UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
DC 20549
|
FORM
10-Q
(Mark
One)
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended September 30, 2008.
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
File Number:
0-16761
HIGHLANDS
BANKSHARES, INC.
(Exact
name of registrant as specified in its charter)
West
Virginia
|
55-0650793
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(IRS
Employer Identification No.)
|
P.O. Box
929
Petersburg,
WV 26847
(Address
of Principal Executive Offices, Including Zip Code)
304-257-4111
(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 a large accelerated filer, an accelerated filed, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
Accelerated Filer [ ]
|
Accelerated
Filer [ ]
|
Non-accelerated
filer [ ]
(Do not check if a smaller
reporting company)
|
Smaller
reporting company [X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [ ] Yes [X]
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date. As of July 31, 2008: 1,336,873
shares of Common Stock, $5 Par Value
HIGHL
A
NDS BANKSHARES, INC.
|
Quarterly
Report on Form 10Q For The Period Ended September 30,
2008
|
|
|
|
|
INDEX
|
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Page
|
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2
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3
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4
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5
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6
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7
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12
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25
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|
|
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26
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|
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26
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26
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26
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|
|
|
|
27
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|
27
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27
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27
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27
|
PA
R
T
I FINANCIAL
INFORMATION
It
e
m
1. Financial
Statements
H
IGHLANDS BANKSHARES, INC.
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
(In
Thousands of Dollars, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Interest
Income
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
18,774
|
|
|
$
|
18,830
|
|
Interest
on federal funds sold
|
|
|
231
|
|
|
|
600
|
|
Interest
on deposits in other banks
|
|
|
38
|
|
|
|
100
|
|
Interest
and dividends on securities
|
|
|
835
|
|
|
|
1,033
|
|
Total
Interest Income
|
|
|
19,878
|
|
|
|
20,563
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
6,467
|
|
|
|
7,458
|
|
Interest
on federal funds purchased
|
|
|
10
|
|
|
|
0
|
|
Interest
on borrowed money
|
|
|
363
|
|
|
|
447
|
|
Total
Interest Expense
|
|
|
6,840
|
|
|
|
7,905
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
|
13,038
|
|
|
|
12,658
|
|
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
|
|
|
636
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income After Provision for Loan Losses
|
|
|
12,402
|
|
|
|
12,172
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
Service
Charges
|
|
|
1,286
|
|
|
|
979
|
|
Investment
in insurance contracts
|
|
|
208
|
|
|
|
173
|
|
Gains
on securities
|
|
|
109
|
|
|
|
0
|
|
Gains
on sale of fixed assets
|
|
|
32
|
|
|
|
0
|
|
Other
non-interest income
|
|
|
389
|
|
|
|
355
|
|
Total
Non-interest Income
|
|
|
2,024
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
4,740
|
|
|
|
4,467
|
|
Equipment
and occupancy expense
|
|
|
1,020
|
|
|
|
1,043
|
|
Data
processing expense
|
|
|
616
|
|
|
|
649
|
|
Legal
and professional fees
|
|
|
413
|
|
|
|
430
|
|
Other
non-interest expense
|
|
|
1,782
|
|
|
|
1,728
|
|
Total
Non-interest Expense
|
|
|
8,571
|
|
|
|
8,317
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision For Income Taxes
|
|
|
5,855
|
|
|
|
5,362
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
2,096
|
|
|
|
1,985
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
3,759
|
|
|
$
|
3,377
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2.69
|
|
|
$
|
2.35
|
|
Cash
Dividends
|
|
$
|
.81
|
|
|
$
|
.75
|
|
Weighted
Average Common Shares Outstanding
|
|
|
1,398,773
|
|
|
|
1,436,874
|
|
The
accompanying notes are an integral part of these
statements.
|
|
HIGHLANDS
BANKSHARES, INC.
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
(In
Thousands of Dollars, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Interest
Income
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
6,162
|
|
|
$
|
6,471
|
|
Interest
on federal funds sold
|
|
|
8
|
|
|
|
195
|
|
Interest
on deposits in other banks
|
|
|
7
|
|
|
|
30
|
|
Interest
and dividends on securities
|
|
|
294
|
|
|
|
383
|
|
Total
Interest Income
|
|
|
6,471
|
|
|
|
7,079
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,916
|
|
|
|
2,652
|
|
Interest
on federal funds purchased
|
|
|
10
|
|
|
|
0
|
|
Interest
on borrowed money
|
|
|
128
|
|
|
|
144
|
|
Total
Interest Expense
|
|
|
2,054
|
|
|
|
2,796
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
|
4,417
|
|
|
|
4,283
|
|
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
|
|
|
238
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income After Provision for Loan Losses
|
|
|
4,179
|
|
|
|
4,138
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
Service
Charges
|
|
|
467
|
|
|
|
347
|
|
Investment
in insurance contracts
|
|
|
89
|
|
|
|
57
|
|
Gain
on sale of fixed assets
|
|
|
7
|
|
|
|
0
|
|
Other
non-interest income
|
|
|
124
|
|
|
|
138
|
|
Total
Non-interest Income
|
|
|
687
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
1,599
|
|
|
|
1,504
|
|
Equipment
and occupancy expense
|
|
|
341
|
|
|
|
352
|
|
Data
processing expense
|
|
|
200
|
|
|
|
221
|
|
Legal
and professional fees
|
|
|
148
|
|
|
|
153
|
|
Other
non-interest expense
|
|
|
622
|
|
|
|
627
|
|
Total
Non-interest Expense
|
|
|
2,910
|
|
|
|
2,857
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision For Income Taxes
|
|
|
1,956
|
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
656
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,300
|
|
|
$
|
1,133
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
.97
|
|
|
$
|
.79
|
|
Cash
Dividends
|
|
$
|
.27
|
|
|
$
|
.25
|
|
Weighted
Average Common Shares Outstanding
|
|
|
1,337,311
|
|
|
|
1,436,874
|
|
The
accompanying notes are an integral part of these
statements.
|
|
HIGHLANDS
BANKSHARES, INC.
|
|
CONSOLIDATED
BALA
N
CE SHEETS
|
|
(In
Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks—non-interest bearing
|
|
$
|
6,774
|
|
|
$
|
7,935
|
|
Deposits
in other banks—interest bearing
|
|
|
492
|
|
|
|
1,853
|
|
Federal
funds sold
|
|
|
828
|
|
|
|
14,246
|
|
Securities
available for sale, at market value
|
|
|
23,398
|
|
|
|
26,090
|
|
Restricted
investments
|
|
|
1,873
|
|
|
|
1,498
|
|
Loans
|
|
|
315,315
|
|
|
|
310,199
|
|
Allowance
for loan losses
|
|
|
(3,651
|
)
|
|
|
(3,577
|
)
|
Bank
premises and equipment, net of depreciation
|
|
|
8,085
|
|
|
|
8,104
|
|
Interest
receivable
|
|
|
2,149
|
|
|
|
2,273
|
|
Investment
in life insurance contracts
|
|
|
6,427
|
|
|
|
6,300
|
|
Goodwill
|
|
|
1,534
|
|
|
|
1,534
|
|
Other
intangible assets
|
|
|
1,264
|
|
|
|
1,572
|
|
Other
Assets
|
|
|
3,585
|
|
|
|
2,909
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
368,073
|
|
|
$
|
380,936
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
$
|
49,011
|
|
|
$
|
48,605
|
|
Savings
and interest bearing demand deposits
|
|
|
69,364
|
|
|
|
73,736
|
|
Time
deposits
|
|
|
192,707
|
|
|
|
201,397
|
|
Total
Deposits
|
|
|
311,082
|
|
|
|
323,738
|
|
|
|
|
|
|
|
|
|
|
Long
term debt
|
|
|
11,450
|
|
|
|
11,819
|
|
Federal
funds purchased
|
|
|
775
|
|
|
|
0
|
|
Accrued
expenses and other liabilities
|
|
|
5,323
|
|
|
|
4,786
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
328,630
|
|
|
|
340,343
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock ($5 par value, 3,000,000 shares authorized, 1,436,874 shares
issued)
|
|
|
7,184
|
|
|
|
7,184
|
|
Surplus
|
|
|
1,662
|
|
|
|
1,662
|
|
Retained
earnings
|
|
|
34,308
|
|
|
|
32,032
|
|
Other
accumulated comprehensive loss
|
|
|
(339
|
)
|
|
|
(285
|
)
|
Treasury
stock
(at
cost, 100,001 shares at September 30, 2008)
|
|
|
(3,372
|
)
|
|
|
0
|
|
Total
Stockholders’ Equity
|
|
|
39,443
|
|
|
|
40,593
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
368,073
|
|
|
$
|
380,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
HIGHLANDS
BANKSHARES, INC
|
|
CONSOLIDATED
STATEMENTS OF CHA
N
GES IN STOCKHOLDERS’
EQUITY
|
|
(In
Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Surplus
|
|
|
Treasury
Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
|
|
Balances
at December 31, 2006
|
|
$
|
7,184
|
|
|
$
|
1,662
|
|
|
$
|
0
|
|
|
$
|
28,816
|
|
|
$
|
(586
|
)
|
|
$
|
37,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,377
|
|
|
|
|
|
|
|
3,377
|
|
Change
in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
95
|
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,078
|
)
|
|
|
|
|
|
|
(1,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2007
|
|
$
|
7,184
|
|
|
$
|
1,662
|
|
|
$
|
0
|
|
|
$
|
31,115
|
|
|
$
|
(491
|
)
|
|
$
|
39,470
|
|
|
|
Common
Stock
|
|
|
Surplus
|
|
|
Treasury
Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
|
|
Balances
at December 31, 2007
|
|
$
|
7,184
|
|
|
$
|
1,662
|
|
|
$
|
0
|
|
|
$
|
32,032
|
|
|
$
|
(285
|
)
|
|
$
|
40,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,759
|
|
|
|
|
|
|
|
3,759
|
|
Change
in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
(54
|
)
|
Cumulative
effect adjustment to retained earnings for change in accounting
principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
(348
|
)
|
Total
comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock repurchased
|
|
|
|
|
|
|
|
|
|
|
(3,372
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,372
|
)
|
Dividends
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2008
|
|
$
|
7,184
|
|
|
$
|
1,662
|
|
|
$
|
(3,372
|
)
|
|
$
|
34,308
|
|
|
$
|
(339
|
)
|
|
$
|
39,443
|
|
HIGHLANDS
BANKSHARES, INC.
