Highlands Bankshares, Inc. Reports Second Quarter 2019 Results

ABINGDON, Va., August 12, 2019 /PRNewswire/ -- Highlands Bankshares, Inc. (HLND) today reported net income of $571,000 or $0.06 per diluted share for the quarter ended June 30, 2019, compared to $1.1 million or $0.10 per diluted share, for the quarter ended March 31, 2019, and net income of $923,000, or $0.09 per diluted share, for the quarter ended June 30, 2018. The annualized return on average assets and return on average equity for the second quarter of 2019 were 0.37 percent and 3.89 percent respectively.

"Second quarter 2019 was significantly impacted by our continued focus on asset quality,” reported Bryan Booher, Interim President and Chief Executive Officer. "We recorded $836,000 in provision for loan losses during the second quarter, primarily to replenish the allowance for credit losses following a $565,000 charge-off recorded on a single relationship after we completed foreclosure proceedings. While our efforts to resolve this large exposure were painful to second quarter net income, we removed a significant problem asset from our balance sheet.”

“Aside from the credit-related items, our second quarter of 2019 was generally in line with the first quarter. Noninterest income improved slightly and noninterest expense declined when compared to the first quarter, while net interest income was flat,” Booher continued. “Our sales efforts during the second quarter were successful, with the loan portfolio growing $9.4 million after two quarters of net shrinkage. Deposits have grown $15.6 million or 3.1 percent so far during 2019.”

Consolidated net income for the six months ending June 30, 2019 totaled $1.6 million, compared to $1.5 million earned during the same period of 2018, as the benefit of lower noninterest expense was largely offset by higher provision for loan losses.

Revenue Growth

Second quarter 2019 total revenue (net interest income plus noninterest income) increased slightly to $6.0 million. Net interest income was $5.1 million in both the second and first quarters of 2019, as the favorable impact of loan growth offset a 9 basis point reduction in the net interest margin. Second quarter 2019 noninterest income totaled $933,000 compared to $890,000 in the first quarter of 2019 due higher BOLI and cardholder interchange income.

Noninterest Expense and Operating Efficiency

Noninterest expenses increased slightly over the first quarter of 2019, the net impact of lower personnel and occupancy expense, partially offset by higher legal and other professional fees. In the second quarter of 2019, the efficiency ratio was 75.36 percent, compared to 75.91 percent in the first quarter of 2019.

Asset Quality

The provision for credit losses for second quarter 2019 was $836,000, compared to $103,000 in first quarter 2019. Net charge-offs in the second quarter of 2019 totaled $689,000, or 0.62 percent annualized of average loans held for investment, compared to $380,000 or 0.34 percent annualized of loans held for investment for the first quarter of 2019.

Past due loans as a percentage of total loans held for investment were 1.26 percent at June 30, 2019, compared to 1.36 percent at March 31, 2019. As of June 30, 2019, loans greater than 90 days past due totaled $3.4 million, or 0.74 percent of loans held for investment, compared to 0.77 percent at March 31, 2019. Nonperforming assets were $8.3 million, or 1.83 percent of loans held for investment and OREO at June 30, 2019.

As of June 30, 2019, the allowance for credit losses totaled $4.2 million, representing 0.96 percent of loans held for investment, and 79.64 percent of nonperforming loans.

Capital and Liquidity

At June 30, 2019, the Company's subsidiary bank, Highlands Union Bank, reported a tier 1 leverage ratio of 9.19 percent, tier 1 risk-based capital ratio of 12.89 percent, and total risk-based capital ratio of 13.87 percent

The Company's loans held for investment to deposit ratio was 87.1 percent and the loans held for investment to asset ratio was 73.8 percent at June 30, 2019. The Company maintained cash and investment securities totaling 19.1 percent of assets as of this date. The Company's funding mix is weighted heavily towards customer deposits, which funded 84.7 percent of assets at June 30, 2019.

About Highlands Bankshares, Inc.

Highlands provides a relationship-based and highly personal banking experience to small to mid-sized private businesses, professionals, and 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 Company's Annual Report on Form 10-K for the year ended December 31, 2018, 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.



