as the result of a single customer being
sold to new investors who infused funds in the business and eliminated
overdrafts and their related fees. The net increase in other income is primarily
due to a corresponding increase in underwriting revenue of HBI Life Insurance
Company.
Noninterest Expenses
Overall noninterest expense increased 9.30% in 2002 as the result of
operating expense increases at Capon Valley Bank's new Gore Branch which opened
in June 2001, a marketing campaign with additional advertising expenses and an
increase in expenses relative to employee benefit plan administration of 401-K.
Personnel expense increases of 12.31% were the result of a 8.08% increase in
full time equivalent employees due to growth and reorganization and an increase
in average wages. Expenses for occupancy, equipment and data processing expenses
increased 7.59% due to costs of upgrading data processing equipment and
equipping an additional branch facility. Other noninterest expenses increased
4.08% due to asset growth and additional branch locations. The overall increase
in noninterest expense of 9.30% is in line with management estimates for the
first quarter of the year and the increase in average earning assets of 8.13%.
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,
northern Pendleton 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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Loan Portfolio (Continued)
Loans outstanding increased $4,130,000 or 2.01% in the first quarter in 2002
compared to levels at December 31, 2001. 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 4.88% rise in real estate construction
and mortgage loans was primarily responsible for the first quarter increase
with modest losses in consumer and commercial lending. The loan to deposit
ratio was 85.58% at March 31, 2002 compared to 84.89% at December 31, 2001.
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 $951,000 at March
31, 2002 compared to $885,000 in nonaccrual loans at December 31, 2001. The
increase was the result of one mortgage loan that went into bankruptcy and is
pending foreclosure.
Real estate acquired through foreclosure was $72,000 at March 31, 2002 and
$77,000 at December 31, 2001. 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, 2002,
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,
2002 2001
-------- --------
Balance, beginning of period $ 1,602 $ 1,493
Net charge-offs (recoveries)
Charge-offs (122) (104)
Recoveries 23 86
------ ------
Total net charge-offs * (99) (18)
Provision for credit losses 120 120
------ ------
Balance, End of Period $ 1,623 $ 1,595
====== ======
* Components of net charge-offs:
Real estate $ (8) $
Commercial (16) (8)
Consumer (75) (10)
------- ------
Total $ (99) $ (18)
======= ======
The allowance for credit losses of $1,623,000 at March 31, 2002, was up
$21,000 from its level at December 31, 2001. The increase was due to net loan
growth in the first quarter. The allowance was equal to .77% and .78% of total
loans outstanding at March 31, 2002 and December 31, 2001, 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)
Allowance for Loan Losses (Continued)
The following table shows the allocation of loans in the loan portfolio and
the corresponding amounts of the allowance allocated by loan types as of March
31, 2002 and December 31, 2001:
March 31, 2002 December 31, 2001
-------------- -----------------
Loan Allowance Percentage Percentage of Allowance Percentage Percentage of
Type Allocation of Allowance Total Loans Allocation of Allowance Total Loans
Commercial $ 538 33% 20% $ 486 30% 21%
Mortgage 624 39% 58% 576 36% 56%
Consumer 461 28% 22% 450 28% 23%
Unallocated % % 90 6% %
----- ---- ---- ----- --- ---
Totals $1,623 100% 100% $1,602 100% 100%
===== === ==== ===== === ===
Until recently, the allowance allocation weighted toward commercial loans
due to its sensitivity to economic conditions. During 2001 the adoption of FFIEC
guidelines SAB 102 placed more weight of the allowance toward the higher balance
makeup of the portfolio in combination with specific allocations toward impaired
loans. As a result, a shift of weighted allowance has gone to mortgage loans
which carry 58% of the balances and 39% of the allocation as the highest
category currently.
Commercial loans carry the largest percentage of the allowance as these
loans tend to be more sensitive to changes in economic conditions and generally
show losses earlier than consumer and mortgage lending. Mortgage lending carries
a lower percentage of the allowance as losses on these types of loans have shown
a lower loss rate in previous periods and tend to be well collateralized.
Consumer and credit card losses tend to have a loss rate that is reflective both
of the current economy and the levels of collateral required by the lender and
have been a moderate source of losses in prior periods.
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, 2002
were $32,102,000 compared to $31,855,000 at December 31, 2001. Total securities
and other investments as a percentage of total assets were 11.45% at March 31,
2002 compared to 11.51% at December 31, 2001. The modest increase in security
investments is due to overall asset growth.
13
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 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, 2002, the market value of the securities available for sale
exceeded their cost by $338,000 ($213,000 after tax effect).