|
|
CONSOLIDATED
STATEM
E
NTS OF CASH FLOWS
|
|
(In
Thousands of Dollars)
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
Income
|
|
$
|
3,759
|
|
|
$
|
3,377
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash
provided by operating activities
|
|
|
|
|
|
|
|
|
(Gain)
on investment securities
|
|
|
(109
|
)
|
|
|
0
|
|
(Gain)
on sale of fixed asset
|
|
|
(32
|
)
|
|
|
0
|
|
Other
(Gain)/Loss
|
|
|
22
|
|
|
|
0
|
|
Depreciation
|
|
|
512
|
|
|
|
519
|
|
Income
from insurance contracts
|
|
|
(209
|
)
|
|
|
(173
|
)
|
Net
amortization of securities
|
|
|
3
|
|
|
|
(163
|
)
|
Provision
for loan losses
|
|
|
636
|
|
|
|
486
|
|
Deferred
income tax benefit
|
|
|
(14
|
)
|
|
|
0
|
|
Amortization
of intangibles
|
|
|
133
|
|
|
|
132
|
|
Net
purchase of intangibles
|
|
|
175
|
|
|
|
|
|
Decrease
(increase) in interest receivable
|
|
|
124
|
|
|
|
(361
|
)
|
Decrease
(increase) in other assets
|
|
|
(685
|
)
|
|
|
(429
|
)
|
Increase
(decrease) in accrued expenses and other liabilities
|
|
|
189
|
|
|
|
325
|
|
Net
Cash Provided by Operating Activities
|
|
|
4,504
|
|
|
|
3,713
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Increase
(decrease) in federal funds sold
|
|
|
13,418
|
|
|
|
(342
|
)
|
Settlement
on insurance contract
|
|
|
82
|
|
|
|
0
|
|
Proceeds
from maturities of securities available for sale
|
|
|
15,282
|
|
|
|
6,479
|
|
Purchase
of securities available for sale
|
|
|
(12,537
|
)
|
|
|
(10,827
|
)
|
Decrease
(increase) in restricted investments
|
|
|
(375
|
)
|
|
|
71
|
|
Decrease
(increase) in interest bearing deposits in other banks
|
|
|
1,361
|
|
|
|
(1,759
|
)
|
Purchase
of property and equipment
|
|
|
(461
|
)
|
|
|
(428
|
)
|
Net
Increase in Loans
|
|
|
(5,678
|
)
|
|
|
(15,476
|
)
|
Net
Cash Provided by (Used in) Investing Activities
|
|
|
11,092
|
|
|
|
(22,282
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Net
change in deposits
|
|
|
(12,656
|
)
|
|
|
23,088
|
|
Federal
funds purchased
|
|
|
775
|
|
|
|
0
|
|
Additional
long term debt
|
|
|
1,500
|
|
|
|
0
|
|
Repayment
of long term debt
|
|
|
(1,869
|
)
|
|
|
(2,727
|
)
|
Purchase
of treasury stock
|
|
|
(3,372
|
)
|
|
|
0
|
|
Dividends
paid in cash
|
|
|
(1,135
|
)
|
|
|
(1,078
|
)
|
Net
Cash Provided (Used in) by Financing Activities
|
|
|
(16,757
|
)
|
|
|
19,283
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (decrease) in Cash and Cash Equivalents
|
|
|
(1,161
|
)
|
|
|
714
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
7,935
|
|
|
|
7,111
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
6,774
|
|
|
$
|
7,825
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
1,997
|
|
|
$
|
2,315
|
|
Cash
paid for interest
|
|
$
|
6,746
|
|
|
$
|
7,745
|
|
The
accompanying notes are an integral part of these
statements.
|
|
NOTES
TO C
O
NSOLIDATED FINANCIAL STATEMENTS
NOTE
1
|
ACCOUNTING
PRINCIPLES
|
These
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 solely of normal recurring adjustments, necessary to
present fairly the financial position as of September 30, 2008 and the results
of operations for the three and nine month periods ended September 30, 2008 and
2007.
The
results of operations for the three and nine month periods ended September 30,
2008 and 2007 are not necessarily indicative of the results to be expected for
the full year.
The notes
included herein should be read in conjunction with the notes to financial
statements included in the Company’s 2007 annual report on Form
10-K.
Certain
reclassifications have been made to prior period balances to conform to the
current year’s presentation format.
A summary
of loans outstanding as of September 30, 2008 and December 31, 2007 is shown in
the table below (in thousands of dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Loan
Type
|
|
|
|
|
|
|
Commercial
|
|
$
|
89,156
|
|
|
$
|
79,892
|
|
Real
Estate construction
|
|
|
24,948
|
|
|
|
15,560
|
|
Real
Estate mortgage
|
|
|
155,578
|
|
|
|
169,122
|
|
Consumer
installment
|
|
|
45,633
|
|
|
|
45,625
|
|
Total
Loans
|
|
$
|
315,315
|
|
|
$
|
310,199
|
|
In
addition to loans to fund construction and traditional mortgage loans, portions
of the portfolio identified as commercial are also secured by real
estate. At September 30, 2008, the total balance of loans in the
portfolio secured by real estate was $248,980,000.
NOTE
3
|
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 Company’s average cost of funds and of providing life
insurance and retirement benefits to certain executives.
A summary
of the changes to the balance of investments in insurance contracts from
December 31, 2007 to September 30, 2008 is shown in the table below (in
thousands of dollars):
Balance
December 31, 2007
|
|
$
|
6,300
|
|
Increases
in value of policies
|
|
|
179
|
|
Settlement
payout
|
|
|
(52
|
)
|
Balance
September 30, 2008
|
|
$
|
6,427
|
|
NOTE
4
|
SECURITIES
AND RESTRICTED INVESTMENTS
|
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.
The
amortized cost and market value of securities as of September 30, 2008 and
December 31, 2007 is shown in the table below (in thousands of dollars). All of
the securities on the Company’s balance sheet are classified as available for
sale.
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Amortized
|
|
|
Market
|
|
|
Amortized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Available For Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasuries and Agencies
|
|
$
|
8,704
|
|
|
$
|
8,826
|
|
|
$
|
15,040
|
|
|
$
|
15,245
|
|
Mortgage
backed securities
|
|
|
10,785
|
|
|
|
10,839
|
|
|
|
7,718
|
|
|
|
7,784
|
|
Obligations
of states and municipalities
|
|
|
3,696
|
|
|
|
3,711
|
|
|
|
3,034
|
|
|
|
3,039
|
|
Marketable
equities
|
|
|
28
|
|
|
|
22
|
|
|
|
28
|
|
|
|
22
|
|
Total
Available For Sale Securities
|
|
$
|
23,213
|
|
|
$
|
23,398
|
|
|
$
|
25,820
|
|
|
$
|
26,090
|
|
Information
pertaining to securities with gross unrealized losses at December 31, 2007 and
September 30, 2007, aggregated by investment category and length of time that
individual securities have been in a continuous loss position is shown in the
table below (in thousands of dollars):
|
|
Total
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
backed securities
|
|
|
5,794
|
|
|
|
(40
|
)
|
|
|
5,723
|
|
|
|
(39
|
)
|
|
|
71
|
|
|
|
(1
|
)
|
State
and municipals
|
|
|
1,547
|
|
|
|
(10
|
)
|
|
|
1,547
|
|
|
|
(10
|
)
|
|
|
0
|
|
|
|
0
|
|
Other
equity securities
|
|
|
22
|
|
|
|
(6
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
22
|
|
|
|
(6
|
)
|
Total
|
|
$
|
7,363
|
|
|
$
|
(56
|
)
|
|
$
|
7,270
|
|
|
$
|
(49
|
)
|
|
$
|
93
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and Agency
|
|
$
|
1,497
|
|
|
$
|
(2
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,497
|
|
|
$
|
(2
|
)
|
Mortgage
backed securities
|
|
|
2,574
|
|
|
|
(8
|
)
|
|
|
1,005
|
|
|
|
(1
|
)
|
|
|
1,569
|
|
|
|
(7
|
)
|
State
and municipals
|
|
|
575
|
|
|
|
(3
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
575
|
|
|
|
(3
|
)
|
Other
equity securities
|
|
|
22
|
|
|
|
(6
|
)
|
|
|
22
|
|
|
|
(6
|
)
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
4,668
|
|
|
$
|
(19
|
)
|
|
$
|
1,027
|
|
|
$
|
(7
|
)
|
|
$
|
3,641
|
|
|
$
|
(12
|
)
|
Restricted
investments consist of investments in the Federal Home Loan Bank, the Federal
Reserve Bank and West Virginia Bankers’ Title Insurance
Company. Investments are carried at face value and the level of
investment is dictated by the level of participation with each
institution. Amounts are restricted as to transferability.