Quarterly Consolidated Income Statements (unaudited)

	Quarter ended							Percent change compared to
(thousands)	June 30, 2019			March 31, 2019		June 30, 2018		Prior quarter		Same quarter of prior year
INTEREST INCOME
Loans receivable and fees on loans	$	5,652		$	5,653	$	5,276	—	%	7.1	%
Investment securities	433			412		438		5.1	%	(1.1	)%
Federal funds sold and overnight investments	227			141		57		61	%	298.2	%
Total interest income	6,312			6,206		5,771		1.7	%	9.4	%
INTEREST EXPENSE
Deposits	955			824		463		15.9	%	106.3	%
Other borrowed funds	275			273		323		0.7	%	(14.9	)%
Total interest expense	1,230			1,097		786		12.1	%	56.5	%
Net interest income	5,082			5,109		4,985		(0.5	)%	1.9	%
Provision for loan losses	836			103		172		711.7	%	386	%
Net interest income after provision for loan losses	4,246			5,006		4,813		(15.2	)%	(11.8	)%
NONINTEREST INCOME
Service charges on deposit accounts	338			342		342		(1.2	)%	(1.2	)%
Other service charges, commissions and fees	378			339		428		11.5	%	(11.7	)%
Mortgage banking income	48			48		52		—	%	(7.7	)%
Securities gains, net	(7		)	—		—
Other operating income	176			161		167		9.3	%	5.4	%
Total noninterest income	933			890		989		4.8	%	(5.7	)%
NONINTEREST EXPENSE
Salaries and employee benefits	2,281			2,416		2,380		(5.6	)%	(4.2	)%
Occupancy and equipment expense	527			615		750		(14.3	)%	(29.7	)%
OREO-related expenses	92			50		146		84	%	(37	)%
Other operating expense	1,633			1,473		1,356		10.9	%	20.4	%
Total noninterest expense	4,533			4,554		4,632		(0.5	)%	(2.1	)%
Income before income taxes	646			1,342		1,170		(51.9	)%	(44.8	)%
Income tax expense	75			282		247		(73.4	)%	(69.6	)%
Net income	$	571		$	1,060	$	923	(46.1	)%	(38.1	)%
Net income per common share:
Basic	$	0.07		$	0.13	$	0.11
Diluted	0.06			0.10		0.09



Consolidated Income Statements (unaudited)

	Six months ended June 30,
(thousands)	2019			2018		Percent change
INTEREST INCOME
Loans receivable and fees on loans	$	11,305		$	10,591	6.7	%
Investment securities	845			916		(7.8	)%
Federal funds sold and overnight investments	368			127		189.8	%
Total interest income	12,518			11,634		7.6	%
INTEREST EXPENSE
Deposits	1,779			926		92.1	%
Other borrowed funds	548			687		(20.2	)%
Total interest expense	2,327			1,613		44.3	%
Net interest income	10,191			10,021		1.7	%
Provision for loan losses	939			344		173.0	%
Net interest income after provision for loan losses	9,252			9,677		(4.4	)%
NONINTEREST INCOME
Service charges on deposit accounts	680			679		0.1	%
Other service charges, commissions and fees	717			847		(15.3	)%
Mortgage banking income	96			152		(36.8	)%
Securities gains, net	(7		)	—		—
Other operating income	337			393		(14.2	)%
Total noninterest income	1,823			2,071		(12.0	)%
NONINTEREST EXPENSE
Salaries and employee benefits	4,697			4,783		(1.8	)%
Occupancy and equipment expense	1,142			1,481		(22.9	)%
OREO-related expenses	142			277		(48.7	)%
Other operating expense	3,106			3,257		(4.6	)%
Total noninterest expense	9,087			9,798		(7.3	)%
Income before income taxes	1,988			1,950		1.9	%
Income tax expense	357			417		(14.4	)%
Net income	$	1,631		$	1,533	6.4	%
Net income per common share:
Basic	$	0.20		$	0.19
Diluted	0.16			0.15



