Highlands Bankshares, Inc. Reports First Quarter 2017 Results

ABINGDON, Va., May 1, 2017 /PRNewswire/ -- Highlands Bankshares, Inc. (OTCQX: HLND) today reported earnings of $1.0 million or $0.10 per diluted share, for the quarter ended March 31, 2017, compared with net income of $155,000, or $0.02 per diluted share, for the quarter ended December 31, 2016 and net income of $530,000, or $0.05 per diluted share, for the quarter ended March 31, 2016.  Return on assets and return on equity were 0.67% and 7.65%, respectively.

"Highlands is off to a solid start in 2017.  With the help of many, our earnings quality, profitability, and risk profile each have markedly improved over the last twelve months," said Timothy K. Schools, President and Chief Executive Officer.  "In a relatively short period, we have established a strong credit culture, made strides in rationalizing our expense base, and strengthened our business development capabilities.  Importantly, our customers continue to receive outstanding service and rewarded Highlands by being recognized as the High Country's best bank for the third year in a row and as the highest ranked bank in our Abingdon and Bristol markets - actually moving up one position from a year ago.  With heightened focus and discipline, we see continued improvement and we are positioned for an exciting future."

"As previously reported, last year we proactively elected to recognize losses related to several long-standing credit issues and experienced severance costs in an effort to right-size our staffing needs.  In addition to our improved earnings from these actions, first quarter included a number of accomplishments.  Most importantly, our past dues were 1.14 percent, down from 4.11 percent only a year ago.  Key to this improvement was the payoff of our largest nonperforming loan of $3 million.  Following the hiring of our new High Country and Tri-Cities Market Executives, we hired a Knoxville Market Executive with extensive commercial and consumer experience across metro Knoxville at Pinnacle, BB&T, and SunTrust.  These hires have amplified our revenue capabilities.  Combined with six significant mergers underway across our region, we feel we have a tremendous opportunity to expand our personalized banking services."

"In the first quarter, we increased non-interest bearing deposits $6 million, expanded our merchant services accounts by 54 to a total of 290 – up from 188 a year ago, and produced $25 million of new loans for the second consecutive quarter – a level not achieved in over a decade.  Not historically having residential mortgage capabilities, we formed a mortgage company in Raleigh in the second quarter of last year and followed that with the hiring of mortgage loan originators in our banking markets.  In the last week of the first quarter, we were excited to have one of Greensboro's leading mortgage banking teams join Highlands, giving us a presence in another strong, growing metro area.  Lastly, to bring additional experiences and help us achieve our vision across a broader geography, we are adding three well recognized and accomplished executives to our board of directors, subject to regulatory approval:  Sutton Bacon – Chairman, Nantahala Outdoor Center; Chuck Meade – President, Meade Tractor; and Rob Moser – Chief Operating Officer, Immedion."

Revenue Growth

First quarter 2017 total revenue (tax-equivalent net interest income plus non-interest income) declined $257,000 to $5.9 million from $6.2 million in the fourth quarter of 2016.  The decline in quarterly revenue is a result of the fourth quarter benefiting from the recovery of interest for the Company's largest nonperforming loan and the first quarter having two fewer days. Net interest income was $4.7 million in the first quarter of 2017 compared to $4.8 million in the fourth quarter of 2016.  First quarter 2017 non-interest income totaled $1.3 million compared to $1.4 million in the previous quarter.

The tax-equivalent net interest margin for the first quarter of 2017 declined twenty basis points to 3.46 percent from 3.66 percent for the fourth quarter of 2016.  The net interest margin decline was principally due to the interest recovery of the Company's largest non-performing loan that paid off in January of 2017.  Deposits and loans remained relatively flat from the prior quarter.  However, the Company continued to improve the mix of deposits increasing the percentage of core deposits and non-interest bearing deposits and the underlying quality of the loans.  Loan production, as discussed above, was at its highest level for the second consecutive quarter but was offset by the payoff of the Company's largest nonperforming loan.

Efficiency

Operating efficiency is a core tenet of the Company's operations and is viewed as a significant opportunity.  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).  Highlands' has historically been more inefficient than industry peers in each of these metrics.  Efficiency and performance measurement became a focus in 2016.  Significant progress has been achieved and is expected to continue to improve.

