Highlands Bankshares, Inc. Reports Third Quarter Results

ABINGDON, Va., Nov. 8, 2016 /PRNewswire/ -- Highlands Bankshares, Inc. (HLND) today reported earnings of $1,000 or $0.00 per diluted share, for the quarter ended September 30, 2016, compared with a net loss of ($674,000), or ($0.08) per diluted share, for the quarter ended June 30, 2016 and net income of $429,000, or $0.04 per diluted share, for the quarter ended September 30, 2015.  Third quarter 2016 pre-tax results included OREO losses and operating expenses of $684,000 and  Highlands Home Mortgage start-up expense of $91,000.

"While not reflective in third quarter earnings, I am extremely pleased with Highlands' continued progress towards a disciplined, high performing company," said Timothy K. Schools, President and Chief Executive Officer.  "Having successfully transitioned three prior financial institutions, it takes time to do it right, the completion is never as fast as everyone would like, and many of the necessary steps and accomplishments are not clearly visible.  Highlands' historical financial performance is the result of an extended period of poor credit and lack of expense management - neither of which is a quick fix. Both require a culture change.  Our team has identified the root cause behind each of these two issues, and are well on our way to fully resolving them.  Importantly, during this transformation we continue to provide excellent customer service as indicated by our recognition this quarter as Smyth County, Virginia's number one bank."

"Highlands has experienced greater than $60 million in credit related expenses since 2008 relative to approximately $55 million it had in shareholder equity and its allowance for loan losses. To start the year, the bank had approximately 4% past due and nonperforming asset ratios, and prior to 2008 maintained past due and nonperforming asset ratios 30% to 100% greater than industry averages with no compensating offset in loan yields.  Management has taken a three step process to improve current credit risk and to build a strong credit culture going forward:  1. analyze all classified assets for potential loss and opportunities to strengthen, 2. review all pass credits for unidentified weaknesses to provide additional allowance and pursue opportunities to strengthen, and 3. strengthen credit staff, policies, and procedures to ensure higher quality credits are produced in the future."

"As a result, Highlands is in a much stronger credit, earnings, and capital position going forward.  Nonperforming assets have declined from $13.8 million at September 30, 2015 and $11.4 million at December 31, 2015 to $8.8 million today.  At this point, we see further improvement in each of these numbers and feel our allowance for loan loss is adequate. A small number of fragile credits exist which could warrant higher provisions in the future.  Much of the higher operating expense in recent years has been due to OREO losses and related expenses.  While appraisals support each of our remaining properties, these properties tend to be smaller or unique which make them challenging to sell.  Therefore, management has been proactive in marking several of the older properties down in an effort to sell them.  In the last twelve months, OREO balances have declined over 50 percent.  I am also happy to report that management reached an agreement in early fourth quarter for the recovery of a $500,000 loan that was charged off in second quarter.  This agreement calls for the full amount as well as accrued interest to be repaid by January 2017."

"Secondly, Highlands expenses are materially higher than industry averages based on expenses to assets and efficiency ratios.  This is a result of having had higher relative staffing, failure to review expenses and to competitively bid alternative vendors.  Each of these have now been thoroughly reviewed. Due to the timing of these actions and associated severance expense, limited benefit was experienced in 2016. Management expects expenses to be more in line starting in January 2017.  This has been a particularly challenging project as many dedicated employees who have done exactly what they have been asked to do were impacted and we want to ensure that we maintain our highly regarded service levels."

Revenue Growth

Third quarter total revenue (tax-equivalent net interest income plus non-interest income) increased $334,000 to $6.1 million from $5.8 million in the second quarter of 2016.  Tax-equivalent net interest income was $4.7 million in the third quarter equal to the second quarter of 2016.  Third quarter 2016 non-interest income increased $337,000 to $1.3 million from $1.0 million for the second quarter of 2016.

The tax-equivalent net interest margin for third quarter 2016 improved six basis points to 3.59 percent from 3.53 percent for second quarter 2016.  The net interest margin improvement was due primarily to the Company's ability to maintain its third quarter net interest income as compared to the second quarter even with a reduction in outstanding loan balances. This was done primarily by a shift into higher yielding securities and fed funds.

