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| 8-K - 8-K - HIGHLANDS BANKSHARES INC /VA/ | a2018q28-kcoverxearningsre.htm |
Highlands Bankshares, Inc. Reports Second Quarter 2018 Results
Strong Improvement in Net Income, Return on Assets, Net Interest Margin, Loans Held for Investment, Noninterest Bearing Deposits, Efficiency Ratio, and Leverage Ratio
ABINGDON, Va., Aug. 3, 2018 /PRNewswire/ -- Highlands Bankshares, Inc. (HLND) today reported net income of $923,000 or $0.09 per diluted share, for the quarter ended June 30, 2018, compared with $610,000 or $0.06 per share, for the quarter ended March 31, 2018 and $637,000 or $0.06 per diluted share, for the quarter ended June 30, 2017. The annualized return on average assets and return on average equity for the period were 0.63 percent and 6.89 percent, respectively.
For the six months ended June 30, 2018, the Company reported net income of $1.5 million or $0.15 per diluted share, compared with $1.7 million or $0.16 per diluted share, for the same period of 2017. The annualized return on average assets and return on average equity for the period were 0.52 percent and 5.74 percent, respectively.
"We are very pleased with the results from the second quarter," said Timothy K. Schools, President and Chief Executive Officer of Highlands Bankshares, Inc. "Our performance continues to improve as we strategically position the Company for the future. This quarter, our net interest margin, noninterest bearing deposits as a percent of total assets, and leverage ratio each improved to their highest level in our Company's history. Additionally, loans held for investment rose to its highest level since Highlands' recapitalization in the spring of 2014. Combined with our improved credit quality, our balance sheet is now the strongest it has ever been. Opportunities exist to further enhance profitability and we are very excited about the expanded and new customer relationships we are obtaining across all of our markets."
Target | 2Q 18 | 1Q 18 | 2Q 17 | |||||
Return on average assets (annualized) | 1.25 | % | 0.63 | % | 0.41 | % | 0.42 | % |
Revenue growth | 5.00 | (2.35 | ) | (2.44 | ) | 5.36 | ||
Net interest margin | 3.75 | 3.84 | 3.78 | 3.42 | ||||
Non-interest income to average assets | 1.00 | 0.68 | 0.73 | 1.08 | ||||
Non-interest expense to average assets | 2.75 | 3.17 | 3.47 | 3.41 | ||||
Efficiency ratio | 55.00 | 77.54 | 84.44 | 84.14 | ||||
Net charge-offs to loans held for investment | 0.30 | 0.03 | 0.12 | 0.09 | ||||
Revenue Growth
Second quarter 2018 total revenue (net interest income plus noninterest income) declined $144,000 to $6.0 million from $6.1 million in the first quarter of 2018. Net interest income was $5.0 million in the second quarter of 2018, down slightly from the first quarter of 2018. During the second quarter, the net interest margin increased six basis points offsetting a decline in average interest earning assets of $11.5 million from first quarter 2018. Average interest earning assets declined due to the payoff of FHLB funding using lower yielding cash and securities and investment security reductions. Second quarter 2018 noninterest income declined $93,000 to $1.0 million from the first quarter of 2018. Mortgage income was lower during the second quarter of 2018, resulting from a decision to modify the Company's mortgage
origination strategy. As a result of this change, gross mortgage revenue declined, but the Company anticipates realizing a larger reduction in operating expenses by the third quarter of 2018.
Noninterest Expense and Operating Efficiency
Noninterest expenses decreased $534,000 from the first quarter of 2018 and decreased $631,000 from the second quarter of 2017 to $4.6 million in the second quarter of 2018. The improvement was principally related to a reduction in legal and project related expenses as well as a change in the Company's residential mortgage strategy.
For the second quarter of 2018, the efficiency ratio was 77.54 percent, an improvement from 84.44 and 84.14 percent in the first quarter of 2018 and second quarter of 2017, respectively. Noninterest expense as a percentage of assets improved in the second quarter of 2018 to 3.17 percent from 3.47 and 3.41 percent in the first quarter of 2018 and second quarter of 2017, respectively. Assets per employee was $4.2 million as of June 30, 2018, compared with $4.3 and $3.5 million at March 31, 2018 and June 30, 2017, respectively.
Second quarter 2018 noninterest expense included $146,000 of OREO-related expenses as the Company continues to work proactively to reduce long-standing bank owned property/leases. As of June 30, 2018, other real estate owned and real estate held for sale totaled $3.2 million. The Company currently has contracts and expects to sell $1.4 million of these balances in third quarter 2018.
