Market Overview

Highlands Bankshares, Inc. Reports Second Quarter 2017 Results

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Strong Loan Growth and Mortgage Banking Revenue; Continued Improvement in Asset Quality and Capital Ratios; Announced Expansion into Triad Region of North Carolina; Earnings, Capital Ratios, and Profitability Ratios to Further Improve in Third Quarter Due to Payoff of High Cost Wholesale Funding

ABINGDON, Va., July 28, 2017 /PRNewswire/ -- Highlands Bankshares, Inc. (OTCQX: HLND) today reported earnings of $637,000 or $0.06 per diluted share, for the quarter ended June 30, 2017, compared to net income of $1.0 million, or $0.10 per diluted share, for the quarter ended March 31, 2017 and a net loss of $(674,000), or $(0.08) per diluted share, for the quarter ended June 30, 2016. The annualized return on assets and return on equity for the period were 0.42 percent and 4.68 percent, respectively. Second quarter results include pre-tax expense of $135,000 related to the disposition of assets and contracts, $124,000 for an auction of legacy bank owned properties, and approximately $75,000 in startup expenses related to the new Triad mortgage team that was announced in first quarter, net of incremental revenues.

 (PRNewsfoto/Highlands Bankshares, Inc.)

For the six months ended June 30, 2017, the Company reported net income of $1.7 million, compared to a net loss of $(144,000) recorded during the same period of 2016. The annualized return on assets and return on equity for the period was 0.55 percent and 6.21 percent, respectively.

"I am pleased to report that Highlands had another strong quarter, and particularly the month of June, with improved credit metrics, positive earnings, and increased capital ratios," said Timothy K. Schools, President and Chief Executive Officer. "In eighteen months, our team's hard work has resulted in past due loan and nonperforming asset metrics that are 60-80 percent lower, nearly $2 million of mid-year profits, and regulatory capital ratios that are 6-9 percent higher. This quarter we also saw loan production from our recent market executives, commercial bankers, and Triad mortgage hires begin to close in June, we hired Alan Pike – SouthTrust's former Triad, North Carolina market executive who founded and led it to their highest performing market – to lead our entry into that market, we received a favorable judgment for the full recovery of a $540,000 charged-off loan that we hope to resolve by year end, and we strengthened our board of directors with the addition of three southeast business leaders."

"I am proud of the progress our company is making and our outlook for the remainder of the year is very positive. We have developed a focused, full relationship strategy for professionals and small to medium sized business and have developed a large pipeline. We have added very competitive merchant services and mortgage banking products and are in the process of introducing a similarly capable remote deposit capture product. We are prepaying $22.5 million of high cost FHLB borrowings which will increase recurring pre-tax earnings approximately $700,000 and further improve our profitability and capital ratios. Our $18 million of promotional HELOC balances begin to reprice with an expected lift of 325 basis points over the next twelve months – a potential of an additional $500,000 of recurring pre-tax income. We are actively working on strategies for our three largest nonperforming loans totaling $2.2 million and are optimistic we can resolve them by year end with minimal further loss. Lastly, with our loan portfolio materially improved, we are turning our full attention to Highlands' profitability which remains unsatisfactory. We have selected ten well-run peer banks in our geography whose return on assets is twice the level of the Company's and developed specific strategies that we feel will bring our performance in line with this group. We are going to keep improving and strive to be a valuable and responsible partner to our customers and shareholders."


Target

2Q 2017

1Q 2017

2Q 2016

Return on average assets (annualized)

1.25

%

0.42

%

0.37

%

(0.44)

%

Revenue growth

5.00


5.36


(4.10)


(4.86)


Net interest margin

3.75


3.42


3.46


3.73


Non-interest income to assets

1.00


1.08


0.83


0.67


Non-interest expense to assets

2.75


3.41


2.87


3.84


Efficiency ratio

55.00


84.14


74.94


100.57


Net charge-off to total loans

0.30


0.09


0.11


1.64


Revenue Growth

Second quarter 2017 total revenue (tax-equivalent net interest income plus non-interest income) increased $318,000 to $6.3 million from $5.9 million in the first quarter of 2017. Tax-equivalent net interest income was $4.6 million in the second quarter of 2017, a decline of $68,000 from $4.7 million in the first quarter of 2017. Second quarter 2017 non-interest income increased $386,000 to $1.7 million from $1.3 million in the first quarter of 2017.