Non-interest income totaled $1.3 million, or 0.88 percent of total assets in the third quarter of 2016, compared to 0.67 percent for second quarter 2016.  The increased non-interest income and non-interest income as a percent of assets is the result of merchant services payment processing and Highlands Home Mortgage.  Since April, the number of merchants processed has increased by 50% contributing approximately $100,000 of additional annualized fee income.  Highlands Home Mortgage took its first application in May and has grown quarterly production from $0 to over $7 million.  Each of these are high return, repeatable businesses, with a large number of target customers that the Company has essentially not served in the past.  The customers' feedback has been outstanding, such as the following note received from one of the largest realtors within our markets, "I do not think I have ever had a client's loan be as easy as mine has been.  I am totally impressed and will send you some business.  I do not personally handle a lot of buyers but I will certainly send them to you when I have an opportunity to.  I will also make sure that my buyer's agent has your information stored."

Following a repositioning of its Knoxville market in second quarter 2016, Highlands added two accomplished banking teams in early fourth quarter.  In the Company's High Country market area, where it has been recognized as the number one bank two years in a row, David Lecka has joined as High Country Market Executive.  Lecka is an Avery County native and served as Avery County City President for United Community Banks since 2004.  Joining Lecka is Bill Caroselli who served as a High Country Commercial Relationship Manager for Community One since 2013 and Merchant Sales Consultant for BB&T from 2009 to 2013.  In the Company's Tri-Cities market area, where it was recently recognized as the number two bank, Mike Hill has joined as Tri-Cities Market Executive.  Hill is a Tri-Cities native and served as Tri-Cities Market Executive for First Citizens since 2008.  Joining Hill is Chris Blankenship who served with Hill at First Citizens in the Tri-Cities as a Business Banker since 2014 and as a Business Banker at First Tennessee from 2008 to 2014.

Efficiency

The efficiency ratio (non-interest expense divided by total revenue) was 98.34 percent in the third quarter of 2016.  As previously mentioned, third quarter expenses included OREO losses and operating expenses of $684,000 and Highlands Home Mortgage start-up expense of $91,000.  Adjusting for these expenses, Highlands efficiency ratio is materially above the industry average.  The Company's higher relative expense base is the result of:  higher staffing, a practice of not reviewing and bidding our vendor relationships, and higher legal and regulatory expense related to the current regulatory written agreement.

Throughout the year 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, total employees were 215, equivalent to $2.8 million of assets per employee.  At December 31, 2016, the Company expects to have approximately 170 employees, equivalent to $3.6 million of assets per employee.  The staffing reductions have occurred throughout the year and will continue into fourth quarter 2016. These reductions are expected to have a substantial impact to 2017 earnings. The 2016 staffing reduction has resulted in year to date severance expense of $420,000.

Secondly, the Company has proactively reviewed expenses for reduction opportunities and identified over $1 million of annualized reductions for which a nominal amount is currently in the earnings run rate.  In second quarter 2016, the Company disposed of its fleet of company vehicles and property and casualty insurance was reduced approximately $100,000 annually.  In late third quarter, processing for the bank's financial services division was reduced by $50,000 annually.  Beginning in October debit card processing was reduced $400,000 annually.  In late fourth quarter, the Company will outsource all remaining customer statements for an annualized saving of $16,000. In 2017, the Company's health insurance will be reduced by over $500,000 and janitorial services by $100,000.

Asset Quality

The provision for credit losses for the third quarter of 2016 totaled $173,000, a decline from $1.1 million in the second quarter of 2016.  The improvement in the third quarter 2016 provision for credit losses was the result of a second quarter write-down of a single non-performing loan and a $500,000 charge-off of loans to one borrower that had previously been performing but reached 90 days past due during the second quarter.  Net loan charge-offs in the third quarter of 2016 were $370,000 compared to $1.7 million in the second quarter of 2015.  Net charge-offs were 0.34 percent annualized to end of period loans in the third quarter of 2016.

The past due ratio continued to improve from 3.73 percent at September 30, 2015 and 2.75 percent at March 31, 2016, to 2.17 percent at September 30, 2016.  Nonperforming assets and nonperforming assets as a percent of total loans and OREO each improved from second quarter 2016 to $8.8 million and 2.14% from $13.8 million and 3.22 percent at September 30, 2015 and $11.4 million and 2.71 percent at June 30, 2016.

The allowance for loan losses at September 30, 2016 was $5.0 million or 1.22 percent of end of period total loans, down $198,000 or three basis points from June 30, 2016.

Capital and Liquidity     

At September 30, 2016, the equity to assets ratio was 9.04 percent.  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 11.85  percent, and Total Risk-Based Capital ratio of 13.12 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 67.7 percent at September 30, 2016.  The Company maintained cash and investment securities totaling 23.5 percent of assets as of this date.  Further, the Company's deposit mix is weighted heavily towards customer deposits which fund 80.5 percent of assets at September 30, 2016 of which 56.5 percent is funded by core deposits.  Time deposits fund 24.0 percent of assets at September 30, 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.

Related Links

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