Investments in the Federal Home Loan Bank act as a collateral against the
outstanding borrowings from that institution.
NOTE
5
|
ALLOWANCE
FOR LOAN LOSSES
|
A summary
of the transactions in the allowance for loan losses for the nine month periods
ended September 30, 2008 and 2007 is shown below (in thousands of
dollars):
|
|
2008
|
|
|
2007
|
|
Balance,
beginning of period
|
|
$
|
3,577
|
|
|
$
|
3,482
|
|
Provisions
charged to operations
|
|
|
636
|
|
|
|
486
|
|
Loan
recoveries
|
|
|
102
|
|
|
|
283
|
|
Loan
charge-offs
|
|
|
(664
|
)
|
|
|
(540
|
)
|
Balance,
end of period
|
|
$
|
3,651
|
|
|
$
|
3,711
|
|
Balances
of time deposits over $100,000 and of all other time deposits at September 30,
2008 and December 31, 2007 are shown below (in thousands of
dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Time
deposits over $100,000
|
|
$
|
61,993
|
|
|
$
|
65,486
|
|
All
other time deposits
|
|
|
130,714
|
|
|
|
135,911
|
|
Total
Time Deposits
|
|
$
|
192,707
|
|
|
$
|
201,397
|
|
Interest
expense for time deposits over $100,000 and for all other time deposits for the
nine month and three month periods ended September 30, 2008 and 2007 is shown
below (in thousands of dollars):
|
|
Nine
months ended
September
30,
|
|
|
Three
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Time
deposits over $100,000
|
|
$
|
2,072
|
|
|
$
|
2,243
|
|
|
$
|
609
|
|
|
$
|
818
|
|
All
other time deposits
|
|
|
3,982
|
|
|
|
4,540
|
|
|
|
1,213
|
|
|
|
1,587
|
|
Total
interest paid on time deposits
|
|
$
|
6,054
|
|
|
$
|
6,783
|
|
|
$
|
1,822
|
|
|
$
|
2,405
|
|
As it
becomes necessary, the Company borrows money from the Federal Home Loan Bank of
Pittsburgh (FHLB) to meet specific
funding
needs. The interest rates of the long term notes payable as of
September 30, 2008
range from
3.94% to 5.96%. The weighted average interest rate was 4.62% at
September 30, 2008. The debt is secured by the general assets of the
Banks.
On
multiple instances during the third quarter of 2008, the subsidiary banks of
Highlands Bankshares, due to a need for liquid funds, utilized overnight
borrowing facilities available to each of the subsidiary banks. The average
balance of overnight and other short term borrowings during the third quarter
was $1,478,000.
The
Company's two subsidiary banks each have separate retirement and profit sharing
plans which cover substantially all full time employees at each
bank.
Capon
Valley Bank has a defined contribution pension plan with 401(k) features that is
funded with discretionary contributions by the Bank. The bank matches
on a limited basis the contributions of the employees. Investment of
employee balances is done through the direction of each
employee. Employer contributions are vested over a six year
period.
The Grant
County Bank is a member of the West Virginia Bankers' Association Retirement
Plan. Benefits under the plan are based on compensation and years of
service with 100% vesting after seven years of service. The bank was
required to make contributions to the plan in 2007 and made a contribution to
the plan during the first quarter of 2008. The Bank has recognized
liabilities of $206,000 at September 30, 2008 as a result of this
shortfall. The following table provides the components of the net periodic
benefit cost for the plan for the nine month periods ended September 30, 2008
and 2007 (in thousands of dollars):
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
127
|
|
|
$
|
100
|
|
Interest
cost
|
|
|
201
|
|
|
|
160
|
|
Expected
return on plan assets
|
|
|
(244
|
)
|
|
|
(170
|
)
|
Amortization
of unrecognized prior service costs
|
|
|
3
|
|
|
|
8
|
|
Recognized
net actuarial loss
|
|
|
40
|
|
|
|
48
|
|
Net
periodic expense
|
|
$
|
127
|
|
|
$
|
146
|
|
NOTE
9
|
EARNINGS
PER SHARE
|
During
the first nine months of 2007, there were no changes to the outstanding shares
of common stock. During the second and third quarters of 2008, the Company
purchased, at varying intervals, 100,001 shares of outstanding common stock. The
weighted average shares, upon which earnings per share calculations for the
three and nine month periods ended September 30, 2008, were calculated based
upon the date repurchased and the number of shares repurchased on that date, as
a percentage of the total period represented.
NOTE
10
|
INTANGIBLE
ASSETS
|
The
Company’s balance sheet contains several components of intangible assets. At
September 30, 2008, the total balance of intangible assets was comprised of
Goodwill and Core Deposit Intangible Assets acquired as a result of the
acquisition of other banks and also an intangible asset related to the purchased
naming rights for a performing arts center located within the Company’s primary
business area.
During
the fourth quarter of 2007, The Grant County Bank entered into an agreement to
contribute $250,000 toward the erection of a performing arts center located
within the Company’s primary business area. In return, the bank has been granted
naming rights for this performing arts center. During the second quarter of
2008, the performing arts center reached an agreement with another party for the
same rights but at better terms and cancelled the contractual agreement with The
Grant County Bank. The $250,000 paid to the performing arts center was
subsequently returned during the third quarter of 2008. After the cancellation
of the original contract, the performing arts center and The Grant County Bank
reached another agreement whereby a contribution of $75,000 was made in return
for naming rights to only a portion of the same arts center.
A summary
of the changes to the balance of goodwill and other intangible assets from
December 31, 2007 to September 30, 2008 is shown below (in thousands of
dollars):
Balance
December 31, 2007
|
|
$
|
3,106
|
|
Amortization
of intangibles other than goodwill
|
|
|
(133
|
)
|
Cancellation
of original naming rights contract
|
|
|
(250
|
)
|
Purchase
of new naming rights contract
|
|
|
75
|
|
Balance
September 30, 2008
|
|
$
|
2,798
|
|
|
|
|
|
|
NOTE
11
|
ADJUSTMENT
TO RETAINED EARNINGS FOR CHANGE IN ACCOUNTING
PRINCIPLE
|
In 2006,
the FASB issued EITF 06-04 and EITF 06-10. These EITF pronouncements require
that companies which own life insurance policies insuring employees and for
which the employees receive a portion of the death benefits of the policies
(commonly referred to as “split dollar” policies) and for which these death
benefits to the employee continue post retirement record a liability for the
present value of the cost of these post retirement death benefits. These EITF
pronouncements became effective for Highlands Bankshares on January 1,
2008.
These
EITF pronouncements provided an option for affected companies to record the
resulting liability as a cumulative effect adjustment to retained earnings at
the beginning of the period in which recorded or to record through retrospective
application to prior periods. Highlands Bankshares opted to record the liability
as a cumulative effect adjustment to prior period retained earnings and as such
recorded a liability and corresponding reduction of prior period retained
earnings of $348,000. There is no corresponding deferred tax consequence
relating to this liability. The recording of the cumulative effect adjustment to
prior period retained earnings is reflected in the June 30, 2008 balance of
retained earnings and is shown as an adjustment to retained earnings in the
Consolidated Statement of Changes in Stockholders’ Equity.
NOTE
12
|
FAIR
VALUE MEASUREMENTS
|
SFAS
No. 157,
Fair Value
Measurements
, defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follow:
|
·
|
Level One:
Inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
|
|
·
|
Level Two: I
nputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the
financial instrument.
|
|
·
|
Level Three
:
Inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
Following
is a description of the valuation methodologies used for instruments measured at
fair value on the Company’s balance sheet, as well as the general classification
of such instruments pursuant to the valuation hierarchy:
Securities
Where
quoted prices are available in an active market, securities are classified
within level 1 of the valuation hierarchy. Level 1 securities would include
highly liquid government bonds, mortgage products and exchange traded equities.
If quoted market prices are not available, then fair values are estimated by
using pricing models, quoted prices of securities with similar characteristics,
or discounted cash flow. Level 2 securities would include U.S. agency
securities, mortgage-backed agency securities, obligations of states and
political subdivisions and certain corporate, asset backed and other securities.
In certain cases where there is limited activity or less transparency around
inputs to the valuation, securities are classified within level 3 of the
valuation hierarchy. Currently, all of the Company’s securities are
considered to be Level 2 securities.