Taxable-equivalent net interest income declined modestly in the first quarter due to a six basis point decline in the net interest margin and relatively flat average earning assets. While average and end of period earning assets were stable from the prior quarter, a positive shift occurred late in the quarter with $14.0 million of loan growth being funded with proceeds from lower yielding cash and securities. The net interest margin will benefit from the pending repayment of $22.5 million of FHLB advances. These advances had a weighted-average rate of 3.34 percent and will be repaid using available liquidity earning 1.25 percent or less. The net interest margin will also begin to benefit from the anticipated repricing of home equity lines of credit that were originated under a promotional rate of one percent during the past year.

The Company has placed a strong emphasis on adding and improving products and services that generate non-interest income. Over the past year, the level of non-interest income to assets has increased 61 percent from 0.67 percent to 1.08 percent. Key to the improvement has been the development of strengthened merchant service and mortgage banking capabilities. In second quarter 2017, mortgage banking revenue increased $500,000 from first quarter 2017 with a large contribution coming from the Triad mortgage team who joined the Company in second quarter.

Efficiency

Operating efficiency remains the immediate opportunity for the Company. The Company monitors efficiency using a number of metrics to include: assets per employee, non-interest expense to assets, and non-interest expense to total revenue (efficiency ratio). The Company has historically been more inefficient than industry peers in each of these metrics. Progress has been achieved over recent quarters but performance is below targeted levels.

Non-interest expense to assets was 3.4 percent in the second quarter of 2017, higher than the 2.9 percent recorded during the first quarter of 2017. The unfavorable increase during the second quarter resulted from incremental expenses related to the mortgage division, lower deferred loan origination costs and higher OREO losses. With well run banking institutions operating in a range of 2.50 to 2.75 percent, the Company has established a target of 2.75 percent or below. A sub component of this measure is assets per employee. Well run banking institutions operate in a range of $4 to $5 million of assets per employee. In second quarter 2017, the Company's assets per employee remained at $3.5 million, an improvement over historical levels.

The efficiency ratio is a measure of the revenue produced from both the Company's assets and human resources. In the second quarter of 2017, the efficiency ratio experienced a negative trend as the improvement in revenue was less than the increase in expense. With well run banking institutions operating in a range of 50 to 55 percent, the Company is focused on improving the ratio of expense relative to the revenue it produces. Three factors contribute to the remaining gap: non-staffing related expense relative to peers, the level of cash and our cash and securities investment yield relative to peers, and the investment in our mortgage company whereby our volume continues to ramp up.

Asset Quality

The Company continues to progress in establishing a strong credit culture and improving the risk profile of the bank. Tremendous focus has been placed on instituting accountability with customers to abide by their payment date, identifying and strengthening weak pass credits, resolving the bank's problem assets, and generating stronger credits with greater industry and geographic diversification. In concert with the improved credit metrics, the Company's first ever external loan review was completed in second quarter which did not identify any unidentified major weaknesses or credits and complemented the underwriting of recently produced credits.


