HIGHLANDS BANKSHARES, INC. 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 $1.0 million deferred tax valuation reversal.
"Fourth quarter included a number of major accomplishments completing a year of transition for Highlands. This groundwork positions Highlands very well for 2017 and into the future," said Timothy K. Schools, President and Chief Executive Officer. "At the outset of last year, Highlands' new management team set out to restore the company's net income and profitability which had been hampered by poor credit quality and excessive expenses since prior to the recession. Throughout 2016, management: 1. proactively improved elevated credit metrics to industry levels and instilled a strong credit culture, 2. thoughtfully lowered staffing levels closer to industry levels, and 3. diligently reviewed the services the company was procurring for opportunities to eliminate or reduce expenses. In many cases, these actions came with a cost. I feel very fortunate and am impressed that Highlands' employees were able to remedy material risk management deficiencies and reset the future earnings power of the company, overcome the associated costs to do so, and still increase each of the three regulatory capital ratios."
($ mil) 12/31/2015 12/31/2016
Nonperforming assets $15.2 $6.8
Nonperforming assets to loans and OREO 3.47% 1.64%
Past due loans $16.8 $7.6
Past due loans to end of period loans 3.89% 1.87%
Past due loans with NPL sale $5.4
-
Past due loans to end of period loans with NPL sale 1.34%
-
Tier 1 leverage ratio 7.33% 7.59%
Tier 1 risk-based capital ratio 11.28% 11.78%
Total risk-based capital ratio 12.55% 13.02%
Full time equivalent employees (FTE) 219 172
Assets per FTE $2.8 $3.6
"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."
Key Performance Indicators
Target 4Q16 3Q16 4Q15
Return on Assets 1.25% 0.10% 0.00% (0.52%)
Revenue Growth 5.00% 1.72% 5.80% (4.91%)
Net Interest Margin 3.75% 3.66% 3.59% 3.24%
Non-Interest Income to Assets 1.00% 0.88% 0.88% 0.65%
Non-Interest Expense to Assets 2.75% 3.94% 3.91% 3.78%
Efficiency Ratio 55.00% 97.34% 98.34% 109.23%
Net Charge-offs to Total Loans 0.30% 0.21% 0.36% 0.42%
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.
Highlands Bankshares Inc. (OTCQX : HLND)
Balance Sheet
(Dollars in Thousands)
(Unaudited) Quarter Ended: Sequential Year over
--------------
December 31 September 30 Decmeber 31 Quarter Year
2016 2016 2015 % Change % Change
---- ---- ---- -------- --------
Assets:
Cash and Due from Banks $27,391 $24,824 $26,713 10% 3%
Fed Funds Sold 22,994 22,379 20,178 3% 14%
------ ------ ------ --- ---
50,385 47,203 46,891 7% 7%
Cash and Cash Equivalents
Investment Securities Available for Sale 95,073 96,860 79,860 -2% 19%
Other Investments, at cost 6,637 6,636 6,592 0% 1%
101,710 103,496 86,452 -2% 18%
Total Investments
Loans 409,667 410,093 432,083 0% -5%
Allowance for Loan Losses 4,829 5,004 5,654 -3% -15%
----- ----- ----- --- ---
404,838 405,089 426,429 0% -5%
Total Net Loans
Loans Held for Sale 1,255 2,760 - 0%
Premises and Equipment, net 17,814 19,972 20,612 -11% -14%
Deferred Tax Assets 12,989 12,006 12,126 8% 7%
Other Real Estate Owned 2,768 3,288 5,694 -16% -51%
Bank Owned Life Insurance 14,314 14,217 14,585 1% -2%
Accrued Interest Receivable 2,047 1,945 1,761 5% 16%
Other Assets 4,558 2,294 2,432 99% 87%
----- ----- ----- --- ---
55,745 56,482 57,210 -1% -3%
Total Other Assets
$612,678 $612,270 $616,982 0% -1%
Total Assets
===
Liabilities and Shareholders' Equity:
Deposits:
$134,488 $132,006 $129,634 2% 4%
Demand, Non-Interest Bearing
$355,381 $356,058 $365,278 0% -3%
Interest Bearing
489,869 488,064 494,912 0% -1%
Total Deposits
Interest, taxes and other liabilities 1,353 1,099 761 23% 78%
Other short-term borrowings 27,552 27,551 20,052 0% 37%
Long-term debt 40,146 40,160 47,698 0% -16%
69,051 68,810 68,511 0% 1%
Total Other Liabilities
558,920 556,874 563,423 0% -1%
Total Liabilities
Shareholders' Equity:
Common Stock 5,124 5,124 4,907 0% 4%
Preferred Stock 4,184 4,184 4,184 0% 0%
Additional Paid-in Capital 18,891 18,837 17,944 0% 5%
Retained Earnings 26,785 26,627 26,773 1% 0%
Accumulated Other Comprehensive Income (Loss) (1,226) 624 (248) -296% 394%
------ --- ---- ---- ---
53,758 55,396 53,560 -3% 0%
Total Shareholders' Equity
$612,678 $612,270 $616,983 0% -1%
Total Liabilities and Shareholders' Equity
===
Highlands Bankshares Inc. (OTCQX : HLND)
Income Statement
(Dollars in thousands, except per share data)
(Unaudited) Quarter Ended: Sequential Year over
--------------
Dec 31 Sept. 30 Dec 31 Quarter Year
2016 2016 2015 % Change % Change
---- ---- ---- -------- --------
Interest Income