Asset Quality
The provision for credit losses for second quarter 2018 was $172,000. Net charge-offs in the second quarter of 2018 were $34,000, or 0.03 percent annualized of average loans held for investment.
Total past due loans as a percentage of total loans held for investment were 1.47 percent at June 30, 2018, equivalent to March 31, 2018. First quarter 2018 past due loans increased from prior periods primarily related to a single relationship which had been previously reported in the Company's watch list for several years. In second quarter 2018, this relationship became greater than 90 days past due causing June 30, 2018 loans 30-89 days past due to decline to 0.62 percent of loans held for investment, loans greater than 90 days past due to increase to 0.84 percent of loans held for investment, and nonperforming assets to increase to 1.38 percent of loans held for investment and OREO.
2Q 18 | 1Q 18 | 4Q 17 | 3Q 17 | 2Q 17 | ||||||
Past due loans to loans held for investment | 1.47 | % | 1.47 | % | 0.77 | % | 1.07 | % | 0.89 | % |
Past due loans 30-89 days to loans held for investment | 0.62 | 1.14 | 0.39 | 0.40 | 0.24 | |||||
Past due loans 90 plus days to loans held for investment | 0.84 | 0.33 | 0.38 | 0.67 | 0.65 | |||||
Nonperforming assets to loans held for investment and OREO | 1.38 | 0.86 | 1.02 | 1.24 | 1.32 | |||||
Classified assets to tier 1 capital and allowance for loan loss | 34 | 33 | 31 | 31 | 33 | |||||
Allowance for credit losses to nonperforming loans | 106.90 | 258.97 | 193.80 | 158.09 | 152.15 | |||||
As of June 30, 2018, the allowance for credit losses totaled $4.1 million, or 0.94 percent of loans held for investment an increase from $4.0 million, or 0.93 percent of loans held for investment at March 31, 2018. Second quarter 2018 allowance coverage was 1.07 times nonperforming loans.
Capital and Liquidity
At June 30, 2018, the regulatory capital ratios for the Company's subsidiary bank, Highlands Union Bank, were: tier 1 leverage ratio of 8.85 percent, tier 1 risk-based capital ratio of 12.08 percent, and total risk-based capital ratio of 13.05 percent.
2Q 18 | 1Q 18 | 4Q17 | 3Q17 | 2Q17 | ||||||
Tier 1 leverage ratio | 8.85 | % | 8.51 | % | 8.36 | % | 8.41 | % | 7.98 | % |
Tier 1 risk-based capital ratio | 12.08 | 12.13 | 12.15 | 12.18 | 12.12 | |||||
Total risk-based capital ratio | 13.05 | 13.10 | 13.11 | 13.32 | 13.29 | |||||
The Company's loans held for investment to deposit ratio was 88.6 percent and the loans held for investment to asset ratio was 75.6 percent at June 30, 2018. The Company maintained cash and investment securities totaling 16.7 percent of assets as of this date. Further, the Company's deposit mix is weighted heavily towards customer deposits which funded 85.3 percent of assets at June 30, 2018 of which 65.1 percent is represented by core deposits, an increase from 57.6 percent at June 30, 2017, to include 25.9 percent in noninterest bearing deposits. Time deposits funded 20.3 percent of assets at June 30, 2018, 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 related 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 risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, 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.
