UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 0-27622
HIGHLANDS BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia (State or Other Jurisdiction of Incorporation or Organization) | 54-1796693 (I.R.S. Employer Identification No.) |
P.O. Box 1128 Abingdon, Virginia (Address of Principal Executive Offices) | 24212-1128 (Zip Code) |
276-628-9181
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
2,661,787 shares of common stock, par value $1.25 per share,
outstanding as of May 13, 2004
Highlands Bankshares, Inc.
FORM 10-Q
For the Quarter Ended March 31, 2004
INDEX
PART I. FINANCIAL INFORMATION
| PAGE |
Item 1. Financial Statements | |
Consolidated Balance Sheets March 31, 2004 (Unaudited) and December 31, 2003 (Note 1) | |
3 | |
| |
Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2004 and 2003 | |
4 | |
. | |
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2004 and 2003 | |
5 | |
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2004 and 2003 | |
6 | |
Notes to Consolidated Financial Statements (Unaudited) | 7-9 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
10-13 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 14 |
Item 4. Controls and Procedures | 14-15 |
| |
PART II. OTHER INFORMATION | |
Item 1. Legal Proceedings | 16 |
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity 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. Exhibits and Reports on Form 8-K | 16 |
SIGNATURES | 17 |
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(Amounts in thousands)
ASSETS | (Unaudited) March 31, 2004 | (Note 1) December 31, 2003 | ||
Cash and due from banks | $ 11,328 | $ 14,473 | ||
Federal funds sold | 357 | 389 | ||
Total Cash and Cash Equivalents | 11,685 | 14,862 | ||
Investment securities available for sale (amortized cost $131,980 as of March 31, 2004, $122,336 as of December 31, 2003) | 133,185 | 122,064 | ||
Other investments, at cost | 2,600 | 2,900 | ||
Loans, net of allowance for loan losses of $4,279 at March 31, 2004, $4,274 at December 31, 2003 | 375,143 | 373,534 | ||
Premises and equipment, net | 15,794 | 15,465 | ||
Interest receivable | 2,785 | 2,749 | ||
Other assets | 11,489 | 11,842 | ||
Total Assets | $ 552,681 | $ 543,416 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
LIABILITIES | ||||
Deposits: | ||||
Non-interest bearing | $ 63,436 | $ 59,057 | ||
Interest bearing | 389,829 | 390,952 | ||
Total Deposits | 453,265 | 450,009 | ||
Interest, taxes and other liabilities | 2,983 | 2,244 | ||
Other short-term borrowings | 36,383 | 33,000 | ||
Long-term debt | 16,417 | 16,429 | ||
Capital securities | 6,300 | 6,300 | ||
Total Other Liabilities | 62,083 | 57,973 | ||
Total Liabilities | 515,348 | 507,982 | ||
STOCKHOLDERS’ EQUITY | ||||
Common stock (2,662 and 2,659 shares issued and outstanding, respectively) | 3,327 | 3,324 | ||
Additional paid-in capital | 6,355 | 6,305 | ||
Retained earnings | 26,855 | 25,984 | ||
Accumulated other comprehensive income | 796 | (179) | ||
Total Stockholders’ Equity | 37,333 | 35,434 | ||
Total Liabilities and Stockholders’ Equity | $ 552,681 | $ 543,416 |
See accompanying Notes to Consolidated Financial Statements
- 3 -
Consolidated Statements of Income
(Amounts in thousands, except for per share data)
(Unaudited)
Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | ||
INTEREST INCOME | |||
Loans receivable and fees on loans | $ 6,169 | $ 6,236 | |
Securities available for sale: | |||
Taxable | 513 | 718 | |
Exempt from taxable income | 636 | 392 | |
Other investment income | 20 | 26 | |
Federal funds sold | 3 | 31 | |
Total Interest Income | 7,341 | 7,403 | |
INTEREST EXPENSE | |||
Deposits | 2,307 | 2,688 | |
Federal funds purchased | 10 | - | |
Other borrowed funds | 655 | 649 | |
Total Interest Expense | 2,972 | 3,337 | |
Net Interest Income | 4,369 | 4,066 | |
Allowance for Loan Losses | 348 | 470 | |
