HIGHLANDS BANKSHARES, INC. 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.
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
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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 0.89% 1.14% 1.93% 2.17% 2.75% 3.35% 4.12%
loans
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 7.98% 7.80% 7.59% 7.60% 7.55% 7.60% 7.33%
ratio
Tier 1
risk-
based 12.12 12.15 11.78 11.85 11.75 11.84 11.28
capital
ratio
Total
risk-
based 13.29 13.37 13.02 13.12 13.02 13.11 12.55
capital
ratio
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, March 31, June 30, Prior quarter Same quarter
2017 2017 2016 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, March 31, June 30, Prior Same
2017 2017 2016 quarter 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.
