Highlands Bankshares, Inc. (HLND) today reported net income of $1.1 million or $0.10 per diluted share, for the quarter ended March 31, 2019, compared with net income of $1.0 million or $0.09 per diluted share, for the quarter ended December 31, 2018 and net income of $610,000, or $0.06 per diluted share, for the quarter ended March 31, 2018. Return on average assets and return on average equity for the first quarter of 2019 were 0.71% and 7.53% respectively.

"I am excited to have begun 2019 with a number of positive developments," reported Timothy K. Schools, President and Chief Executive Officer. "Our team has worked diligently over the last three years to establish a disciplined risk and earnings profile. We are pleased to report another solid quarter of earnings improving over the first and fourth quarters of last year while maintaining a strong net interest margin and improving our efficiency metrics. We grew deposits $18 million, a long-time substandard loan paid down $2 million, and several other watch list loans showed signs of improvement. We are proud to be recognized as the second best bank in Bristol in 2019 and the overall best bank in our High Country market for a remarkable fifth consecutive year."

"Loan production was tepid during the quarter as a result of the large amount of rain our markets experienced this winter, customer reaction to rising rates as well as our conservative nature at a time where we are seeing many of our competitors loosening underwriting standards," Schools continued. "While we remain focused on booking quality loans made at reasonable rates and terms, we have recently seen other banks begin to offer interest only loans, 100% LTVs, no closing costs, and reduced rates on commercial loans. In second quarter, our loan pipeline has expanded to $60 millionand we are hopeful this will allow us to put our increased liquidity to work. Additionally, with much of our regulatory efforts behind us we are now able to dedicate more time on profitability improvement and have identified approximately $1 million of recurring pretax income opportunities. We remain excited about our prospects and with our improved risk, earnings, and growth profile, feel our current valuation does not yet recognize the value of our franchise."

Revenue Growth

First quarter 2019 total revenue (net interest income plus noninterest income) decreased $475,000 to $6.0million from $6.5 million in the fourth quarter of 2018. Net interest income was $5.1 million in the first quarter of 2019, a decrease of $237,000 from $5.3 million in the fourth quarter of 2018 due to the reduced day count and a reduction in average loans held for investment. First quarter 2019 noninterest income totaled $890,000 compared to $1.1 million in the fourth quarter of 2018 due to a $55,000 reduction in overdraft charges, a $35,000 reduction in OREO income and gains, a $24,000 reduction in combined interchange and merchant income, and a $41,000 fourth quarter 2018 annual true-up of equity method investments.

Noninterest Expense and Operating Efficiency

Noninterest expenses decreased $513,000 from the fourth quarter of 2018 and $612,000 from the first quarter of 2018 to $4.6 million in the first quarter of 2019. Compared to the prior quarter, first quarter 2019 benefited from reductions in employee health expense, fraud losses, and software-related expenses. Compared to the first quarter of 2018, the first quarter of 2019 benefited from reductions in OREO-related expenses, telephone and software-related expenses, and legal expense. The Company anticipates future expenses to more closely align with the level experienced in the first quarter of 2019.

In the first quarter of 2019, each of the Company's efficiency metrics improved. For the first quarter of 2019, the efficiency ratio was 75.91 percent, an improvement from 78.27 percent in the fourth quarter of 2018 and 84.44 percent in the first quarter of 2018. Noninterest expense as a percentage of assets improved to 2.97 percent from 3.42 percent in the fourth quarter of 2018 and 3.47 percent in the first quarter of 2018. Assets per employee improved to $4.4 millioncompared to $4.1 million at December 31, 2018 and $4.3 million at March 31, 2018.

Asset Quality

The provision for credit losses for first quarter 2019 was $103,000, compared to $196,000 in fourth quarter 2018. Net charge-offs in the first quarter of 2019 were $380,000, or 0.34 percent annualized of average loans held for investment.

Past due loans as a percentage of total loans held for investment were 1.36 percent at March 31, 2019, compared to 1.51 percent at December 31, 2018. As of March 31, 2019, loans greater than 90 days past due totaled $3.4 million, or 0.77 percent of loans held for investment, compared to 0.81 percent at December 31, 2018. A substantial portion of the greater than 90 days balance as of quarter end was related to a single relationship discussed further below. Nonperforming assets were $8.4 million, or 1.86 percent of loans held for investment and OREO at March 31, 2019. The nonperforming loan balance includes the above referenced relationship as well as a $1.6 million relationship that is current and never been past due but was moved to nonaccrual status in fourth quarter due to declining financial performance. The Company is working with this client to seek alternative financing.

During the first quarter of 2019, the Company proceeded with foreclosure of property securing a delinquent, nonaccrual loan. The Company was the winning bidder of collateral valued at $475,000, which was reported as OREO as of March 31, 2019. Net of an additional $92,000 writedown, the loan balance was $1.3 million at March 31, 2019. Foreclosure continued during the second quarter, resulting in an additional $594,000 of OREO acquired by the Company, with the remaining collateral purchased by third parties. The remaining loan balance was fully reserved as of March 31, 2019.

As a result of the third party sales and the transition of balances to OREO, the Company expects its past due ratios to improve in coming quarters.