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 1.18% between December 31, 2001 and March 31,
2002, exclusively in the form of demand, savings and money market accounts. The
cost of funds for the first quarter of 2002 was 3.99% compared to 5.01% for the
same quarter in 2001. Primarily responsible for this decrease was the general
decline in interest rates throughout 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 did see a
decline in time deposits as customers have been reluctant to commit deposits to
longer terms when rates are at historic lows.
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, 2002, 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, 2002 which is in
line with the Company's peer group.
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.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Liquidity (Continued)
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, growths
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, 2002 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 necessary actions to correct 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).
15
TABLE I
HIGHLANDS BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
-------------------- --------------------
Average Income/ Average Income/
Balance2 Expense Rates Balance2 Expense Rates
Interest Income
Loans
Commercial $11,428 $ 235 8.23% $12,246 $ 233 7.61%
Consumer 54,577 1,569 11.50 51,927 1,683 12.96
Real estate 139,802 2,475 7.08 127,175 2,457 7.73
------- ------ ----- ------- ----- ------
Total Loans 205,807 4,279 8.31 191,348 4,373 9.14
Federal funds sold 13,012 54 1.66 10,321 132 5.12
Interest bearing
deposits 5,348 33 2.47 5,377 59 4.39
Investments
Taxable 26,408 319 4.83 21,937 355 6.47
Tax exempt 1 5,101 82 6.43 3,116 59 7.57
----- ------ ----- ------ ----- -----
Total Earning
Assets 1 255,676 4,767 7.46 232,099 4,978 8.58
------- ------ ----- ------- ----- ------
Interest Expense
Demand deposits 29,397 48 .65 29,494 175 2.34
Savings 27,697 147 2.12 23,835 163 2.74
Time deposits 154,520 1,908 4.94 142,106 2,104 5.93
Other borrowed
money 4,467 53 4.75 3,947 57 5.78
------- ------ ----- ------ ----- ------
Total Interest
Bearing
Liabilities $216,081 2,156 3.99 $199,382 2,499 5.01
======= ------ ----- ======= ----- ------
Net Interest Margin $ 2,611 $2,479
====== =====
Net Yield on Interest
Earning Assets 1 4.08% 4.27%
====== ======
1 Yields are on a taxable equivalent basis.
2 Includes loans in nonaccrual status.
16
TABLE II
HIGHLANDS BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31, 2002
(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 $29,161 $92,008 $54,537 $24,467 $ 9,426 $209,599
Fed funds sold 12,877 12,877
Securities 1,578 5,025 16,307 2,304 6,888 32,102
Time deposits in
other banks 5,123 200 100 5,423
----- ------ ------ ------ ------ ------
Total 48,739 97,233 70,944 26,771 16,314 260,001
------ ------ ------ ------ ------ -------
INTEREST BEARING LIABILITIES
Transaction accounts 19,276 19,276
Money market savings 12,345 12,345
Savings accounts 28,950 28,950
Time deposits more
than $100,000 12,278 17,865 11,835 2,116 44,094
Time deposits less
than $100,000 23,112 50,339 28,713 6,467 108,631
Other borrowed money 125 308 1,323 705 1,940 4,401
----- ------ ------ ------ ------ ------
Total 96,086 68,512 41,871 9,288 1,940 217,697
------ ------ ------ ------ ------ -------
Rate sensitivity GAP (47,347) 28,721 29,073 17,483 14,374 42,304
Cumulative GAP (47,347) (18,626) 10,447 27,930 42,304
Ratio of cummulative
interest sensitive assets
to cummulative interest
sensitive liabilities 50.72% 88.68% 105.06% 112.95% 119.43%
Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.
17
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - (a)Exhibits
--------
3 (i) Articles of Incorporation of
Highlands Bankshares, Inc. are
incorporated by reference to
Appendix C to Highlands
Bankshares, Inc.'s Form S-4 filed
October 20, 1986; amended on
December 8, 1997 and
incorporated in 1997 Form 10-KSB.
3 (ii) Bylaws of Highlands
Bankshares, Inc. are
incorporated by reference to
Appendix D to Highland
Bankshares, Inc.'s Form S-4
filed October 20, 1986;
amended on December 8, 1997
and incorporated in 1997 Form
10-KSB.
(b) Reports on Form 8-K filed
during the three months ended
March 31, 2002
None
18
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.
/s/ LESLIE A. BARR
--------------------------
Leslie A. Barr
President
/s/ ALAN L. BRILL
--------------------------
Alan L. Brill
Secretary
May 14, 2002