2Q17

1Q17

4Q16

3Q16

2Q16

1Q16

4Q15

Past due loans to end of period
loans

0.89

%

1.14

%

1.93

%

2.17

%

2.75

%

3.35

%

4.12

%

Past due loans 30-89 days to end of period loans

0.24


0.29


0.42


0.81


1.18


1.13


1.93


Past due loans 90 plus days to end of period loans

0.65


0.84


1.51


1.36


1.57


2.22


2.19


Nonperforming assets to loans and OREO

1.32


1.50


1.64


2.14


2.71


3.43


3.47


Classified assets to tier 1 capital

33.00


34.00


40.00


41.00


46.00


53.00


57.00


Allowance for loan losses to nonperforming loans

152.15


136.96


120.76


90.13


79.44


61.36


59.79
























Total past due loans as a percentage of end of period loans were 0.89 percent at June 30, 2017, a significant improvement from 4.12 percent at December 31, 2015. The reduced risk of the loan portfolio is demonstrated by past due loans 30 to 89 days past due as a percentage of end of period loans of 0.24 percent. As of June 30, 2017, loans greater than 90 days past due totaled $3.1 million of which three loans total $2.2 million. The Company is hopeful it will resolve the three loans in the third or fourth quarter of 2017 with minimal loss. Further, the Company received a court ordered judgement in the second quarter allowing for the full recovery of over $500,000 for a previously charged off loan. The recovery is anticipated to occur in third or fourth quarter and, depending on the risk migration of the remaining loan portfolio, will either increase the allowance for loan losses or be reversed into capital.

Nonperforming assets were $5.6 million or 1.3 percent of total loans and OREO at June 30, 2017, an improvement from $6.2 million and 1.5 percent at March 31, 2017. Fifty-nine percent of the Company's current nonperforming assets are related to the three legacy past due loans mentioned above and a single OREO property. The OREO property was a broker originated participation for the development of class A commercial office space which is complete and partially occupied. Unlike most OREO, this property is generating income that exceeds its carrying cost.

Provision for credit losses for the second quarter of 2017 was nominal as a result of the improving risk profile and a low level of net charge-offs, totaling $35,000, compared to $17,000 in the first quarter of 2017. On an annualized basis, net loan charge-offs during the second quarter were 0.09 percent, below the Company's established target of 0.30 percent. As of June 30, 2017, the allowance for loan losses equaled 1.11 percent of end of period total loans, compared to 1.16 percent at March 31, 2017.

Capital and Liquidity

As a result of reduced credit and non-interest expense, the Company's positive earnings trends have resulted in improved capital ratios. At June 30, 2017, the regulatory capital ratios for the Company's subsidiary bank, Highlands Union Bank, were: tier 1 leverage ratio of 7.98 percent, tier 1 risk-based capital ratio of 12.12 percent, and total risk-based capital ratio of 13.29 percent. Each of these metrics have increased over the past year and are anticipated to increase over the remainder of 2017.


2Q17

1Q17

4Q16

3Q16

2Q16

1Q16

4Q15

Tier 1 leverage
ratio

7.98

%

7.80

%

7.59

%

7.60

%

7.55

%

7.60

%

7.33

%

Tier 1 risk-based
capital ratio

12.12


12.15


11.78


11.85


11.75


11.84


11.28


Total risk-based
capital ratio

13.29


13.37


13.02


13.12


13.02


13.11


12.55
























The Company's loan to deposit ratio was 84.6 percent and the loan to asset ratio was 68.1 percent at June 30, 2017. The Company maintained cash and investment securities totaling 23.1 percent of assets as of this date. Further, the Company's deposit mix is weighted heavily towards customer deposits which funded 80.5 percent of assets at June 30, 2017 of which 58.7 percent is represented by core deposits to include 23.1 percent in non-interest bearing deposits. Time deposits funded 21.9 percent of assets at June 30, 2017, but very few of these deposits are in accounts that have balances of more than $250,000, reflecting the granularity and strength of the company's funding.

About Highlands Bankshares, Inc.

Highlands provides a relationship-based and highly personal banking experience to small to mid-sized private businesses and professionals. Focused on providing value to each and every customer, Highlands delivers banking services through highly skilled employees, digital channels, as well as 16 offices located in North Carolina, Eastern Tennessee, and Southwest Virginia.

Cautions Concerning Forward-Looking Statements

This news release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements relating to financial and operational performance and certain plans, expectations, goals and projections. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, these statements are inherently subject to numerous assumptions, risks and uncertainties, and there can be no assurances that actual results, performance or achievements will not differ materially from those set forth or implied in the forward-looking statements. For an explanation of the risks and uncertainties associated with forward-looking statements, see the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, and other filings with the Securities and Exchange Commission. All forward-looking statements included in this press release are based upon information available at the time of the release, and the Company assumes no obligation to update any forward-looking statement.



