Highlands Bankshares, Inc. Reports First Quarter Results

ABINGDON, Va., April 20, 2016 /PRNewswire/ -- Highlands Bankshares, Inc. (OTCQX: HLND) today reported net income of $530,000, or $0.05 per diluted share, for the quarter ended March 31, 2016, compared with a net loss of $806,000, or ($0.08) per diluted share, for the quarter ended December 31, 2015 and net income of $580,000, or $0.06 per diluted share, for the quarter ended March 31, 2015.  First quarter 2016 pre-tax results included severance expense of $244,000, an insurance settlement of $148,000, and securities gains of $35,000.

"Highlands is off to an excellent start in 2016.  In a short amount of time, we have made significant strides in improving performance and expect to see continued improvement throughout the year," said Timothy K. Schools, President and Chief Executive Officer.  "In December, we announced a performance improvement initiative designed to:  1. significantly enhance our net income and return on capital by establishing and recalibrating seven key performance indicators; 2. materially strengthen our credit culture by reducing our past due and nonperforming asset ratios, and 3. satisfactorily remediate the Company's existing regulatory agreement.  All through first quarter, we have been implementing strategies resulting  in real progress towards each of these goals."

"Looking at March, which included a full month of all executed strategies to date except one, adjusting for the full month benefit of this one strategy, and adjusting for the severance, insurance settlement, and securities gains that occurred in first quarter, our annualized net income run rate exceeded $3 million.  On top of this run rate, our team has identified an additional $8 million of potential, recurring pre-tax pre-provision opportunities that we will be working to implement over the next twenty-four months.  Key to our first quarter strategies was a more focused and improved collections process.  As a result of this company-wide effort, I am pleased to report the total past due percentage declined to a seven year low."

"Many other exciting accomplishments occurred during the quarter.  From a business development standpoint, we hired one of the leading retail executives from the former National Commerce Financial which was recognized as an industry leading retail bank, one of the top mortgage CEOs across the Carolinas and Virginia, as well as the branch manager and two of his top lieutenants from the largest single branch in our home market of Washington County, Virginia.  From an operations standpoint, we hired two of the key back-office leaders of the former National Commerce Financial which was recognized for industry-leading efficiency.  From a customer standpoint, we were recognized for the second year in a row as the number one bank in the Boone/Watauga County, NC market and the number two bank in the Bristol, TN/VA market."

"Lastly, we took three significant actions to demonstrate Highlands' shareholder oriented focus: 1. instituted the first company-wide performance based bonus plan based on increasing net income, improving Return on Assets, and remediating our regulatory agreement; 2. adopted executive shareholder guidelines to encourage the CEO and CEO's direct reports to own Highlands Bankshares' common stock at a level two times and one times their annual respective salary; and 3. sought a higher quality stock exchange in the OTCQX to improve liquidity and which Highlands will begin trading on Friday, April 22."                                                         

Revenue Growth 

Total revenue (tax-equivalent net interest income plus non-interest income) increased $706,000 to $6.0 million from $5.3 million in the fourth quarter of 2015.  First quarter 2016 tax-equivalent net interest income increased $551,000 from $4.3 million in the fourth quarter of 2015 to $4.9 million in the first quarter of 2016.  Fourth quarter 2015 net interest income included a $395,000 reversal of a loan late charge receivable.  First quarter 2016 non-interest income increased $155,000 to $1.2 million from $1.0 million for the fourth quarter of 2015. 

The tax-equivalent net interest margin for first quarter 2016 improved 22 basis points to 3.63 percent from 3.41 percent for fourth quarter 2015.  The net interest margin improvement was due primarily to deposit strategies, the beginning of the restructuring of the investment portfolio, and the reversal of the late charge receivable mentioned above.