$5,349 $5,224 $5,009 2% 7%
Loans receivable and fees on loans
Securities available for sale:
$374 390 292 -4% 28%
Taxable
$88 87 80 1% 10%
Exempt from taxable income
$54 61 61 -11% -11%
Other investment income
$30 20 19 50% 58%
Federal funds sold
5,895 5,782 5,461 2% 8%
Total interest income
Interest Expense
$450 445 507 1% -11%
Deposits
$602 596 614 1% -2%
Other borrowed funds
1,052 1,041 1,121 1% -6%
Total interest expense
Net Interest Income 4,843 4,741 4,340 2% 12%
Provision for Loan Losses $40 173 772 -77% -95%
--- --- ---
Net interest income after provision for loan losses 4,803 4,568 3,568 5% 35%
Non-interest Income
Securities gains, losses, net $ - 0 0 0% 0%
Mortgage Banking Income $164 361 0
Service charges on deposit accounts $456 464 425 -2% 7%
Other service charges, commissions and fees $571 381 427 50% 34%
Other operating income $160 142 151 13% 6%
1,351 1,348 1,003 0% 35%
Total Noninterest Income
Non-interest Expense
Salaries and employee benefits $3,155 2,895 2,644 9% 19%
Occupancy expense of bank premises $324 358 266 -9% 22%
Furniture and equipment expense $368 412 344 -11% 7%
Other operating expense $1,829 1,639 1,521 12% 20%
Foreclosed Assets - Write-down and operating expenses $353 684 1,061
6,029 5,988 5,836 1% 3%
Total Noninterest Expense
Income Before Income Taxes $125 (72) (1,265) -274% -110%
Income Tax Expense (Benefit) $(30) (73) (459)
$155 $1 $(806) - -
Net Income
===
Basic earnings per share ($) 0.02 0.00 (0.10) - -
Diluted earnings per share ($) 0.02 0.00 (0.08) - -
Highlands Bankshares Inc. (OTCQX : HLND)
Income Statement
(Dollars in thousands, except per share data)
(Unaudited) For the Twelve Months Ended One
---------------------------
Dec 31 Dec 31 Year
2016 2015 % Change
---- ---- --------
Interest Income
Loans receivable and fees on loans $21,327 $20,930 2%
Securities available for sale:
1,408 1,165 21%
Taxable
333 361 -8%
Exempt from taxable income
227 222 2%
Other investment income
99 85 16%
Federal Funds sold
23,394 22,763 3%
Total interest income
Interest Expense
Deposits 1,794 2,169 -17%
Other borrowed funds 2,381 2,388 0%
4,175 4,557 -8%
Total interest expense
Net Interest Income 19,219 18,206 6%
Provision for (recapture of) loan losses 1,526 1,469 4%
----- ----- ---
Net interest income after provision for loan losses 17,693 16,737 6%
Non-interest Income
Securities gains, losses, net 47 16 194%
Mortgage Banking Income 525 -
Service charges on deposit accounts 1,786 1,685 6%
Other service charges, commissions and fees 1,748 1,647 6%
Other operating income 762 584 30%
4,868 3,932 24%
Total Noninterest Income
Non-interest Expense
Salaries and employee benefits 12,005 10,242 17%
Occupancy expense of bank premises 1,332 1,131 18%
Furniture and equipment expense 1,516 1,370 11%
Other operating expense 6,173 6,049 2%
Foreclosed Assets - Write-down and operating expenses 1,883 1,745 8%
22,909 20,537 12%
Total Noninterest Expense
Income Before Income Taxes (348) 132 -364%
Income Tax Expense (Benefit) (360) (1,205)
$12 $1,337 -99%
Net Income
===
Basic earnings per share ($) 0.00 0.17 -100%
Diluted earnings per share ($) 0.00 0.13 -100%
Highlands Bankshares Inc. (OTCQX : HLND)
Asset Quality and Capital Adequacy
(Dollars in thousands, except per share data)
(Unaudited)
Dec 31 Sept 30 Dec 31
Period Ended 2016 2016 2015
---- ---- ----
Asset Quality
$ - $ - $ -
Loans 90 days past due & still accruing interest
3,999 5,552 9,456
Nonaccrual loans (1)
3,999 5,552 9,456
Total nonperforming loans
2,768 3,288 5,724
OREO and repossessed assets, net
$6,767 $8,840 $15,180
Total Nonperforming Assets
===
0.97% 1.34% 2.16%
Nonperforming loans to loans and OREO
1.64% 2.14% 3.47%
Nonperforming assets to loans and OREO
1.18% 1.22% 1.31%
Allowance for loan losses to total loans
120.76% 90.13% 59.79%
Allowance for loan losses to nonperforming loans
1.87% 2.17% 3.89%
Past due loans to end of period loans
0.21% 0.36% 0.42%
Net chargeoffs (annualized) to end of period loans
Profitability Ratios
3.66% 3.59% 3.24%
Net interest margin
0.10% 0.00% -0.52%
Return on average assets
1.14% 0.00% -5.95%
Return on average equity
97.34% 98.34% 109.23%
Efficiency ratio
Capital Data (at quarter end)
$5.71 $5.91 $5.94
Book value per common share
8,199,230 8,199,230 7,851,780
Shares outstanding-common
2,092,287 2,092,287 2,092,287
Shares outstanding-preferred
$5.22 $5.38 $5.39
Book value per share including preferred shares
Capital Adequacy -Bank Only
7.59% 7.60% 7.33%
Tier 1 leverage ratio
11.78% 11.85% 11.28%
Tier 1 risk-based capital ratio
13.02% 13.12% 12.55%
Total risk-based capital ratio
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SOURCE Highlands Bankshares, Inc.