Impaired
Loans
SFAS No.
157 applies to loans measured for impairment using the practical expedients
permitted by SFAS No. 114,
Accounting by Creditors for
Impairment of a Loan
, including impaired loans measured at an observable
market price (if available), or at the fair value of the loan’s collateral (if
the loan is collateral dependent). Fair value of the loan’s collateral, when the
loan is dependent on collateral, is determined by appraisals or independent
valuation which is then adjusted for the cost related to liquidation of the
collateral.
Other Real Estate
Owned
Certain
assets such as other real estate owned (OREO) are measured at fair value less
cost to sell. We believe that the fair value component in its valuation follows
the provisions of SFAS No. 157.
Item 2.
Management
’
s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion focuses on significant results of the Company’s operations
and significant changes in our financial condition or results of operations for
the periods indicated in the discussion. This discussion should be read in
conjunction with the preceding financial statements and related notes, as well
as the Company’s Annual Report on Form 10-K for the period ended December 31,
2007. Current performance does not guarantee, and may not be
indicative of, similar performance in the future.
Critical Accounting
Policies
The
Company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”). The financial
statements contained within these statements are, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. In
addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of these transactions would be the same,
the timing of events that would impact these transactions could
change.
Disclosure
of the Company’s significant accounting policies is included in Note Two to the
Consolidated Financial Statements of the Company’s Annual Report on Form 10-K
for the period ended December 31, 2007. Some of the policies are particularly
sensitive, requiring significant judgments, estimates and assumptions by
management.
Allowance for Loan
Losses
The
allowance for loan losses is an estimate of the losses that may be sustained in
the loan portfolio. The allowance is based on two basic principles of
accounting: (i) Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies
(SFAS 5)
,
which
requires that losses be accrued when they are probable of occurring and
estimable, and (ii) Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for
Impairment of a Loan
(SFAS 114)
,
which requires that losses
be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The
allowance for loan losses includes two basic components: estimated credit losses
on individually evaluated loans that are determined to be impaired, and
estimated credit losses inherent in the remainder of the loan portfolio. Under
SFAS 114, an individual loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. An individually
evaluated loan that is determined not to be impaired under SFAS 114 is evaluated
under SFAS 5 when specific characteristics of the loan indicate that it is
probable there would be estimated credit losses in a group of loans with those
characteristics.
SFAS 114
does not specify how an institution should identify loans that are to be
evaluated for collectibility, nor does it specify how an institution should
determine that a loan is impaired. Each subsidiary of Highlands Bankshares uses
its standard loan review procedures in making those judgments so that allowance
estimates are based on a comprehensive analysis of the loan portfolio. For loans
within the scope of SFAS 114 that are individually evaluated and found to be
impaired, the associated allowance is based on upon the estimated fair value,
less costs to sell, of any collateral securing the loan as compared to the
existing balance of the loan as of the date of analysis.
All other
loans, including individually evaluated loans determined not to be impaired
under SFAS 114, are included in a group of loans that are measured under SFAS 5
to provide for estimated credit losses that have been incurred on groups of
loans with similar risk characteristics. The methodology for measuring estimated
credit losses on groups of loans with similar risk characteristics in accordance
with SFAS 5 is based on each group’s historical net charge-off rate, adjusted
for the effects of the qualitative or environmental factors that are likely to
cause estimated credit losses as of the evaluation date to differ from the
group’s historical loss experience.
Investment in Life Insurance
Policies
The
Company has invested in and owns life insurance policies on certain officers.
The policies are designed so that the company recovers the interest expenses
associated with carrying the policies and the officer will, at the time of
retirement, receive any earnings in excess of the amounts earned by the Company.
The Company recognizes as an asset the net amount that could be realized under
the insurance contract as of the balance sheet date. This amount represents the
cash surrender value of the policies less applicable surrender charges. The
portion of the benefits which will be received by the executives at the time of
their retirement is considered, when taken collectively, to constitute a
retirement plan. Therefore the Company accounts for these policies using
guidance found in Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Post Retirement Benefits Other Than Pensions.” SFAS
No. 106 requires that an employers' obligation under a deferred compensation
agreement be accrued over the expected service life of the employee through
their normal retirement date. Assumptions are used in estimating the present
value of amounts due officers after their normal retirement
date. These assumptions include the estimated income to be derived
from the investments and an estimate of the Company’s cost of funds in these
future periods. In addition, the discount rate used in the present
value calculation will change in future years based on market
conditions.
Intangible
Assets
In accordance with provisions of SFAS
No. 142, "
Goodwill and Other
Intangible Assets
",
goodwill is not amortized over an estimated useful life, but rather will be
tested at least annually for impairment. Core deposit and other intangible
assets include premiums paid for acquisitions of core deposits (core deposit
intangibles) and other identifiable intangible assets. Intangible
assets other than goodwill, which are determined to have finite lives, are
amortized based upon the estimated economic benefits
received
.
Recent Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS 157 does not
require any new fair value measurements, but provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at
fair value. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods
within those years. As of December 1, 2007, the FASB has proposed a
one-year deferral for the implementation of the Statement for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. SFAS 157 had no
material impact on the Company’s September 30, 2008 financial statements.
Additional disclosure information required by this pronouncement is included as
a footnote to the financial statements
.
In 2006,
the FASB issued EITF 06-04 and 06-10. These EITF pronouncements require that
companies which own life insurance policies insuring employees and for which the
employees receive a portion of the death benefits of the policies (commonly
referred to as “split dollar” policies) and for which these death benefits to
the employee continue post retirement record a liability for the present value
of the cost of these post retirement death benefits. These EITF pronouncements
became effective for Highlands Bankshares on January 1, 2008. These EITF
pronouncements provided an option for affected companies to record the resulting
liability as a cumulative effect adjustment to retained earnings at the
beginning of the period in which recorded or to record through retrospective
application to prior periods. Highlands Bankshares opted to record the liability
as a cumulative effect adjustment to prior period retained earnings and as such
recorded a liability and corresponding reduction of prior period retained
earnings of $348,000. There is no corresponding deferred tax consequence
relating to this liability.
No other
recent accounting pronouncements had a material impact on the Company’s
consolidated financial statements, and it is believed that none will have a
material impact on the Company’s operations in future years.
Forward Looking
Statements
Certain
statements in this report may constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are statements that include
projections, predictions, expectations or beliefs about future events or results
or otherwise are not statements of historical fact. Such statements
are often characterized by the use of qualified words (and their derivatives)
such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate” or
other similar words. Although the Company believes that its
expectations with respect to certain forward-looking statements are based upon
reasonable assumptions within the bounds of its existing knowledge of its
business and operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Actual future results and trends may
differ materially from historical results or those anticipated depending on a
variety of factors, including, but not limited to, the effects of and changes
in: general economic conditions, the interest rate environment,
legislative and regulatory requirements, competitive pressures, new products and
delivery systems, inflation, changes in the stock and bond markets, technology,
downturns in the trucking and timber industries, effects of mergers and/or
downsizing in the poultry industry in Hardy County, and consumer spending and
savings habits. Additionally, actual future results and trends may
differ from historical or anticipated results to the extent: (1) any significant
downturn in certain industries, particularly the trucking and timber industries
are experienced; (2) loan demand decreases from prior periods; (3) the Company
may make additional loan loss provisions due to negative credit quality trends
in the future that may lead to a deterioration of asset quality; (4) the Company
may not continue to experience significant recoveries of previously charged-off
loans or loans resulting in foreclosure; and (5) the Company is unable to
control costs and expenses as anticipated. The Company does not update any
forward-looking statements that may be made from time to time by or on behalf of
the Company.
Overview
Income
for the first nine months of 2008 increased 11.31% compared to the first nine
months of 2007. For the same nine month periods, earnings per weighted average
share outstanding (EPS) increased 14.47%. The Company’s increase in net income
was due largely to continued increases in net interest income and increases in
other non interest income, offset slightly by increases in operational expenses.
Loan growth has slowed compared to recent years, however, balances of loans were
1.65% greater at September 30, 2008 than at December 31, 2007. This slowing loan
growth and changes in relative rates of earning assets and liabilities prompted
certain measures of balance sheet management by the Company, namely a reduction
in time deposits, which allowed net interest income, before provision for loan
loss, to increase 3.00% in spite of the slowing loan demand.
Income
for the three months ended September 30, 2008 increased 14.74% as compared to
the third quarter of 2007. For the same three month periods, EPS increased
22.78%
The
increase in EPS for each of the comparative periods indicated above is larger
than the increase in net income for the same periods due to a reduction in
shares outstanding as the result of the Company’s repurchase of 100,001 shares
during the second and third quarters of 2008.This share repurchase also had the
effect of increasing the Company’s Return on Average Equity, as the effect of
the share repurchase was to reduce shareholders’ equity by
$3,372,000.
The
Company’s assets at September 30, 2008 as compared to December 31, 2007
decreased by 3.38%. This reduction in assets came as a result of both the share
repurchase program referenced above and also as a result of management efforts
to maintain net interest income margins through closer management of earning
assets and liabilities which is discussed further under the heading “Net
Interest Income.”