Consolidated Balance Sheets (unaudited)
										Percent change since
(thousands)	June 30, 2019			December 31, 2018			June 30, 2018			Prior quarter		Same quarter of prior year
ASSETS
Cash and due from banks	$	26,684		$	19,965		$	23,007		33.7	%	16.0	%
Federal funds sold	21,138			10,101			963			109.3	%	2,095.0	%
Total cash and cash equivalents	47,822			30,066			23,970			59.1	%	99.5	%
Investment securities	68,997			71,405			73,553			(3.4	)%	(6.2	)%
Loans held for sale	863			265			1,424			225.7	%	(39.4	)%
Loans held for investment	451,590			448,121			441,460			0.8	%	2.3	%
Allowance for loan losses	(4,243		)	(4,373		)	(4,138		)	(3.0	)%	2.5	%
Net loans held for investment	447,347			443,748			437,322			0.8	%	2.3	%
Premises and equipment, net	17,159			17,447			17,879			(1.7	)%	(4.0	)%
Real estate held for sale	590			817			992			(27.8	)%	(40.5	)%
Deferred tax assets	5,706			6,526			7,152			(12.6	)%	(20.2	)%
Interest receivable	2,010			1,617			1,728			24.3	%	16.3	%
Bank-owned life insurance	15,215			15,022			14,835			1.3	%	2.6	%
Other real estate owned	2,892			2,212			2,233			30.7	%	29.5	%
Other assets	3,120			2,816			2,991			10.8	%	4.3	%
Total assets	$	611,721		$	591,941		$	584,079		3.3	%	4.7	%

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing	$	153,982		$	156,408		$	155,337		(1.6	)%	(0.9	)%
Interest bearing	364,462			346,408			342,979			5.2	%	6.3	%
Total deposits	518,444			502,816			498,316			3.1	%	4.0	%
Short-term borrowings	30,000			30,000			—			—	%	—	%
Long-term debt	67			93			30,120			(28.0	)%	(99.8	)%
Other liabilities	3,179			2,391			1,482			33.0	%	114.5	%
Total liabilities	551,690			535,300			529,918			3.1	%	4.1	%
STOCKHOLDERS' EQUITY
Common stock	5,156			5,156			5,124			—	%	0.6	%
Preferred stock	4,184			4,184			4,184			—	%	—	%
Additional paid-in capital	19,292			19,277			19,224			0.1	%	0.4	%
Retained earnings	31,762			30,131			28,072			5.4	%	13.1	%
Accumulated other comprehensive loss	(363		)	(2,107		)	(2,443		)	(82.8	)%	(85.1	)%
Total stockholders' equity	60,031			56,641			54,161			6.0	%	10.8	%
Total liabilities and stockholders' equity	$	611,721		$	591,941		$	584,079		3.3	%	4.7	%



Profitability Ratios, Asset Quality and Capital (unaudited)
	Quarter ended
(dollars in thousands)		June 30, 2019			March 31, 2019			June 30, 2018
Profitability Ratios (current quarter, annualized)
Net interest margin		3.75		%	3.86		%	3.84		%
Annualized return on average assets		0.37			0.71			0.63
Annualized return on average equity		3.89			7.53			6.89
Efficiency ratio		75.36			75.91			77.54

		June 30, 2019			December 31, 2018			June 30, 2018
Asset Quality
Loans 90 days past due and still accruing		$	168		$	107		$	—
Non-accrual loans		5,265			5,920			3,871
Total non-performing loans		5,433			6,027			3,871
Other real estate owned		2,892			2,212			2,233
Total non-performing assets		$	8,325		$	8,239		$	6,104
Ratios:
Non-performing loans to loans held for investment		1.20		%	1.34		%	0.88		%
Non-performing assets to loans held for investment and OREO		1.83			1.83			1.38
Allowance for credit losses to loans held for investment		0.96			0.98			0.94
Allowance for credit losses to non-performing loans		79.64			73.87			106.90
Past-due loans to loans held for investment		1.36			1.51			1.47
Annualized net charge-offs to loans held for investment		0.62			0.04			0.03

Capital
Common shares outstanding		8,251			8,251			8,199
Preferred shares outstanding		2,092			2,092			2,092
Book value per share:
Common		$	6.43		$	6.02		$	5.76
Combined common and preferred		5.80			5.48			5.26
Ratios (Bank only, estimated):
Tier 1 leverage ratio		9.19		%	9.22		%	8.85		%
Tier 1 risk-based capital ratio		12.89			12.94			12.22
Total risk-based capital ratio		13.87			13.90			13.20
Common equity tier 1 ratio		12.89			12.94			12.22

CONTACT: John Gray, 276-619-4937, jgray@hubank.com

HIGHLANDS BANKSHARES INC /VA/ 8-K