Quarter ended


Percent change compared to




June 30,
2017


March 31,
2017


June 30,
2016


Prior quarter


Same quarter
of prior year


INTEREST INCOME












Loans receivable and fees on loans


$

5,002



$

5,049



$

5,276



(0.93)

%


(5.19)

%


Investment securities


572



582



482



(1.72)



18.67



Federal funds sold


74



50



23



48.00



221.74



Total interest income


5,648



5,681



5,781



(0.58)



(2.30)



INTEREST EXPENSE












Deposits


465



446



446



4.26



4.26



Other borrowed funds


601



585



591



2.74



1.69



Total interest expense


1,066



1,031



1,037



3.39



2.80



Net interest income


4,582



4,650



4,744



(1.46)



(3.41)



Provision for loan losses


35



17



1,089



105.88



(96.79)



Net interest income after provision for loan losses


4,547



4,633



3,655



(1.86)



24.40



NON-INTEREST INCOME












Mortgage banking income


726



226





221.24





Securities gains, net






12





(100.00)



Service charges on deposit accounts


395



397



468



(0.50)



(15.60)



Other service charges, commissions and fees


463



498



355



(7.03)



30.42



Other operating income


89



166



176



(46.39)



(49.43)



Total non-interest income


1,673



1,287



1,011



29.99



65.48



NON-INTEREST EXPENSE












Salaries and employee benefits


2,928



2,493



3,036



17.45



(3.56)



Occupancy and equipment expense


723



669



722



8.07



0.14



Other operating expense


1,438



1,267



1,403



13.50



2.49



OREO-related expenses


174



20



627



770.00



(72.25)



Total non-interest expense


5,263



4,449



5,788



18.30



(9.07)



Income (loss) before income taxes


957



1,471



(1,122)



(34.94)



NM



Income tax expense (credit)


320



439



(448)



(27.11)



NM



Net income (loss)


$

637



$

1,032



$

(674)



(38.28)



NM



Net income (loss) per common share:












Basic


$

0.08



$

0.13



$

(0.08)







Diluted


0.06



0.10



(0.08)



















NM - variance calculation is not meaningful.












 



Six months ended June 30,


Percent
change




2017


2016



INTEREST INCOME








Loans receivable and fees on loans


$

10,051



$

10,754



(6.5)

%


Other investment income


61



112



(45.5)



Investment securities


1,154



914



26.3



Federal funds sold


124



49



153.1



Total interest income


11,329



11,717



(3.3)



INTEREST EXPENSE








Deposits


911



899



1.3



Other borrowed funds


1,186



1,183



0.3



Total interest expense


2,097



2,082



0.7



Net interest income


9,232



9,635



(4.2)



Provision for loan losses


52



1,313



(96.0)



Net interest income after provision for loan losses


9,180



8,322



10.3



NON-INTEREST INCOME








Mortgage banking income


952







Securities gains, net




47



(100.0)



Service charges on deposit accounts


792



866



(8.5)



Other service charges, commissions and fees


961



796



20.7



Other operating income


255



460



(44.6)



Total non-interest income


2,960



2,169



36.5



NON-INTEREST EXPENSE








Salaries and employee benefits


5,421



5,955



(9.0)



Occupancy and equipment expense


1,392



1,386



0.4



Other operating expense


2,705



2,705





OREO-related expenses


194



846



(77.1)



Total non-interest expense


9,712



10,892



(10.8)



Income (loss) before income taxes


2,428



(401)



NM



Income tax expense (credit)


759



(257)



NM



Net income (loss)


$

1,669



$

(144)



NM



Net income (loss) per common share:








Basic


0.20



(0.02)





Diluted


0.16



(0.02)













NM - variance calculation is not meaningful.