Performance
Measures
The table
below compares selected commonly used measures of bank performance for the three
and nine month periods ended September 30, 2007 and 2008:
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Annualized
return on average assets
|
|
|
1.41
|
%
|
|
|
1.20
|
%
|
|
|
1.33
|
%
|
|
|
1.21
|
%
|
Annualized
return on average equity
|
|
|
12.46
|
%
|
|
|
11.76
|
%
|
|
|
13.38
|
%
|
|
|
11.80
|
%
|
Net
interest margin (1)
|
|
|
5.16
|
%
|
|
|
4.88
|
%
|
|
|
4.97
|
%
|
|
|
4.90
|
%
|
Efficiency
Ratio (2)
|
|
|
57.02
|
%
|
|
|
59.21
|
%
|
|
|
56.91
|
%
|
|
|
58.72
|
%
|
Earnings
per share (3)
|
|
$
|
.97
|
|
|
$
|
.79
|
|
|
$
|
2.69
|
|
|
$
|
2.35
|
|
(1)
On a fully taxable equivalent basis and including loan origination
fees
|
|
(2)
Non-interest expenses for the period indicated divided by the sum of net
interest income and non-interest income for the period
indicated
|
|
(3)
Per weighted average shares of common stock outstanding for the period
indicated. Earnings per share for the three and nine month periods ended
September 30, 2008 reflect share repurchase of 100,001 shares during the
second and third quarters of 2008.
|
|
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, Hampshire, Mineral, Randolph,
Tucker, and northern Pendleton counties in West Virginia, Frederick County,
Virginia and Garrett County, Maryland. 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.
Securities
Portfolio
The
Company's securities portfolio serves several purposes. Portions of
the portfolio are used to secure certain public and trust
deposits. The remaining portfolio is held as investments or used to
assist the Company in liquidity and asset liability management. Total
securities, including restricted securities, represented 6.87% of total assets
and 64.07% of total shareholders’ equity at September 20, 2008.
The
securities portfolio typically will consist of three
components: securities held to maturity, securities available for
sale and restricted securities. 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. Restricted securities are those investments
purchased as a requirement of membership in certain governmental lending
institutions and cannot be transferred without the issuer’s
permission. The Company's purchases of securities have generally been
limited to securities of high credit quality with short to medium term
maturities.
The
Company identifies at the time of acquisition those securities that are
available for sale. These securities are valued at their market value with any
difference in market value and amortized cost shown as an adjustment in
stockholders' equity. Changes in market values of securities which
are considered temporary changes due to changes in the market rate of interest
are reflected as changes in other comprehensive income, net of the deferred tax
effect. Any changes in market values of securities deemed by
management to be attributable to reasons other than changes in market rates of
interest would be recorded through results of operations It is
management’s determination that all securities held at September 30, 2008 which
have fair values less than the amortized cost, have these gross unrealized
losses related to increases in the current interest rates for similar issues of
securities, and that no material impairment for any securities in the portfolio
exists because of downgrades of the securities or as a result of a change in the
financial condition of any of the issuers. A summary of the length of time of
unrealized losses for all securities held at September 30, 2008 can be found in
the footnotes to the financial statements. Management reviews all securities
with unrealized losses, and all securities in the portfolio on a regular basis
to determine whether the potential for other than temporary impairment exists.
One of the criteria for making this determination is the rating given to each
bond by the major ratings agencies Moodys and Standard & Poors. A summary of
the Company’s securities portfolio at September 30, 2008, based on the ratings
of the securities in the portfolio given by these ratings agencies is shown
below (in thousands of dollars):
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
Ratings
Provided by Ratings Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
|
S&P
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and
Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa
|
|
|
AAA
|
|
|
$
|
8,704
|
|
|
$
|
122
|
|
|
$
|
0
|
|
|
$
|
8,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa
|
|
|
AAA
|
|
|
$
|
10,785
|
|
|
$
|
94
|
|
|
$
|
40
|
|
|
$
|
10,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and
Municipals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa
|
|
|
AAA
|
|
|
$
|
1,618
|
|
|
$
|
14
|
|
|
$
|
9
|
|
|
$
|
1,623
|
|
Aa2
|
|
|
AA
|
|
|
|
608
|
|
|
|
5
|
|
|
|
0
|
|
|
|
613
|
|
Aa3
|
|
|
AA-
|
|
|
|
514
|
|
|
|
0
|
|
|
|
3
|
|
|
|
512
|
|
A2
|
|
|
A
|
|
|
|
205
|
|
|
|
1
|
|
|
|
0
|
|
|
|
206
|
|
A3
|
|
|
A-
|
|
|
|
140
|
|
|
|
2
|
|
|
|
0
|
|
|
|
142
|
|
Baa1
|
|
|
BBB+
|
|
|
|
155
|
|
|
|
0
|
|
|
|
0
|
|
|
|
155
|
|
No
Rating
|
|
|
|
456
|
|
|
|
4
|
|
|
|
0
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
Rating
|
|
|
$
|
28
|
|
|
$
|
0
|
|
|
$
|
6
|
|
|
$
|
22
|
|
Credit Quality and Allowance
for Loan Losses
The
following table illustrates certain ratios related to quality of the Company’s
loan portfolio:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Allowance
for loan losses as a percentage of gross loans
|
|
|
1.16
|
%
|
|
|
1.15
|
%
|
Non
performing loans as a percentage of gross loans
|
|
|
0.93
|
%
|
|
|
1.08
|
%
|
Ratio
of allowance for loan losses to non-performing loans
|
|
|
1.25
|
|
|
|
1.07
|
|
The
following table summarizes the Company’s non-performing loans at September 30,
2008 and December 31, 2007 (in thousands of dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Non-accrual
loans
|
|
$
|
659
|
|
|
$
|
916
|
|
Loans
past due 90 days and still accruing interest
|
|
|
1,560
|
|
|
|
2,244
|
|
Restructured
loans
|
|
|
705
|
|
|
|
198
|
|
Total
non-performing loans
|
|
$
|
2,924
|
|
|
$
|
3,358
|
|
Management
has analyzed the potential risk of loss on the Company's loan portfolio given
the loan balances and the value of the underlying collateral and has recognized
losses where appropriate. Non-performing loans are closely monitored on an
ongoing basis as part of the Company's loan review process. The
required level of the allowance for loan losses is computed quarterly and the
allowance adjusted prior to the issuance of the quarterly financial
statements. The allowance is reviewed for adequacy after considering
historical loss rates, current economic conditions (both locally and nationally)
and any known credit problems that have not been considered under the above
formula.
The
following table shows the allocation for loans in the loan portfolio and the
corresponding amounts of the allowance allocated by loan type as of September
30, 2008 and December 31, 2007 (in thousands of dollars):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
Percent
of
|
|
|
|
|
|
Percent
of
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
Loan
Type
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,301
|
|
|
|
28
|
%
|
|
$
|
1,140
|
|
|
|
26
|
%
|
Mortgage
and construction
|
|
|
864
|
|
|
|
57
|
%
|
|
|
1,200
|
|
|
|
59
|
%
|
Consumer
|
|
|
1,311
|
|
|
|
15
|
%
|
|
|
1,172
|
|
|
|
15
|
%
|
Unallocated
|
|
|
175
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
Totals
|
|
$
|
3,651
|
|
|
|
|
|
|
$
|
3,577
|
|
|
|
|
|
As
certain loans identified as impaired are paid current, collateral values
increase or loans are removed from watch lists for other reasons, and as other
loans become identified as impaired, and because delinquency levels within each
of the portfolios change, the allocation of the allowance among the loan types
may change. Management feels that the allowance is a fair representation of the
losses present in the portfolio given historical loss trends, economic
conditions and any known credit problems as of a given date. Management believes
that the allowance is to be taken as a whole, and allocation between loan types
is an estimation of potential losses within each type given information known at
the time. Due to concerns by management regarding deterioration of the economy
and the potential effects of this deterioration on the quality of the loan
portfolio, it was deemed appropriate by management that a larger unallocated
portion of the allowance exist.
The
following table summarizes the Company’s net charge-offs by loan type for the
nine month periods ended September 30, 2008 and 2007 (in thousands of
dollars):
|
|
2008
|
|
|
2007
|
|
Charge-offs
|
|
|
|
|
|
|
Commercial
|
|
$
|
(170
|
)
|
|
$
|
(141
|
)
|
Mortgage
and construction
|
|
|
(155
|
)
|
|
|
(38
|
)
|
Consumer
|
|
|
(339
|
)
|
|
|
(361
|
)
|
Total
Charge-offs
|
|
|
(664
|
)
|
|
|
(540
|
)
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
19
|
|
|
|
50
|
|
Mortgage
|
|
|
2
|
|
|
|
4
|
|
Consumer
|
|
|
81
|
|
|
|
229
|
|
Total
Recoveries
|
|
|
102
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
Total
Net Charge-offs
|
|
$
|
(562
|
)
|
|
$
|
(257
|
)
|
Year to
date in 2008, the Company has experienced a significant increase in net
charge-offs as compared to 2007. The recoveries experienced during 2007 on
previously charged off loans was greater than the organization has typically
historically experienced, with the result being that net charge-off rates for
the nine month period ended September 30, 2007 were lower than often
historically experienced by the Company.
