ABINGDON, Va., Aug. 2, 2016 /PRNewswire/ — Highlands Bankshares, Inc. (HLND) today reported a net loss of $674,000 or ($0.08) per diluted share, for the quarter ended June 30, 2016, compared with net income of $530,000, or $0.05 per diluted share, for the quarter ended March 31, 2016 and net income of $1.1 million, or $0.14 per diluted share, for the quarter ended June 30, 2015. Second quarter 2016 pre-tax results included severance expense of $176,000, a pre-tax loss of $251,000 for Highlands Home Mortgage, provision expense of $1.1 million, and foreclosed asset losses and operating expenses of $627,000.
For the first six months of the year, Highlands’ reported a net loss of $144 thousand, or ($0.02) per diluted share.
“While second quarter’s bottom line results are not satisfactory, Highlands continues to make great strides with our performance improvement initiative designed to increase profitability and the consistency of our earnings,” said Timothy K. Schools, President and Chief Executive Officer. “Over time, Highlands has experienced lower loan quality than the industry and greater loan related losses. During the first half of the year, the management team performed a thorough analysis as to the key reasons behind Highlands’ elevated credit metrics with a focus on how to remediate the current high level of past dues and nonperforming assets with as little loss as possible. From these findings, actions are well underway to: strengthen the company’s credit policies to ensure stronger credits are brought into the bank; actively manage the elevated level of past dues and NPAs to minimize further losses; and surface any unidentified credits with potential weakness – all with the goal of keeping future loan losses in line with the related profit we make on our loans. To lead these efforts and the development of a strong credit culture we are pleased to announce that Brian Lowery has joined Highlands as our new Chief Credit Officer. Brian is a former teammate of mine who has over twenty five years of extensive commercial and consumer credit and line experience largely at National Commerce Financial which was renowned for industry leading credit metrics.”
“With our team’s efforts, I am pleased to report that since December 31, 2015 our past due, classified, and nonperforming asset balances have declined 36%, 16%, and 25% respectively – all while maintaining book value per share. Moreover, since quarter end, our team has negotiated contracts for the sale of an additional $1.5 million of bank owned (OREO) properties with nominal loss. Assuming no further inflows this quarter, this would result in year-to-date reductions in classified and nonperforming assets of 21% and 35% while maintaining book value per share. In the current quarter, we partially wrote-down and charged off three loans and we proactively made the decision to sell two bank-owned properties which the bank has owned for six years. This has been an extremely time consuming effort and in the short term a distraction from growing revenue. However, to recoup $1 million in loan losses, a bank needs to increase high quality loan balances $40 – $50 million for a year, increase fee income about $2 million for a year, or reduce expenses $1 million for a year. These are no easy feats and certainly not repeatable so developing a strong credit culture is our top priority. As we work through the remaining NPAs of the legacy portfolio, it is our expectation that any additional provision or write-downs will continue to be covered by our improving pre-tax pre-provision earnings.”
“On the business development front, four key initiatives began this quarter which I foresee benefiting the second half of the year and positioning us well for next year. First, we introduced a new merchant services line of business. Over Highlands’ thirty year history, the company had acquired 188 merchant services accounts or an average of six per year. Since the rollout of our new program in April, we have produced 220 proposals and already opened 61 new accounts which will generate $99,000 in new annual revenue. Many of the remaining proposals are still in process. Second, Highlands Home Mortgage began operations May 7. The feedback from customers and employees has been outstanding. In July, we closed $3.0 million in loans, we currently have $7.0 million in process, and we expect to close $6.8 million this August. This initiative was a net expense of $251,000 in second quarter and we expect it to approach break even in third quarter. Third, we surveyed the market and created what we believe will be very competitive portfolio mortgage and home equity products. Highlands currently has less than two percent of its loans in home equity where many high performing banks have ten to fifteen percent. Lastly, we reorganized our Knoxville market where we are now staffed more adequately for business development and with some of the leading talent in the market. We are very excited about this market and believe it offers a great growth opportunity for Highlands.”
Total revenue (tax-equivalent net interest income plus non-interest income) decreased $294,000 to $5.70 million from $6.0 million in the first quarter of 2016. Second quarter 2016 tax-equivalent net interest income decreased $152,000 from $4.9 million in the first quarter of 2016 to $4.7 million in the second quarter of 2016.
The tax-equivalent net interest margin for second quarter 2016 decreased 10 basis points to 3.53 percent from 3.63 percent for first quarter 2016. The net interest margin decline was primarily due to the reduction in loan balances that occurred during the second quarter. Non-interest income totaled $1.0 million, or 0.67 percent of total assets in the second quarter of 2016, compared to 0.74 percent for first quarter 2016 principally from a decline in investment services income.
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 continued growth of its newly formed secondary market mortgage division.
The efficiency ratio (non-interest expense divided by total revenue) increased to 100 percent in the second quarter of 2016 from 84 percent in the first quarter of 2016 from a combination of the reduction in net interest income and investment services income and the above mentioned secondary market mortgage division start-up and OREO expenses. As previously mentioned, second quarter 2016 pre-tax results also included severance expense of $176,000. The Company also received an insurance settlement of $148,000 in first quarter of 2016.
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.
The provision for credit losses for the first quarter of 2016 totaled $1,089,000 an increase of $865,000 from the first quarter of 2016. The increased provision in the second quarter 2016 provision for credit losses was the result of additional provision for three credits in the Company’s Tri-Cities market area. These three charge-offs totaled $1.7 million. Net loan charge-offs in the second quarter of 2016 were $1.71 million compared to only $53,000 in the first quarter of 2016. Net charge-offs were 1.64 percent annualized to end of period loans in the second quarter of 2016.
The past due ratio improved from 3.34% at March 31, 2016, to a decade low of 2.75 percent at June 30, 2016. Nonperforming assets and nonperforming assets as a percent of total loans and OREO each improved from first quarter 2016 to $11.4 million and 2.71% respectively. Classified assets and classified assets as a percent of Tier 1 Capital plus allowance for loan loss each improved from first quarter 2016 to $23.8 million and 46% respectively. In August, the Company has entered into contracts to sell an additional $1.5 million of bank owned properties for a pre-tax loss of $82,000. The allowance for loan losses at June 30, 2016, was $5.2 million or 1.25 percent of end of period total loans, down $623 thousand or 11 basis points from March 31, 2016.
Capital and Liquidity
At June 30, 2016, the equity to assets ratio was 9.23 percent, an increase from 9.02 percent at March 31, 2016. The regulatory capital ratios for the Company’s subsidiary bank, Highlands Union Bank, were: Tier 1 Leverage Ratio of 7.55 percent, Tier I Risk-Based Capital ratio of 11.75 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 87.22 percent and the loan to asset ratio was 69.2 percent at June 30, 2016. The Company maintained cash and investment securities totaling 22.2 percent of assets as of this date. Further, the Company’s funding mix is weighted heavily towards customer deposits which fund 79 percent of assets at June 30, 2016 of which 53.7 percent is funded by core deposits. Time deposits fund 24.3 percent of assets at June 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.