Non-interest income totaled $1.2 million, or 0.74 percent of total assets in the first quarter of 2016, compared to 0.65 percent for fourth quarter 2015.  The Company has outlined and is evaluating several opportunities to increase non-interest income as a percent of assets to include: assessing existing fees for products and services relative to local peers and the industry; assessing local peer and industry product and service fees not currently assessed; additional penetration and utilization of debit and credit cards; expansion of investment advisory services; expansion of merchant services; and the establishment of a secondary market mortgage division.

Efficiency

The efficiency ratio (non-interest expense divided by total revenue) improved to 84.38 percent in the first quarter of 2016 from 109.23 percent in the fourth quarter of 2015 as non-interest expense declined $732,000 while total revenue increased $706,000.  As previously mentioned, first quarter 2016 pre-tax results included severance expense of $244,000, an insurance settlement of $148,000, and securities gains of $35,000.  As illustrated in the key performance indicators above, the company is above its targeted efficiency ratio as a result of both non-interest expense and total revenue not meeting their targeted thresholds.  The efficiency ratio is expected to improve throughout the year as a result of the performance improvement initiative.  The Company is proactively identifying and implementing revenue and expense strategies to ensure it is positioned to maximize revenue growth as well as provide outstanding customer service.

Asset Quality

The provision for credit losses for the first quarter of 2016 totaled $224,000, a decline of $548,000 from the fourth quarter of 2015.  The improvement in the first quarter 2016 provision for credit losses was the result of an additional provision for a single new nonaccrual loan and loan growth in the fourth quarter of 2015.  Net loan charge-offs in the first quarter of 2016 were $54,000 compared to $452,000 in the fourth quarter of 2015.  Net charge-offs were 0.05 percent annualized to end of period loans in the first quarter of 2016, below the Company's targeted level of 0.30 percent.

During the first quarter, the Company created a centralized Collections and Recovery Department and Special Assets Department which will be led by two new employees from the former National Commerce Financial and BB&T, respectively each of which are recognized for outstanding credit cultures and credit risk management.  These efforts led to a 78 basis point reduction in the past due ratio, in a single quarter, to a seven year low of 3.34 percent with no increase in net charge offs.  Total nonperforming assets and nonperforming assets as a percent of total loans and OREO each improved from fourth quarter 2015 to $14.9 million and 3.43% respectively.  In addition to further reducing the current level of past dues and non-performing assets, these individuals are implementing recovery strategies for the $23 million of demand deposits and loans that have been charged off since 2008.

The allowance for loan losses at March 31, 2016, was $5.8 million or 1.36 percent of end of period total loans, up from $5.7 million or 1.31 percent at December 31, 2015.  While past dues and non-performing assets have shown material improvement, they remain above industry levels and the Company's targeted ratios.  In combination with the two new credit departments, an internal team is reviewing all credit policies, the credit approval process, and credit review process in an effort to establish a strong credit culture and recalibrate the Company's credit metrics. 

Capital and Liquidity      

At March 31, 2016, each of the Company's capital ratios improved.  The equity to assets ratio was 9.02 percent, an increase from 8.68  percent at December 31, 2015.  The regulatory capital ratios for the Company's subsidiary bank, Highlands Union Bank, were: Tier 1 Leverage Ratio of 7.60 percent, Tier I Risk-Based Capital ratio of 11.84  percent, and Total Risk-Based Capital ratio of 13.11 percent. These 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 86.8 percent and the loan to asset ratio was 69.3 percent at March 31, 2016.  The Company maintained cash and investment securities totaling 22.7 percent of assets as of this date.  Further, the Company's deposit mix is weighted heavily towards customer deposits which fund 79.8 percent of assets at March 31, 2016 of which 55.2 percent is funded by core deposits.  Time deposits fund 24.6 percent of assets at March 31, 2016, 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 Bankshares, Inc. is a bank holding company and parent company of Highlands Union Bank.  The Company and Bank are headquartered in Abingdon, Virginia, and offer relationship-based financial services through 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, 2015, 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.