Consolidated Income Statements (unaudited) | |||||||||||||||||||
Quarter ended | Percent change compared to | ||||||||||||||||||
(thousands) | June 30, 2018 | March 31, 2018 | June 30, 2017 | Prior quarter | Same quarter of prior year | ||||||||||||||
INTEREST INCOME | |||||||||||||||||||
Loans receivable and fees on loans | $ | 5,276 | $ | 5,315 | $ | 5,002 | (0.7 | )% | 5.5 | % | |||||||||
Investment securities | 438 | 478 | 572 | (8.4 | ) | (23.4 | ) | ||||||||||||
Federal funds sold | 57 | 70 | 74 | (18.6 | ) | (23.0 | ) | ||||||||||||
Total interest income | 5,771 | 5,863 | 5,648 | (1.6 | ) | 2.2 | |||||||||||||
INTEREST EXPENSE | |||||||||||||||||||
Deposits | 463 | 463 | 465 | — | (0.4 | ) | |||||||||||||
Other borrowed funds | 323 | 364 | 601 | (11.3 | ) | (46.3 | ) | ||||||||||||
Total interest expense | 786 | 827 | 1,066 | (5.0 | ) | (26.3 | ) | ||||||||||||
Net interest income | 4,985 | 5,036 | 4,582 | (1.0 | ) | 8.8 | |||||||||||||
Provision for loan losses | 172 | 172 | 35 | — | 391.4 | ||||||||||||||
Net interest income after provision for loan losses | 4,813 | 4,864 | 4,547 | (1.0 | ) | 5.9 | |||||||||||||
NONINTEREST INCOME | |||||||||||||||||||
Mortgage banking income | 52 | 100 | 726 | (48.0 | ) | (92.8 | ) | ||||||||||||
Service charges on deposit accounts | 342 | 337 | 395 | 1.5 | (13.4 | ) | |||||||||||||
Other service charges, commissions and fees | 428 | 419 | 463 | 2.1 | (7.6 | ) | |||||||||||||
Other operating income | 167 | 226 | 89 | (26.1 | ) | 87.6 | |||||||||||||
Total noninterest income | 989 | 1,082 | 1,673 | (8.6 | ) | (40.9 | ) | ||||||||||||
NONINTEREST EXPENSE | |||||||||||||||||||
Salaries and employee benefits | 2,380 | 2,403 | 2,928 | (1.0 | ) | (18.7 | ) | ||||||||||||
Occupancy and equipment expense | 750 | 731 | 723 | 2.6 | 3.7 | ||||||||||||||
OREO-related expenses | 146 | 131 | 174 | 11.5 | (16.1 | ) | |||||||||||||
Other operating expense | 1,356 | 1,901 | 1,438 | (28.7 | ) | (5.7 | ) | ||||||||||||
Total noninterest expense | 4,632 | 5,166 | 5,263 | (10.3 | ) | (12.0 | ) | ||||||||||||
Income before income taxes | 1,170 | 780 | 957 | 50.0 | 22.3 | ||||||||||||||
Income tax expense | 247 | 170 | 320 | 45.3 | (22.8 | ) | |||||||||||||
Net income | $ | 923 | $ | 610 | $ | 637 | 51.3 | 44.9 | |||||||||||
Net income per common share: | |||||||||||||||||||
Basic | $ | 0.11 | $ | 0.07 | $ | 0.08 | |||||||||||||
Diluted | 0.09 | 0.06 | 0.06 | ||||||||||||||||
Consolidated Income Statements (unaudited) | |||||||||||||
Six months ended June 30, | Percent change | ||||||||||||
(thousands) | 2018 | 2017 | |||||||||||
INTEREST INCOME | |||||||||||||
Loans receivable and fees on loans | $ | 10,591 | $ | 10,051 | 5.4 | % | |||||||
Investment securities | 916 | 1,154 | (20.6 | ) | |||||||||
Federal funds sold | 127 | 124 | 2.4 | ||||||||||
Total interest income | 11,634 | 11,329 | 2.7 | ||||||||||
INTEREST EXPENSE | |||||||||||||
Deposits | 926 | 911 | 1.6 | ||||||||||
Other borrowed funds | 687 | 1,186 | (42.1 | ) | |||||||||
Total interest expense | 1,613 | 2,097 | (23.1 | ) | |||||||||
Net interest income | 10,021 | 9,232 | 8.5 | ||||||||||
Provision for loan losses | 344 | 52 | 561.5 | ||||||||||
Net interest income after provision for loan losses | 9,677 | 9,180 | 5.4 | ||||||||||
NONINTEREST INCOME | |||||||||||||
Mortgage banking income | 152 | 952 | (84.0 | ) | |||||||||
Service charges on deposit accounts | 679 | 792 | (14.3 | ) | |||||||||
Other service charges, commissions and fees | 847 | 961 | (11.9 | ) | |||||||||
Other operating income | 393 | 255 | 54.1 | ||||||||||