Because
of the large impact on the local economy, Management continuously monitors the
economic health of the poultry industry. The Company has direct loans
to poultry growers and the industry is a large employer in the Company’s trade
area. In recent periods, the Company’s loan portfolio has begun to
reflect a concentration in loans collateralized by heavy equipment, particularly
in the trucking, timber and coal extraction industries. In part because of
rising fuel costs, and because of continued slow economic growth, the trucking
and timber sectors have experienced recent downturns, and profitability growth
within this sector still appears to be sluggish. While close monitoring of this
sector is necessary, management expects no significant losses in the foreseeable
future.
Net Interest
Income
Net
interest income for the first nine months of 2008, on a fully taxable equivalent
basis, increased 3.05% as compared to the same period in 2007.
The
Company’s loan demand, as compared to recent years, has slowed. Although demand
is slowing compared to recent periods, the call for new loans in the Company’s
market area has still been enough to maintain modest growth in loan balances and
average loan balances during the first nine months of 2008 were 4.15% higher
than during the same period in 2007 and total loan balances increased 2.20%
(annualized) from December 31, 2007 to September 30, 2008.
Due do
the slowing loan demand and to reductions in the relative earnings potential of
other earning assets like federal funds sold as compared to costs of new
deposits, management, during the second and third quarters of 2008 maintained
rates on deposit products less than the rates offered by local competition for
similar products. The effect of this action was a reduction in balances of
deposits, mainly time deposits. Although average balances of time deposits
during the first nine months of 2008 were higher than during the same period in
2007, the Company’s total balances of time deposits have decreased 4.31% from
December 31, 2007 to September 30, 2008 and a corresponding effect of lowered
balances of lesser earning assets such as federal funds sold, interest bearing
deposits in other banks, and, to a lesser degree, securities available for
sale.
Management’s
efforts to increase the relative weight of loans, a higher earning asset, to
total average balances of earning assets through the reduction of assets earning
a lower rate of interest and reduction of interest costs through the reduction
of balances of time deposits contributed to increases in the Company’s net
interest margin for the first nine months and for the third quarter of 2008 as
compared to the same periods in 2007.
During
the latter parts of the third quarter, reduction in deposits also required the
Company to begin short term borrowing of overnight federal funds purchased.
Historically, management of Highlands has not frequently utilized short term
borrowing facilities. However, the relative opportunity cost of these sources of
funding as compared to deposits or longer term debt vehicles made this an
attractive funding option given current trends in rates on both earning assets
and interest bearing liabilities and trends in the Company’s loan growth.
Although not considered a permanent funding option by the Company, management
will continue to evaluate the relative cost of funding options as compared to
growth opportunities for earning assets and will utilize overnight borrowings as
feasible.
The table
below illustrates the effects on net interest income, on a fully taxable
equivalent basis, and for the first nine months of each year, of changes in
average volumes of interest bearing liabilities and earning assets from 2007 to
2008 and changes in average rates on interest bearing liabilities and earning
assets from 2007 to 2008 (in thousands of dollars):
EFFECT
OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
|
|
(On
a fully taxable equivalent basis)
|
|
(In
thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) Nine Months Ended September 30, 2008 Compared to
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
to change in:
|
|
|
|
|
|
|
Average Volume
|
|
|
Average Rate
|
|
|
Total Change
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
781
|
|
|
$
|
(837
|
)
|
|
$
|
(56
|
)
|
Federal
funds sold
|
|
|
(136
|
)
|
|
|
(233
|
)
|
|
|
(369
|
)
|
Interest
bearing deposits
|
|
|
(30
|
)
|
|
|
(32
|
)
|
|
|
(62
|
)
|
Taxable
investment securities
|
|
|
(115
|
)
|
|
|
(91
|
)
|
|
|
(206
|
)
|
Nontaxable
investment securities
|
|
|
14
|
|
|
|
0
|
|
|
|
14
|
|
Total
Interest Income
|
|
|
514
|
|
|
|
(1,193
|
)
|
|
|
(679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
(12
|
)
|
|
|
(83
|
)
|
|
|
(95
|
)
|
Savings
deposits
|
|
|
25
|
|
|
|
(193
|
)
|
|
|
(168
|
)
|
Time
deposits
|
|
|
76
|
|
|
|
(804
|
)
|
|
|
(728
|
)
|
Federal
funds purchased
|
|
|
10
|
|
|
|
0
|
|
|
|
10
|
|
Borrowed
money
|
|
|
(57
|
)
|
|
|
(27
|
)
|
|
|
(84
|
)
|
Total
Interest Expense
|
|
|
42
|
|
|
|
(1,107
|
)
|
|
|
(1,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
|
472
|
|
|
$
|
(86
|
)
|
|
$
|
386
|
|
The table
below sets forth an analysis of net interest income for the nine month periods
ended September 30, 2008 and 2007 (Average balances and interest/expense shown
in thousands of dollars):
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
1,2
|
|
$
|
313,392
|
|
|
$
|
18,774
|
|
|
|
7.99
|
%
|
|
$
|
300,905
|
|
|
$
|
18,830
|
|
|
|
8.34
|
%
|
Federal
funds sold
|
|
|
12,157
|
|
|
|
231
|
|
|
|
2.53
|
%
|
|
|
15,715
|
|
|
|
600
|
|
|
|
5.09
|
%
|
Interest
bearing deposits
|
|
|
1,747
|
|
|
|
38
|
|
|
|
2.90
|
%
|
|
|
2,490
|
|
|
|
100
|
|
|
|
5.35
|
%
|
Taxable
investment securities
|
|
|
20,717
|
|
|
|
742
|
|
|
|
4.78
|
%
|
|
|
23,581
|
|
|
|
948
|
|
|
|
5.36
|
%
|
Nontaxable
investment securities
3
|
|
|
3,239
|
|
|
|
148
|
|
|
|
6.09
|
%
|
|
|
2,927
|
|
|
|
134
|
|
|
|
6.10
|
%
|
Total
Earning Assets
|
|
|
351,252
|
|
|
|
19,933
|
|
|
|
7.57
|
%
|
|
|
345,618
|
|
|
|
20,612
|
|
|
|
7.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
7,339
|
|
|
|
|
|
|
|
|
|
|
|
8,006
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(3,605
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,626
|
)
|
|
|
|
|
|
|
|
|
Insurance
contracts
|
|
|
6,368
|
|
|
|
|
|
|
|
|
|
|
|
6,151
|
|
|
|
|
|
|
|
|
|
Non-earning
assets
|
|
|
16,337
|
|
|
|
|
|
|
|
|
|
|
|
15,535
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
377,692
|
|
|
|
|
|
|
|
|
|
|
$
|
371,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
$
|
23,700
|
|
|
$
|
73
|
|
|
|
0.41
|
%
|
|
$
|
25,528
|
|
|
$
|
168
|
|
|
|
0.88
|
%
|
Savings
and money markets
|
|
|
50,144
|
|
|
|
339
|
|
|
|
0.90
|
%
|
|
|
47,744
|
|
|
|
507
|
|
|
|
1.42
|
%
|
Time
deposits
|
|
|
196,328
|
|
|
|
6,055
|
|
|
|
4.11
|
%
|
|
|
194,156
|
|
|
|
6,783
|
|
|
|
4.66
|
%
|
Long
term debt
|
|
|
11,217
|
|
|
|
363
|
|
|
|
4.31
|
%
|
|
|
12,841
|
|
|
|
447
|
|
|
|
4.64
|
%
|
Short
term borrowings
|
|
|
496
|
|
|
|
10
|
|
|
|
2.69
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Total
Interest Bearing Liabilities
|
|
|
281,885
|
|
|
|
6,840
|
|
|
|
3.24
|
%
|
|
|
280,269
|
|
|
|
7,905
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
50,020
|
|
|
|
|
|
|
|
|
|
|
|
48,249
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
5,499
|
|
|
|
|
|
|
|
|
|
|
|
4,923
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
40,288
|
|
|
|
|
|
|
|
|
|
|
|
38,243
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
377,692
|
|
|
|
|
|
|
|
|
|
|
$
|
371,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
|
|
|
|
$
|
13,094
|
|
|
|
|
|
|
|
|
|
|
$
|
12,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Yield on Earning Assets
3
|
|
|
|
|
|
|
|
|
|
|
4.97
|
%
|
|
|
|
|
|
|
|
|
|
|
4.90
|
%
|
1
Balances
of loans include loans in non accrual status
2
Interest
income on loans includes fees
3
Yields
are on a fully taxable equivalent basis
The table
below sets forth an analysis of net interest income for the three month periods
ended September 30, 2008 and 2007 (Average balances and interest/expense shown
in thousands of dollars):
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
1,2
|
|
$
|
316,627
|
|
|
$
|