Net Interest Income after Allowance for Loan Losses | 4,021 | 3,596 | |
NON-INTEREST INCOME | |||
Securities gains (losses), net | 53 | 102 | |
Service charges on deposit accounts | 619 | 607 | |
Other service charges, commissions and fees | 176 | 182 | |
Other operating income | 183 | 204 | |
| |||
Total Non-Interest Income | 1,031 | 1,095 | |
NON-INTEREST EXPENSE | |||
Salaries and employee benefits | 2,100 | 1,870 | |
Occupancy expense of bank premises | 189 | 204 | |
Furniture and equipment expense | 408 | 411 | |
Other operating expense | 890 | 783 | |
Total Non-Interest Expense | 3,587 | 3,268 | |
Income Before Income Taxes | 1,465 | 1,423 | |
Income Tax Expense | 275 | 338 | |
Net Income | $ 1,190 | $ 1,085 | |
Basic Earnings Per Common Share – Weighted Average | $ 0.45 | $ 0.41 | |
Earnings Per Common Share – Assuming Dilution | $ 0.42 | $ 0.39 | |
Dividends Per Share | $ 0.12 | $ 0.10 |
See accompanying Notes to Consolidated Financial Statements
- 4 -
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Three Months Ended | Three Months Ended | ||
March 31, 2004 | March 31, 2003 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||
Net income | $ 1,190 | $ 1,085 | |
Adjustments to reconcile net income to net cash provided by operating | |||
activities: | |||
Provision for loan losses | 348 | 470 | |
Depreciation and amortization | 241 | 240 | |
Net realized gains on available-for-sale securities | (53) | (102) | |
Net amortization on securities | 114 | 34 | |
Amortization of capital issue costs | 3 | 3 | |
Increase in interest receivable | (36) | (26) | |
Increase in other assets | (164) | (577) | |
Increase (decrease) in interest, taxes and other liabilities | 739 | 511 | |
Net cash provided by (used in) operating activities | 2,382 | (1,638) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |||
Securities available for sale: | |||
Proceeds from sale of debt and equity securities | 4,511 | 2,350 | |
Proceeds from maturities of debt and equity securities | 4,488 | 6,102 | |
Purchase of debt and equity securities | (18,718) | (17,247) | |
Purchase of other investments | 300 | (185) | |
Net increase in loans | (1,958) | (5,540) | |
Premises and equipment expenditures | (543) | (315) | |
Net cash used in investing activities | (11,920) | (14,835) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |||
Net increase (decrease) in time deposits | (6,017) | 5,177 | |
Net increase in demand, savings and time deposits | 9,273 | 12,248 | |
Net increase (decrease) in short-term borrowings | 3,383 | (8) | |
Net decrease in long-term debt | (12) | (5) | |
Cash dividends paid | (319) | - | |
Proceeds from exercise of common stock options | 53 | 22 | |
Proceeds from issuance of common stock through Dividend Reinvestment and | |||
Stock Purchase Plan | - | 3 | |
Net cash provided by financing activities | 6,361 | 17,437 | |
Net increase in cash and cash equivalents | (3,177) | 4,240 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 14,862 | 18,501 | |
CASH AND CASH EQUIVALENTS AT END OF QUARTER | $ 11,685 | $ 22,741 | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||
Cash paid during the year for: | |||
Interest | $ 3,198 | $ 3,327 | |
Income taxes | $ - | $ - | |
See accompanying Notes to Consolidated Financial Statements
- 5 -
Consolidated Statements of Changes in Stockholders’ Equity
(Amounts in thousands)
(Unaudited)
Accumulated | |||||||
Additional | Other | Total | |||||
Common Stock | Paid-in | Retained | Comprehensive | Stockholders’ | |||
Shares | Par Value | Capital | Earnings | Income | Equity | ||
Balance, December 31, 2002 | 2,648 | $ 3,309 | $ 6,150 | $ 21,729 | $ 1,011 | $ 32,199 | |
Comprehensive income: | |||||||
Net income | - | - | - | 1,085 | - | 1,085 | |
Change in unrealized gain (loss) on securities available for sale, net of deferred income tax expense of $230 | - | - | - | - | 448 | 448 | |