Non-interest expense to assets was 2.87 percent in the first quarter of 2017, an improvement from a historical level of 3.25 percent plus.  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.  Highlands' elevated level relative to the industry has been the result of lower productivity per employee, paying above market prices on contracts from a lack of competitive bidding, and services that are procured and not used.  Each of these were evaluated in 2016 and strategies were identified to bring them thoughtfully closer to industry levels.  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 first quarter 2017, the Company's assets per employee was $3.5 million – an improvement from its historical level of $2.5 million. This is the first time the Company has reported a number above $3 million in the last decade.

The efficiency ratio is a measure of the revenue produced from the Company's assets and human resources.  In the first quarter of 2017, the efficiency ratio improved to 74.94 percent – its lowest level since 2007.  With well run banking institutions operating in a range of 50 to 55 percent, Highlands expects this metric to continue to improve.  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 our investment in our mortgage company whereby our volume continues to ramp up.

Asset Quality

The Company's primary focus over the past year has been to establish a strong credit culture.  Significant time was invested in working through a large amount of nonperforming assets, a high level of past due loans, identifying and strengthening weak pass credits, and ensuring the new loans produced by the bank are of higher quality.  This effort has resulted in an improved credit risk profile as illustrated by a greater than fifty percent reduction in past due loans and nonperforming assets.

Provision for credit losses for the first quarter of 2017 totaled $17,000.  The Company continues to benefit from a lower risk profile.  Net loan charge-offs were $116,000 or 0.11 percent annualized to end of period loans below the Company's established target of 0.30 percent. A stable allowance for loan losses at March 31, 2017 of 1.16 percent of end of period total loans combined with declining nonperforming loans, increased the allowance for loan losses as a percent of nonperforming loans to 137.0 percent from 118.2 percent on December 31, 2016.

Total past due loans as a percent of end of period loans were 1.14 percent at March 31, 2016 an improvement from 1.87 percent at December 31, 2016.  Importantly, total loans 30-89 days past due were 0.29 percent of period end loans.  Total loans greater than 90 days past due remain higher than desired at 0.84 percent of period end loans and are principally comprised of two legacy loans.  The historical elevated past dues were a result of the bank:  1) having created a culture whereby payment due dates were not enforced, 2) having had underwriting criteria materially below industry norms, and 3) not having a formal collection process.  Over the last year, each of these issues have been addressed and the Company anticipates operating at the newly achieved lower levels.

Nonperforming assets were $6.2 million or 1.50 percent of total loans and OREO at March 31, 2017 an improvement from $6.8 million and 1.64 percent at December 31, 2016.  Fifty percent of the Company's current nonperforming assets are related to the two 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 now complete and partially occupied.  Unlike most OREO, this property is generating income that exceeds its carrying cost.

Capital and Liquidity    

At March 31, 2017, the equity to assets ratio was 8.86 percent.  The regulatory capital ratios for the Company's subsidiary bank, Highlands Union Bank, were: Tier 1 Leverage Ratio of 7.80 percent, Tier I Risk-Based Capital ratio of 12.15  percent, and Total Risk-Based Capital ratio of 13.37 percent an improvement from 7.59 percent, 11.78 percent, and 13.02 percent at December 31, 2016, respectively. The regulatory capital ratios are significantly above the levels required to be considered "well capitalized," which is the highest possible regulatory designation.

The Company's loan to deposit ratio was 82.6 percent and the loan to asset ratio was 66.0 percent at March 31, 2017.  The Company maintained cash and investment securities totaling 25.7 percent of assets as of this date.  Further, the Company's deposit mix is weighted heavily towards customer deposits which funded 80.2 percent of assets at March 31, 2017 of which 57.4 percent is represented by core deposits to include 22.5 percent in non-interest bearing deposits.  Time deposits funded 22.8 percent of assets at March 31, 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, professionals, and other individuals.  Focused on providing value to each and every customer, Highlands delivers banking services through highly skilled employees, digital channels, as well as 14 branches located in Western 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.

SOURCE Highlands Bankshares, Inc.

Related Links

http://www.hubank.com