6,162
|
|
|
|
7.78
|
%
|
|
$
|
305,542
|
|
|
$
|
6,471
|
|
|
|
8.47
|
%
|
Federal
funds sold
|
|
|
1,383
|
|
|
|
8
|
|
|
|
2.31
|
%
|
|
|
15,449
|
|
|
|
195
|
|
|
|
5.05
|
%
|
Interest
bearing deposits
|
|
|
773
|
|
|
|
7
|
|
|
|
3.63
|
%
|
|
|
2,660
|
|
|
|
30
|
|
|
|
4.51
|
%
|
Taxable
investment securities
|
|
|
21,669
|
|
|
|
257
|
|
|
|
4.74
|
%
|
|
|
25,792
|
|
|
|
354
|
|
|
|
5.49
|
%
|
Nontaxable
investment securities
3
|
|
|
3,535
|
|
|
|
57
|
|
|
|
6.45
|
%
|
|
|
2,860
|
|
|
|
46
|
|
|
|
6.43
|
%
|
Total
Earning Assets
|
|
|
343,987
|
|
|
|
6,491
|
|
|
|
7.55
|
%
|
|
|
352,303
|
|
|
|
7,096
|
|
|
|
8.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
|
|
7,950
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(3,698
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
Insurance
contracts
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
|
|
6,205
|
|
|
|
|
|
|
|
|
|
Non-earning
assets
|
|
|
16,749
|
|
|
|
|
|
|
|
|
|
|
|
16,518
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
370,721
|
|
|
|
|
|
|
|
|
|
|
$
|
379,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
$
|
22,878
|
|
|
$
|
19
|
|
|
|
0.33
|
%
|
|
$
|
24,538
|
|
|
$
|
55
|
|
|
|
0.90
|
%
|
Savings
and money markets
|
|
|
49,300
|
|
|
|
88
|
|
|
|
0.71
|
%
|
|
|
49,278
|
|
|
|
191
|
|
|
|
1.55
|
%
|
Time
deposits
|
|
|
191,463
|
|
|
|
1,809
|
|
|
|
3.78
|
%
|
|
|
201,223
|
|
|
|
2,406
|
|
|
|
4.78
|
%
|
Long
term debt
|
|
|
11,283
|
|
|
|
128
|
|
|
|
4.54
|
%
|
|
|
12,416
|
|
|
|
144
|
|
|
|
4.64
|
%
|
Short
term borrowings
|
|
|
1,478
|
|
|
|
10
|
|
|
|
2.71
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Total
Interest Bearing Liabilities
|
|
|
276,402
|
|
|
|
2,054
|
|
|
|
2.97
|
%
|
|
|
287,275
|
|
|
|
2,796
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
49,832
|
|
|
|
|
|
|
|
|
|
|
|
47,435
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
5,410
|
|
|
|
|
|
|
|
|
|
|
|
5,550
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
39,077
|
|
|
|
|
|
|
|
|
|
|
|
39,023
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
370,721
|
|
|
|
|
|
|
|
|
|
|
$
|
379,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
|
|
|
|
$
|
4,437
|
|
|
|
|
|
|
|
|
|
|
$
|
4,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Yield on Earning Assets
3
|
|
|
|
|
|
|
|
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
4.88
|
%
|
1
Balances
of loans include loans in non accrual status
2
Interest
income on loans includes fees
3
Yields
are on a fully taxable equivalent basis
Non-interest
Income
Non-interest
income increased 34.31% for the first nine months of 2008 as compared to the
same period in 2007.
Income
received from customer deposit account service charges increased $307,000 due to
continued growth in balances of demand deposits, a large source of these
charges, and also to the implementation by The Grant County Bank, during the
last quarter of 2007, of a courtesy overdraft program, which resulted in an
increase in non-sufficient funds fees collected by that bank.
Non
interest income was also impacted by $177,000 in non recurring gains. The table
below summarizes the components of non-recurring income recorded during the
first nine months of 2008:
Description of
non-recurring income
|
|
Amount
|
|
Gains
recorded on called securities available for sale
|
|
$
|
109
|
|
Gain
on life insurance settlement
|
|
|
30
|
|
Gain
on sale of fixed assets
|
|
|
30
|
|
Gain
on sale of other real estate owned
|
|
|
8
|
|
Non-interest
Expense
Non-interest
expense increased 3.05% for the first nine months of 2008 as compared to
2007.
Salary and benefits
expense
The
following table compares the components of salary and benefits expense for the
nine month periods ended September 30, 2007 and 2008 (in thousands of
dollars):
Salary
and Benefits Expense
|
|
|
|
Nine
month periods
ended
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Employee
salaries
|
|
$
|
3,159
|
|
|
$
|
2,986
|
|
|
$
|
173
|
|
Employee
benefit insurance
|
|
|
683
|
|
|
|
640
|
|
|
|
43
|
|
Payroll
taxes
|
|
|
232
|
|
|
|
209
|
|
|
|
23
|
|
Post
retirement plans
|
|
|
666
|
|
|
|
632
|
|
|
|
34
|
|
Total
|
|
$
|
4,740
|
|
|
$
|
4,467
|
|
|
$
|
273
|
|
The table
below illustrates the change in salary expense between the first nine months of
2008 compared to salary expense for the same period in 2007 occurring because of
increases in average pay per employee and increases in the average number of
full time employees (in thousands of dollars):
|
|
Amount
|
|
Changes
due to increase in average salary per full time equivalent
employee
|
|
$
|
142
|
|
Changes
due to increase in the average full time equivalent employees for the
periods
|
|
|
31
|
|
Total
increase in salary expense
|
|
$
|
173
|
|
Data processing
expense
Data
processing expense decreased 5.08%. As the company has moved toward increased
electronic transfer of information between branch locations and centralized data
processing locations, data processing costs have been reduced.
Occupancy and equipment
expense
The
following table illustrates the components of occupancy and equipment expense
for the nine month periods ended September 30, 2008 and 2007 (in thousands of
dollars):
|
|
2008
|
|
|
2007
|
|
|
Increase
(
Decrease)
|
|
Depreciation
of buildings and equipment
|
|
$
|
512
|
|
|
$
|
519
|
|
|
$
|
(7
|
)
|
Maintenance
expense on buildings and equipment
|
|
|
316
|
|
|
|
327
|
|
|
|
(11
|
)
|
Utilities
expense
|
|
|
67
|
|
|
|
73
|
|
|
|
(6
|
)
|
Real
estate and personal property tax
|
|
|
62
|
|
|
|
62
|
|
|
|
0
|
|
Other
expense related to occupancy and equipment
|
|
|
63
|
|
|
|
62
|
|
|
|
1
|
|
Total
occupancy and equipment expense
|
|
$
|
1,020
|
|
|
$
|
1,043
|
|
|
$
|
(23
|
)
|
Other non interest
expense
Other non
interest expense remained comparatively flat for the first three quarters of
2008 as compared to the same period in 2007. The typical increases in costs
associated with inflation and the increasing size of the organization were
offset by decreases in state franchise tax expense as a result of a reduction in
the effective rate of this tax and also decreases in advertising and marketing
expense and a slight decline in legal and professional fees.
The table
below illustrates components of other non interest expense for the nine month
periods ended September 30, 2008 and 2007 (in thousands of dollars). All
components of other non interest expense comprising over 5% of the total are
itemized.
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Legal
and professional fees
|
|
$
|
413
|
|
|
$
|
430
|
|
|
$
|
(17
|
)
|
Directors
fees
|
|
|
274
|
|
|
|
283
|
|
|
|
(9
|
)
|
Amortization
of intangible assets
|
|
|
134
|
|
|
|
132
|
|
|
|
2
|
|
Office
supplies and postage
|
|
|
382
|
|
|
|
370
|
|
|
|
12
|
|
ATM
expense
|
|
|
146
|
|
|
|
141
|
|
|
|
5
|
|
Advertising
and marketing expense
|
|
|
134
|
|
|
|
154
|
|
|
|
(20
|
)
|
State
franchise tax expense
|
|
|
79
|
|
|
|
108
|
|
|
|
(29
|
)
|
Miscellaneous
components of other non interest expense
|
|
|
633
|
|
|
|
540
|
|
|
|
93
|
|
Total
|
|
$
|
2,195
|
|
|
$
|
2,158
|
|
|
$
|
37
|
|
.
Borrowed
Funds
The
Company borrows funds from the Federal Home Loan Bank (“FHLB”) to reduce market
rate risks or to provide operating liquidity. Management typically
will initiate these borrowings in response to a specific need for managing
market risks or for a specific liquidity need and will attempt to match features
of these borrowings to best suit the specific need. Therefore, the borrowings on
the Company’s balance sheet as of September 30, 2008 and throughout the three
and nine month periods ended September 30, 2008 have varying features of
amortization or single payment with periodic, regular interest payment and also
have interest rates which vary based on the terms and on the features of the
specific borrowing.
Liquidity
Operating
liquidity is the ability to meet present and future financial obligations. Short
term liquidity is provided primarily through cash balances, deposits with other
financial institutions, federal funds sold, non-pledged securities and loans
maturing within one year. 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, the Federal
Reserve Bank of Richmond and the Federal Home Loan Bank of
Pittsburgh.