Total noninterest income | 2,071 | 2,960 | (30.0 | ) | |||||||||
NONINTEREST EXPENSE | |||||||||||||
Salaries and employee benefits | 4,783 | 5,421 | (11.8 | ) | |||||||||
Occupancy and equipment expense | 1,481 | 1,392 | 6.4 | ||||||||||
OREO-related expenses | 277 | 194 | 42.8 | ||||||||||
Other operating expense | 3,257 | 2,705 | 20.4 | ||||||||||
Total noninterest expense | 9,798 | 9,712 | 0.9 | ||||||||||
Income before income taxes | 1,950 | 2,428 | (19.7 | ) | |||||||||
Income tax expense | 417 | 759 | (45.1 | ) | |||||||||
Net income | $ | 1,533 | $ | 1,669 | (8.1 | ) | |||||||
Net income per common share: | |||||||||||||
Basic | $ | 0.19 | $ | 0.20 | |||||||||
Diluted | 0.15 | 0.16 | |||||||||||
Consolidated Balance Sheets (unaudited) | ||||||||||||||||||
Percent change since | ||||||||||||||||||
(thousands) | June 30, 2018 | March 31, 2018 | June 30, 2017 | Prior quarter | Same quarter of prior year | |||||||||||||
ASSETS | ||||||||||||||||||
Cash and due from banks | $ | 23,007 | $ | 22,626 | $ | 18,890 | 1.7 | % | 21.8 | % | ||||||||
Federal funds sold | 963 | 18,276 | 25,823 | (94.7 | ) | (96.3 | ) | |||||||||||
Total cash and cash equivalents | 23,970 | 40,902 | 44,713 | (41.4 | ) | (46.4 | ) | |||||||||||
Investment securities | 73,553 | 76,933 | 98,444 | (4.4 | ) | (25.3 | ) | |||||||||||
Loans held for sale | 1,424 | 1,795 | 5,912 | (20.7 | ) | (75.9 | ) | |||||||||||
Loans held for investment | 441,460 | 431,266 | 420,230 | 2.4 | 5.1 | |||||||||||||
Allowance for loan losses | (4,138 | ) | (4,000 | ) | (4,671 | ) | 3.5 | (11.4 | ) | |||||||||
Net loans | 437,322 | 427,266 | 415,559 | 2.4 | 5.2 | |||||||||||||
Premises and equipment, net | 17,879 | 18,138 | 17,919 | (1.4 | ) | (0.2 | ) | |||||||||||
Real estate held for sale | 992 | 1,370 | 1,430 | (27.6 | ) | (30.6 | ) | |||||||||||
Deferred tax assets | 7,152 | 7,263 | 12,017 | (1.5 | ) | (40.5 | ) | |||||||||||
Interest receivable | 1,728 | 1,777 | 1,501 | (2.8 | ) | 15.1 | ||||||||||||
Bank-owned life insurance | 14,835 | 14,768 | 14,502 | 0.5 | 2.3 | |||||||||||||
Other real estate owned | 2,233 | 2,169 | 2,516 | 3.0 | (11.2 | ) | ||||||||||||
Other assets | 2,517 | 3,148 | 2,380 | (20.0 | ) | 5.8 | ||||||||||||
Total assets | $ | 583,605 | $ | 595,529 | $ | 616,893 | (2.0 | ) | (5.4 | ) | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||
LIABILITIES | ||||||||||||||||||
Deposits: | ||||||||||||||||||
Non-interest bearing | $ | 155,337 | $ | 157,907 | $ | 144,945 | (1.6 | ) | 7.2 | % | ||||||||
Interest bearing | 342,979 | 352,091 | 351,954 | (2.6 | ) | (2.6 | ) | |||||||||||
Total deposits | 498,316 | 509,998 | 496,899 | (2.3 | ) | 0.3 | ||||||||||||
Short-term borrowings | — | — | 22,500 | — | (100.0 | ) | ||||||||||||
Long-term debt | 30,120 | 30,133 | 40,172 | — | (25.0 | ) | ||||||||||||
Other liabilities | 1,008 | 1,954 | 1,368 | (48.4 | ) | (26.3 | ) | |||||||||||
Total liabilities | 529,444 | 542,085 | 560,939 | (2.3 | ) | (5.6 | ) | |||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||||
Common stock | 5,124 | 5,124 | 5,124 | — | — | |||||||||||||
Preferred stock | 4,184 | 4,184 | 4,184 | — | — | |||||||||||||
Additional paid-in capital | 19,224 | 19,169 | 19,002 | 0.3 | 1.2 | |||||||||||||
Retained earnings | 28,072 | 27,146 | 28,454 | 3.4 | (1.3 | ) | ||||||||||||
Accumulated other comprehensive income | (2,443 | ) | (2,179 | ) | (810 | ) | 12.1 | 201.6 | ||||||||||
Total stockholders' equity | 54,161 | 53,444 | 55,954 | 1.3 | (3.2 | ) | ||||||||||||
Total liabilities and stockholders' equity | $ | 583,605 | $ | 595,529 | $ | 616,893 | (2.0 | ) | (5.4 | ) | ||||||||
