Highlands Bankshares, Inc. Reports Fourth Quarter 2017 and Year End Results

ABINGDON, Va., Feb. 12, 2018 /PRNewswire/ -- Highlands Bankshares, Inc. (OTCQX: HLND) today reported a net loss of ($3.1) million or ($0.38) per diluted share, for the quarter ended December 31, 2017, compared with net income of $1.0 million or $0.10 per diluted share, for the quarter ended September 30, 2017 and $155,000, or $0.00 per diluted share, for the quarter ended December 31, 2016.  For the year ended December 31, 2017, the Company reported a loss of ($437,000) or ($0.05) per diluted share, compared with 2016 net income of $12,000 or $0.00 per diluted share.

Fourth quarter 2017 net income includes one-time additional income tax expense, resulting from the revaluation of the Company's net deferred tax asset related to the enactment of the Tax Cuts and Jobs Act in December 2017, of $4.0 million.  Excluding the one-time tax impact, fourth quarter 2017 net income was $835,000 or $0.08 per diluted share and net income for 2017 was $3.5 million or $0.34 per diluted share.

"I am proud to report that Highlands had an outstanding year in 2017," said Timothy K. Schools, President and Chief Executive Officer.  "The hard work of our dedicated employees the last two years resulted in a strengthened balance sheet and the Company's highest core earnings in over a decade.  We improved asset quality by working-out identified and previously unidentified credit risks and replacing a good portion of our loan balances with new, higher quality loan relationships; reduced nonearning assets; used low-to-no-yielding cash and securities to pay off high cost wholesale funding; improved funding where core and noninterest bearing deposits as a percent of assets have risen from 55.2 percent and 21.0 percent to 62.1 percent and 26.9 percent respectively; and meaningfully enhanced our capital ratios.  Highlands' bankers, many of whom joined our Company near the beginning of last year, had great success in attracting strong new relationships and we made initial progress in improving our efficiency.   With our enhanced business development capabilities, an improving economy, and our opportunity to continue to improve efficiency, 2018 is expected to be another strong year."

Revenue Growth

Fourth quarter 2017 total revenue (net interest income plus noninterest income) declined $243,000 to $6.3 million from $6.5 million in the third quarter of 2017.  Net interest income was $4.9 million in the fourth quarter of 2017, an increase of $68,000 from $4.8 million in the third quarter of 2017.  Net interest income increased in the fourth quarter due to a thirteen basis point improvement in the net interest margin.  Fourth quarter 2017 average earning assets were $529.7 million, compared to third quarter 2017 average earning assets of $534.4 million.  Fourth quarter 2017 noninterest income declined $311,000 to $1.4 million from the third quarter of 2017 as a result of seasonally lower secondary market mortgage originations.

Strong loan production continued during the quarter but was offset by a $6 million payoff from the Company's largest borrower, $5 million of payoffs from certain relationships the Company worked to exit the bank, and $865,000 in loan charge-offs from two longstanding nonperforming loans.  As a result of the Company's asset quality improvement efforts, loans held for investment declined by approximately $25 million in 2017 from foreclosure, charge-off, and efforts to exit weak loans from the bank, in addition to, the $6 million payoff cited above.  Total loans held for investment increased 5.3 percent in 2017, or 11.5 percent adjusting for the $25 million decline in loans.  Similarly, noninterest bearing deposits grew 10.3 percent in 2017. 

Noninterest Expense and Operating Efficiency

Noninterest expenses increased $45,000 from the third quarter of 2017 and declined $1.1 million from the fourth quarter of 2016 to $5.0 million in the fourth quarter of 2017.  Over the past year, declines have occurred in salaries and employee benefits, occupancy and equipment expense, other operating expense, and OREO-related expenses.  Operating efficiency remains a key opportunity and the Company uses three metrics to monitor its performance relative to peers: efficiency ratio (noninterest expense as a percentage of total revenue), noninterest expense as a percentage of assets, and assets per employee.

For the fourth quarter of 2017, the efficiency ratio was 79.19 percent, an increase from 75.54 percent in the third quarter of 2017 and a decline from 97.34 percent in the fourth quarter of 2016.   Noninterest expense as a percentage of assets increased in the fourth quarter of 2017 to 3.35 percent from 3.29 percent in the third quarter of 2017 and declined from 3.94 percent in the fourth quarter of 2016.  Assets per employee improved to $3.9 million at December 31, 2017 from $3.5 million at September 30, 2017 and $2.9 million at December 31, 2016.  With the Company's total revenue as a percentage of assets in a reasonable range among high performing banks, management has a heightened focus on aligning operating expenses with revenue in an effort to achieve a stronger pretax preprovision return on assets.  

Asset Quality

The provision for credit losses for fourth quarter 2017 was $49,000, an increase from $19,000 in third quarter 2017.  Net charge-offs in the fourth quarter of 2017 were $776,000, or 0.73% annualized of average loans held for investment.   During the quarter, the Company wrote down longstanding nonperforming loans related to two relationships.  Year-to-date net charge-offs totaled $899,000, or 0.21 percent annualized of average loans held for investment.  Subsequent to the end of 2017, the Company collected $184,000 for a full recovery of $547,000 in principal, interest, and late fees for a 2016 charged-off loan.

Past due loans as a percentage of total loans held for investment were 0.77 percent at December 31, 2017.  As of December 31, 2017, loans greater than 90 days past due totaled $1.6 million, or 0.38 percent of loans held for investment, an improvement from 1.51 percent at December 31, 2016; loans 30-89 days past due were $1.7 million, or 0.39 percent of loans held for investment; and nonperforming assets were $4.4 million, or 1.02 percent of loans held for investment and OREO.  The Company's classified assets as a percentage of tier 1 capital and the allowance for credit losses was 31 percent at December 31, 2017.

As of December 31, 2017, the allowance for loan losses totaled $4.0 million, or 0.92 percent of loans held for investment. Fourth quarter 2017 allowance coverage was 1.94 times nonperforming loans.

Capital and Liquidity

At December 31, 2017, the regulatory capital ratios for the Company's subsidiary bank, Highlands Union Bank, were: tier 1 leverage ratio of 8.36 percent, tier 1 risk-based capital ratio of 12.06 percent, and total risk-based capital ratio of 13.02 percent.  Fourth quarter capital ratios were negatively impacted by approximately 20 basis points as a result of the revaluation of the Company's net deferred tax asset related to the Tax Cuts and Jobs Act. 

The Company's loans held for investment to deposit ratio was 86.6 percent and the loans held for investment to asset ratio was 72.7 percent at December 31, 2017.  The Company maintained cash and investment securities totaling 18.9 percent of assets as of this date.  The Company's deposit mix is weighted heavily towards customer deposits which funded 83.9 percent of assets at December 31, 2017, of which 62.1 percent is represented by core deposits, an increase from 55.2 percent at December 31, 2015, to include 26.9 percent in noninterest bearing deposits.  Time deposits funded 21.4 percent of assets at December 31, 2017.  A limited amount 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 related individuals. 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.

SOURCE Highlands Bankshares, Inc.

Related Links

http://www.hubank.com