 

 









Percent change since



June 30,
2017


March 31,
2017


June 30,
2016


Prior
quarter


Same
quarter of
prior year

ASSETS











Cash and due from banks


$

18,890



$

22,122



$

15,464



(14.6)

%


22.2

%

Federal funds sold


25,823



34,066



12,795



(24.2)



101.8


Total cash and cash equivalents


44,713



56,188



28,259



(20.4)



58.2


Investment securities


98,444



102,769



105,343



(4.2)



(6.5)


Loans held for sale


5,912



3,063



1,637



93.0



261.1


Loans


420,230



409,111



416,940



2.7



0.8


Allowance for loan losses


(4,671)



(4,728)



(5,202)



(1.2)



(10.2)


Net loans


415,559



404,383



411,738



2.8



0.9


Premises and equipment, net


17,919



17,843



20,243



0.4



(11.5)


Real estate held for sale


1,430



1,662





(14.0)




Deferred tax assets


12,017



12,519



11,840



(4.0)



1.5


Interest receivable


1,501



1,845



1,676



(18.6)



(10.4)


Bank-owned life insurance


14,502



14,409



14,120



0.6



2.7


Other real estate owned


2,516



2,741



4,898



(8.2)



(48.6)


Other assets


2,380



2,114



2,588



12.6



(8.0)


Total assets


$

616,893



$

619,536



$

602,342



(0.4)



2.4


LIABILITIES AND STOCKHOLDERS' EQUITY






LIABILITIES











Deposits:











Non-interest bearing


$

144,945



$

140,616



$

121,933



3.1

%


18.9

%

Interest bearing


351,954



354,851



356,092



(0.8)



(1.2)


Total deposits


496,899



495,467



478,025



0.3



3.9


Other liabilities


1,368



1,477



1,017



(7.4)



34.5


Short-term borrowings


22,500



27,552



20,051



(18.3)



12.2


Long-term debt


40,172



40,133



47,673



0.1



(15.7)


Total liabilities


560,939



564,629



546,766



(0.7)



2.6


STOCKHOLDERS' EQUITY









Common stock


5,124



5,124



5,070





1.1


Preferred stock


4,184



4,184



4,184






Additional paid-in capital


19,002



18,946



18,891



0.3



0.6


Retained earnings


28,454



27,817



26,626



2.3



6.9


Accumulated other comprehensive income


(810)



(1,164)



805



(30.4)



(200.6)


Total stockholders' equity


55,954



54,907



55,576



1.9



0.7


Total liabilities and stockholders' equity


$

616,893



$

619,536



$

602,342



(0.4)



2.4













 

Profitability Ratios, Asset Quality and Capital





As of and for the quarter ended



June 30, 2017


March 31, 2017


June 30, 2016

Profitability Ratios (current quarter, annualized)









Net interest margin


3.42

%


3.48

%


3.73

%

Annualized return (loss) on average assets


0.42



0.68



(0.44)


Annualized return (loss) on average equity


4.68



7.59



(4.88)


Efficiency ratio


84.14



74.94



100.57









Asset Quality







Loans 90 days past due and still accruing


$



$



$


Non-accrual loans


3,070



3,452



6,548


Total non-performing loans


3,070



3,452



6,548


OREO, net


2,516



2,741



4,898


Total non-performing assets


$

5,586



$

6,193



$

11,446


Ratios:







Non-performing loans to loans and OREO


0.73

%


0.84

%


1.55

%

Non-performing assets to loans and OREO


1.32



1.50



2.71


Non-performing assets to total assets


0.91



1.00



1.90


Allowance for loan losses to total loans


1.11



1.16



1.25


Allowance for loan losses to non-performing loans


152.15



136.96



79.44


Past-due loans to total loans


0.89



1.14



2.75


Annualized net charge-offs to period-end loans


0.09



0.11



0.85









Capital







Common shares outstanding


8,199



8,199



8,113


Preferred shares outstanding


2,092



2,092



2,092


Book value per share:







Common


$

5.98



$

5.85



$

6.00


Combined common and preferred


5.44



5.34



5.45


Capital ratios (Bank only)







Tier 1 leverage ratio


7.98

%


7.80

%


7.55

%

Tier 1 risk-based capital ratio


12.12



12.15



11.75


Total risk-based capital ratio


13.29



13.37



13.02


Tier 1 common equity ratio


12.12



12.15



11.75









 

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SOURCE Highlands Bankshares, Inc.

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