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

ABINGDON, Va., Jan. 26, 2017 /PRNewswire/ -- Highlands Bankshares, Inc. (HLND) today reported earnings of $155,000 or $0.02 per diluted share, for the quarter ended December 31, 2016, compared with net income of $1,000, or $0.00 per diluted share, for the quarter ended September 30, 2016 and a net loss of ($806,000), or ($0.08) per diluted share, for the quarter ended December 31, 2015.  For the year ended December 31, 2016, net income totaled $12,000 or $0.00 per diluted share, compared with 2015 net income of $1.3 million or $0.13 per diluted share.  In 2016, the Company's earnings were negatively impacted by a proactive strategy to improve credit risk and normalize its expense structure.  In 2015, net income benefited from a $1.0 million deferred tax valuation reversal.

"Fourth quarter included a number of major accomplishments completing a year of transition for Highlands.  This groundwork positions Highlands very well for 2017 and into the future," said Timothy K. Schools, President and Chief Executive Officer.  "At the outset of last year, Highlands' new management team set out to restore the company's net income and profitability which had been hampered by poor credit quality and excessive expenses since prior to the recession.  Throughout 2016, management:  1. proactively improved elevated credit metrics to industry levels and instilled a strong credit culture, 2. thoughtfully lowered staffing levels closer to industry levels, and 3. diligently reviewed the services the company was procurring for opportunities to eliminate or reduce expenses.  In many cases, these actions came with a cost. I feel very fortunate and am impressed that Highlands' employees were able to remedy material risk management deficiencies and reset the future earnings power of the company, overcome the associated costs to do so, and still increase each of the three regulatory capital ratios."

"Specifically, fourth quarter marked three of our largest accomplishments:  an agreement to sell our largest non-performing loan which closed in January and resulted in the recovery of full interest, full late charges and other expenses; the renegotiation of our health insurance, janitorial, and trash collection which will result in over $700,000 of annual recurring expense savings beginning in January 2017; and an agreement for a January 2017 full recovery of a $500,000 consumer unsecured loan that had been fully charged off in the second quarter of 2016.  There continues to be many, many more opportunities to improve our expense base.  Just this month, we have identified an additional $300,000 annual recurring expense savings primarily related to technology cost.  Together with the year's early work, Highlands' credit metrics and expense base are well positioned entering 2017.  Combined with our new High Country and Tri-Cities banking teams, I expect 2017 to have much less noise and to be a much improved year."

Revenue Growth

Fourth quarter total revenue (tax-equivalent net interest income plus non-interest income) increased $105,000 to $6.2 million from $6.1 million in the third quarter of 2016.  Net interest income was $4.8 million in the fourth quarter 2016 compared to $4.7 million in the third quarter of 2016.  Fourth quarter 2016 non-interest income of $1.4 million equals the previous quarter.

The tax-equivalent net interest margin for fourth quarter 2016 improved seven basis points to 3.66 percent from 3.59 percent for third quarter 2016.  The net interest margin improvement was due to the Company's reduction in non accrual loan balances including the interest recovery of the Company's largest non-performing loan that was 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.

Non-interest income totaled $1.3 million, or 0.88 percent of total assets in the fourth quarter of 2016, equalling third quarter 2016. 

Efficiency

The efficiency ratio (non-interest expense divided by total revenue) was 97.34 percent in the fourth quarter of 2016.  As previously mentioned, fourth quarter expenses included OREO losses, valuation writedowns, and operating expenses of $668,000 and severance expenses of $425,000.  Adjusting for these expenses, Highlands efficiency ratio remains materially above the industry average.  The Company's higher efficiency ratio was the result of a higher than industry staffing level, the result of not proactively managing operating expenses, and higher than industry OREO maintenance expense.  Significant actions were taken in 2016 to bring expense to an acceptable level.  The Company expects further improvement in the efficiency ratio in first quarter 2017 and throughout the year.

In 2016, Highlands took the difficult step of reducing its staff by applying industry average staffing metrics to all departments. The goal is to approach the industry target of $4 to $5 million of assets per employee.  As of December 31, 2015, full time equivalent employees were 219, or $2.8 million of assets per employee.  At December 31, 2016, full time equivalent employees were 172, or $3.6 million of assets per employee.  The staffing reductions have occurred throughout the year and continued in fourth quarter 2016. The fourth quarter 2016 reduction included 25 people and will provide recurring, annual expense savings of nearly $1.0 million beginning January 2017.

Secondly, the Company proactively reviewed expenses for reduction opportunities throughout 2016 with partial benefit reflected in fourth quarter 2016.  In the fourth quarter of 2016, an additional $1 million of recurring, annualized expense reductions were identified which will begin January 2017.  In January 2017, the Company has already identified an additional $300,000 of recurring, annualized expense reductions that will occur thoughout the 2017 year.

Asset Quality

The past due and nonperforming assets ratios as of December 31, 2016 were fifty percent lower than December 31, 2015.  Total past due loans as a percent of end of period loans improved from 3.89 percent at December 31, 2015 and 2.17 percent at September 30, 2016, to 1.87 percent at December 31, 2016.  Nonperforming assets and nonperforming assets as a percent of total loans and OREO each improved from fourth quarter 2015 to $6.8 million and 1.64 percent from $15.2 million and 3.47 percent at December 31, 2015 and $8.8 million and 2.14 percent at September 30, 2016.

During the quarter, the Company entered into a transaction to sell its largest, single nonperforming loan which closed and was paid in full on January 19, 2017.  On December 31, 2016, this loan remained past due and for reporting purposes was reclassified to a performing loan.  Had this loan closed and been paid in full on December 31, 2016, total past due loans as a percent of end of period loans would have been 1.34 percent.

The provision for credit losses for the fourth quarter of 2016 totaled $40,000, a decline from $173,000 in the third quarter of 2016.  The improvement in the fourth quarter 2016 provision for credit losses was the result of lower net charge offs, improved credit quality, and stable loan balances.  Net loan charge-offs in the fourth quarter of 2016 were $216,000 compared to $370,000 in the third quarter of 2016.  Net charge-offs were 0.21 percent annualized to end of period loans in the fourth quarter of 2016 compared with 0.36 percent in the third quarter and 0.42 percent in fourth quarter 2015.

The allowance for loan losses at December 31, 2016 was $4.8 million or 1.18 percent of end of period total loans, down $175,000 or four basis points from September 30, 2016.  As of December 31, 2016, the allowance for loan losses as a percent of nonperforming loans increased to 120.76 percent from 90.13 percent on September 30, 2016 and 59.79 percent on December 31, 2015.

Capital and Liquidity

At December 31, 2016, the equity to assets ratio was 8.77 percent.  The regulatory capital ratios for the Company's subsidiary bank, Highlands Union Bank, were: Tier 1 Leverage Ratio of 7.59 percent, Tier I Risk-Based Capital ratio of 11.78  percent, and Total Risk-Based Capital ratio of 13.02 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 84.0 percent and the loan to asset ratio was 66.9 percent at December 31, 2016.  The Company maintained cash and investment securities totaling 24.8 percent of assets as of this date.  Further, the Company's deposit mix is weighted heavily towards customer deposits which fund 80.1 percent of assets at December 31, 2016 of which 57.2 percent is funded by core deposits, an increase from 55.2 percent at December 31, 2015.  Time deposits fund 22.9 percent of assets at December 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 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, 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.

Related Links

http://www.hubank.com