Less: reclassification adjustment | - | - | - | - | (67) | (67) | |
net of deferred tax expense of $35 | |||||||
Total comprehensive income | - | - | - | - | - | 1,751 | |
Common stock issued for stock options exercised, net | 3 | 4 | 19 | - | - | 23 | |
Common stock issued for dividend reinvestment and optional cash purchase plan | - | - | 3 | - | - | 3 | |
Cash dividend | - | - | - | - | - | - | |
Balance, March 31, 2003 | 2,651 | $ 3,313 | $ 6,172 | $ 22,549 | $ 1,392 | $ 33,426 | |
Balance, December 31, 2003 | 2,659 | $ 3,324 | $ 6,305 | $ 25,984 | $ (179) | $ 35,434 | |
Comprehensive income: | |||||||
Net income | - | - | - | 1,190 | - | 1,190 | |
Change in unrealized gain (loss) on securities available for sale, net of deferred income tax benefit of $520 | - | - | - | (1,010) | (1,010) | ||
Less: reclassification adjustment | - | - | - | (35) | (35) | ||
net of deferred tax expense of $18 | |||||||
Total comprehensive income | - | - | - | - | - | 2,165 | |
Common stock issued for stock options exercised, net | 3 | 3 | 50 | - | - | 53 | |
Common stock issued for dividend reinvestment and optional cash purchase plan | - | - | - | - | - | - | |
Cash dividend | - | - | - | (319) | - | (319) | |
Balance, March 31, 2004 | 2,662 | $ 3,327 | $ 6,355 | $ 26,855 | $ 796 | $ 37,333 | |
See accompanying Notes to Consolidated Financial Statements
- 6 -
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
Note 1. - General
The consolidated financial statements of Highlands Bankshares, Inc. (the “Company”) conform to United States generally accepted accounting principles and to industry practices. The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. The consolidated balance sheet as of December 31, 2003 has been extracted from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2003 Form 10-K. The results of operations for the three-month periods ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year.
Note 2. - Allowance for Loan Losses
A summary of transactions in the consolidated allowance for loan losses for the three months ended March 31, is as follows:
2004 | 2003 | |
Balance, January 1 | $ 4,274 | $ 3,877 |
Provision | 348 | 470 |
Recoveries | 19 | 30 |
Charge-offs | (362) | (335) |
Balance, March 31 | $ 4,279 | $ 4,042 |
Note 3. - Income Taxes
Income tax expense for the three months ended March 31 is different than the amount computed by applying the statutory corporate federal income tax rate of 34% to income before taxes. The reasons for these differences are as follows:
2004 | 2003 | |
Tax expense at statutory rate | $ 498 | $ 484 |
Increase (reduction) in taxes from: | ||
Tax-exempt interest | (216) | (133) |
Other, net | (7) | (13) |
Provision for income taxes | $ 275 | $ 338 |
- 7 -
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
Note 4. – Capital Requirements
Regulators of the Company and its subsidiaries, including Highlands Union Bank (the “Bank”), have implemented risk-based capital guidelines which require the maintenance of certain minimum capital as a percent of assets and certain off-balance sheet items adjusted for predefined credit risk factors. The regulatory minimum for Tier 1 and combined Tier 1 and Tier 2 capital ratios are 4.0% and 8.0%, respectively. Tier 1 capital includes tangible equity reduced by goodwill and certain other intangibles. Tier 2 capital includes portions of the allowance for loan losses, not to exceed Tier 1 capital. In addition to the risk-based guidelines, a minimum leverage ratio (Tier 1 capital as a percentage of average total consolidated assets) of 4.0% is required. This minimum may be increased by at least 1.0% or 2.0% for entities with higher levels of risk or that are experiencing or anticipating significant growth. The following table contains the capital ratios for the Company and the Bank as of March 31, 2004.
Entity | Tier 1 | Combined Capital | |