Quarterly Rate Volume Variance Analysis | ||||||||||||||||||||||||||
2Q 2018 | 1Q 2018 | 2Q 2017 | ||||||||||||||||||||||||
(dollars in thousands) | Average balance | Interest income/ expense | Yield/ Rate | Average balance | Interest income/ expense | Yield/ Rate | Average balance | Interest income/ expense | Yield/ Rate | |||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||
Loans (incl loans HFS) | $ | 433,961 | $ | 5,276 | 4.87 | % | $ | 431,812 | $ | 5,315 | 4.92 | % | $ | 410,977 | $ | 5,002 | 4.95 | % | ||||||||
Investments | 75,477 | 438 | 2.32 | % | 80,257 | 478 | 2.38 | % | 99,027 | 572 | 2.35 | % | ||||||||||||||
Fed funds sold and other investments | 10,090 | 57 | 2.23 | % | 18,926 | 70 | 1.48 | % | 29,129 | 74 | 0.69 | % | ||||||||||||||
Total interest-earning assets | 519,528 | 5,771 | 4.45 | % | 530,995 | 5,863 | 4.41 | % | 539,133 | 5,648 | 4.24 | % | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||
Deposits | 350,094 | 463 | 0.53 | % | 352,706 | 463 | 0.53 | % | 354,074 | 465 | 0.51 | % | ||||||||||||||
FHLB borrowings | 30,133 | 323 | 4.30 | % | 36,033 | 364 | 4.10 | % | 67,693 | 601 | 3.50 | % | ||||||||||||||
Total interest-bearing liabilities | 380,227 | 786 | 0.83 | % | 388,739 | 827 | 0.86 | % | 421,767 | 1,066 | 0.99 | % | ||||||||||||||
Net interest income | 4,985 | 5,036 | 4,582 | |||||||||||||||||||||||
Interest rate spread | 3.62 | % | 3.55 | % | 3.25 | % | ||||||||||||||||||||
Net yield on interest-earning assets | 3.84 | % | 3.78 | % | 3.42 | % | ||||||||||||||||||||
Profitability Ratios, Asset Quality and Capital (unaudited) | ||||||||||||
Quarter ended | ||||||||||||
(dollars in thousands) | June 30, 2018 | March 31, 2018 | June 30, 2017 | |||||||||
Profitability Ratios (current quarter, annualized) | ||||||||||||
Net interest margin | 3.84 | % | 3.78 | % | 3.42 | % | ||||||
Annualized return on average assets | 0.63 | 0.41 | 0.42 | |||||||||
Annualized return on average equity | 6.89 | 4.49 | 4.68 | |||||||||
Efficiency ratio | 77.54 | 84.44 | 84.14 | |||||||||
June 30, 2018 | March 31, 2018 | June 30, 2017 | ||||||||||
Asset Quality | ||||||||||||
Loans 90 days past due and still accruing | $ | — | $ | — | $ | — | ||||||
Non-accrual loans | 3,871 | 1,545 | 3,070 | |||||||||
Total non-performing loans | 3,871 | 1,545 | 3,070 | |||||||||
Other real estate owned | 2,233 | 2,169 | 2,516 | |||||||||
Total non-performing assets | $ | 6,104 | $ | 3,714 | $ | 5,586 | ||||||
Ratios: | ||||||||||||
Non-performing loans to loans held for investment | 0.88 | % | 0.36 | % | 0.73 | % | ||||||
Non-performing assets to loans held for investment and OREO | 1.38 | 0.86 | 1.32 | |||||||||
Allowance for credit losses to loans held for investment | 0.94 | 0.93 | 1.11 | |||||||||
Allowance for credit losses to non-performing loans | 106.90 | 258.97 | 152.15 | |||||||||
Past due loans to loans held for investment | 1.47 | 1.47 | 0.89 | |||||||||
Annualized net charge-offs (recoveries) to period-end loans held for investment | 0.03 | 0.12 | 0.09 | |||||||||
Capital | ||||||||||||
Common shares outstanding | 8,199 | 8,199 | 8,199 | |||||||||
Preferred shares outstanding | 2,092 | 2,092 | 2,092 | |||||||||
Book value per share: | ||||||||||||
Common | $ | 5.76 | $ | 5.67 | $ | 5.98 | ||||||
Combined common and preferred | 5.26 | 5.19 | 5.44 | |||||||||
Ratios (Bank only) | ||||||||||||
Tier 1 leverage ratio | 8.85 | % | 8.51 | % | 7.98 | % | ||||||
Tier 1 risk-based capital ratio | 12.08 | 12.13 | 12.12 | |||||||||
Total risk-based capital ratio | 13.05 | 13.10 | 13.29 | |||||||||
Common equity tier 1 ratio | 12.08 | 12.13 | 12.12 | |||||||||