Historically,
the Company’s primary need for additional levels of operational liquidity has
been to fund increases in loan balances. The Company has normally funded
increases in loans by increasing deposits and with decreases in liquid assets
such as balances of federal funds sold and balances of securities. The Company
also utilizes existing borrowing facilities for additional levels of operating
liquidity. In choosing which sources of operating liquidity to utilize,
management evaluates the implications of each liquidity source and its impact on
profitability, balance sheet stability and potential future liquidity
needs.
The
parent Company’s operating funds, funds with which to pay shareholder dividends
and funds for the exploration of new business ventures have been supplied
primarily through dividends paid by the Company’s subsidiary banks Capon Valley
Bank (CVB) and The Grant County Bank (GCB). The various regulatory
authorities impose restrictions on dividends paid by a state bank. A
state bank cannot pay dividends without the consent of the relevant banking
authorities in excess of the total net profits of the current year and the
combined retained profits of the previous two years. As of October 1,
2008, the subsidiary banks could pay dividends to Highlands Bankshares, Inc. of
approximately $5,723,000 without permission of the regulatory
authorities.
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 September 30, 2008, the Company was above the regulatory
minimum levels of capital. The table below summarizes the capital ratios for the
Company and its subsidiary banks as of September 30, 2008 and December 31,
2007:
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Actual
|
|
|
Regulatory
|
|
|
Actual
|
|
|
Regulatory
|
|
|
|
Ratio
|
|
|
Minimum
|
|
|
Ratio
|
|
|
Minimum
|
|
Total
Risk Based Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Highlands
Bankshares
|
|
|
14.24
|
%
|
|
|
8.00
|
%
|
|
|
14.53
|
%
|
|
|
8.00
|
%
|
Capon
Valley Bank
|
|
|
13.10
|
%
|
|
|
8.00
|
%
|
|
|
14.78
|
%
|
|
|
8.00
|
%
|
The
Grant County Bank
|
|
|
13.98
|
%
|
|
|
8.00
|
%
|
|
|
13.23
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Leverage Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highlands
Bankshares
|
|
|
10.05
|
%
|
|
|
4.00
|
%
|
|
|
9.95
|
%
|
|
|
4.00
|
%
|
Capon
Valley Bank
|
|
|
9.07
|
%
|
|
|
4.00
|
%
|
|
|
10.00
|
%
|
|
|
4.00
|
%
|
The
Grant County Bank
|
|
|
9.85
|
%
|
|
|
4.00
|
%
|
|
|
9.09
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Risk Based Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highlands
Bankshares
|
|
|
13.00
|
%
|
|
|
4.00
|
%
|
|
|
13.28
|
%
|
|
|
4.00
|
%
|
Capon
Valley Bank
|
|
|
11.85
|
%
|
|
|
4.00
|
%
|
|
|
13.53
|
%
|
|
|
4.00
|
%
|
The
Grant County Bank
|
|
|
12.75
|
%
|
|
|
4.00
|
%
|
|
|
12.09
|
%
|
|
|
4.00
|
%
|
In April
of 2008, Highlands Bankshares announced that its Board of Directors had
authorized the Company’s management to repurchase up to 100,000 shares of the
Company’s outstanding common stock and in early July of 2008 announced that the
repurchase of 100,000 shares had been completed. This repurchase of
the Company’s common stock outstanding has had the effect of lowering capital.
Management and the board of directors feels that the Company and both subsidiary
banks’ current levels of capitalization as compared to regulatory minimums are
such that the effects on capital of this repurchase program have not reduced
capital to an extent that any type of regulatory action will occur as a result
of lowered capital levels.
Subsequent
to September 30, 2008, U.S. Treasury announced a Troubled Asset Relief Program
(“TARP”) which includes provisions whereby the US Treasury could infuse capital
into qualifying banks via a capital purchase program. The amount of capital
available under TARP is limited to a minimum of 1% of risk weighted assets and a
maximum of 3% of risk weighted assets and would be available to qualifying banks
via sale of senior preferred stock, in combination with warrants on common
stock, to the United States Treasury. After careful consideration of
the potential outcomes relating to participating in this capital purchase
program versus not participating, Management and the Board of Directors of
Highlands Bankshares have decided not to participate in the capital purchase
program.
Effects of
Inflation
Inflation
primarily affects industries having high levels of property, plant and equipment
or inventories. Although the Company is not significantly affected in these
areas, inflation does have an impact on the growth of assets. As
assets grow rapidly, it becomes necessary to increase equity capital at
proportionate levels to maintain the appropriate equity to asset
ratios. Traditionally, the Company's earnings and high capital
retention levels have enabled the Company to meet these needs. The Company's
reported earnings results have been minimally affected by
inflation. The different types of income and expense are affected in
various ways. Interest rates are affected by inflation, but the
timing and magnitude of the changes may not coincide with changes in the
consumer price index. Management actively monitors interest rate
sensitivity in order to minimize the effects of inflationary trends on interest
rates. Other areas of non-interest expenses may be more directly affected by
inflation.
Item 3.
Quantitative
a
nd Qualitative Disclosures About Market Risk
There
have been no material changes in Quantitative and Qualitative Disclosures about
Market Risk as reported in the Company’s Annual Report on Form 10-K for the
period ended December 31, 2007.
Item 4. Controls and Proc
e
dures
The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures as of September 30, 2008. Based on
this evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective as of September 30, 2008. The company has established procedures
undertaken during the normal course of business in an effort to reasonably
ensure that fraudulent activity of either an amount material to these results or
in any amount is not occurring.
Changes in Internal
Controls
During
the period reported upon, there were no significant changes in internal controls
of Highlands Bankshares, Inc. pertaining to its financial reporting and control
of its assets or in other factors that materially affected or are reasonably
likely to materially affect such control.
PART
II OTHER I
N
FORMATION
Item
1. Legal Pr
o
ceedings
Management
is not aware of any material pending or threatened litigation in which the
Company or its subsidiaries may be involved as a defendant. In the
normal course of business, the banks periodically must initiate suits against
borrowers as a final course of action in collecting past due loans. In addition,
to management’s knowledge, no governmental authorities have initiated or
contemplated legal action against the Company.
There
have been no material changes to the Company’s risk factors since these factors
were previously disclosed in the Company’s Annual Report on Form 10-K for the
period ended December 31, 2007.
Item
2. Unregi
s
tered Sales of Equity Securities and Use of
Proceeds.
(a) None
(b)
None
(c) On
April 8, 2008 the Company announced a share repurchase plan whereby Management
was authorized by the Board of Directors to repurchase up to 100,000 shares of
the Company’s Common Stock, $5 par value, through open market transactions. On
July 8, 2008 the Company announced that it had successfully completed the share
repurchase plan at a total cost of $3,372,000 to repurchase 100,001 shares of
the Company’s shares of common stock outstanding. The table below summarizes the
shares purchased from the announcement date through September 30,
2008.
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
Paid
Per
Share
|
|
|
Total
Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plan
|
|
|
Maximum
Number
of
Shares
that May
Yet
Be
Purchased
Under the Plan
|
|
April
9, 2008—April 30, 2008
|
|
|
3,100
|
|
|
$
|
29.07
|
|
|
|
3,100
|
|
|
|
96,900
|
|
May
1, 2008—May 31, 2008
|
|
|
4,631
|
|
|
$
|
31.21
|
|
|
|
4,631
|
|
|
|
92,269
|
|
June
1, 2008—June 30, 2008
|
|
|
68,710
|
|
|
$
|
33.70
|
|
|
|
68,710
|
|
|
|
23,559
|
|
July 1, 2008—July 31, 2008
|
|
|
23,560
|
|
|
$
|
34.88
|
|
|
|
23,560
|
|
|
|
0
|
|
Total
|
|
|
100,001
|
|
|
$
|
33.72
|
|
|
|
100,001
|
|
|
|
0
|
|
Item
3. Defau
l
ts Upon Senior Securities
None
Item
4. Sub
m
ission of Matters to a Vote of Security Holders
None
Item
5. Ot
h
er Information
None
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
3(i)
|
Articles
of Incorporation of Highlands Bankshares, Inc., as restated, are hereby
incorporated by reference to Exhibit 3(i) to Highlands Bankshares Inc.’s
Form 10-Q filed November 13, 2007 .
|
3(ii)
|
Amended
Bylaws of Highlands Bankshares, Inc. are incorporated by reference to
Exhibit 3(ii) to Highlands Bankshares Inc.’s Report on Form 8-K filed
January 9, 2008.
|
|
Certification
of Chief Executive Officer Pursuant to section 302 of the
Sarbanes-Oxley Act of
2002
Chapter 63, Title 18 USC Section 1350 (A) and (B).
|
|
Certification
of Chief Financial Officer Pursuant to section 302 of the
Sarbanes-Oxley Act of
2002
Chapter 63, Title 18 USC Section 1350 (A) and (B).
|
|
Statement
of Chief Executive Officer Pursuant to 18 U.S.C.
§1350.
|
|
Statement
of Chief Financial Officer Pursuant to 18 U.S.C.
§1350.
|
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/ C.E.
Porter
|
|
C.E.
Porter
|
|
President
& Chief Executive Officer
|
|
|
|
/s/ R. Alan
Miller
|
|
R.
Alan Miller
|
|
Principal
Financial Officer
|
November
12, 2008
|
|