2017 Annual Shareholder Meeting. May 16, 2017 The Olde Farm

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1 2017 Annual Shareholder Meeting May 16, 2017 The Olde Farm

2 Forward-Looking Statements This presentation contains forward-looking statements, as defined by federal securities laws, including statements about Highlands and its financial outlook. These statements are based on management's expectations, related only to the date they are made, and are provided to assist investors in understanding its operations and business outlook. Highlands' operations involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in any forward-looking statements. For a discussion of some of the risks and other factors that may cause forward-looking statements to differ materially from actual results, please refer to Highlands Bankshares, Inc. s filings with the Securities and Exchange Commission, including its 2016 Annual Report on Form 10-K and its most recent quarterly report on Form 10-Q under the sections entitled Forward-Looking Statements. Highlands undertakes no obligation to update or revise forward-looking statements. hubank.com 2

3 Shareholder Commitment Step 1 Step 2 1 Invest in organic growth at or above the shareholder cost of capital Run an operationally excellent company in an effort to consistently produce a return in excess of the shareholder cost of capital 2 3 Return excess capital to shareholders via stock repurchases if p/b < 1.5 Invest in acquisitions at or above the shareholder cost of capital 4 Return excess capital to shareholders via dividends hubank.com 3

4 Financial Performance Net Income Shareholders Equity $6 $60 $4 $50 $2 $40 $- $30 $(2) $(4) $(6) $(8) $20 $10 $ Shares Including Conversion Earnings per Share Book Value per Share 12 $10 10 $ $6 $4 2 $ $- $(2) Note: Net Income and Return on Assets exclude offsetting DTA adjustments during the period. hubank.com 4

5 Total Shareholder Return Over the Past 10 Years Note: U.S. Bank $500M - $1B index includes all NYSE and Nasdaq bank s in SNLs coverage universe with $500M to $1B in assets as of most recent financial data. Performance includes dividend reinvestment. Data Source: SNL Financial. Data as of May 10, Provided by Stephens. hubank.com 5

6 Total Shareholder Return Over the Past 15 Years Note: U.S. Bank $500M - $1B index includes all NYSE and Nasdaq bank s in SNLs coverage universe with $500M to $1B in assets as of most recent financial data. Performance includes dividend reinvestment. Data Source: SNL Financial. Data as of May 10, Provided by Stephens. hubank.com 6

7 What we will discuss tonight Our challenges. Our resolutions. Our exciting future. 1 Our responsibility and commitment 2 3 Highlands yesterday Steps taken to reposition and strengthen the company 4 5 Highlands today Thoughts on our valuation and investment thesis 6 Questions and answers hubank.com 7

8 Total Shareholder Return Since New Management Note: U.S. Bank $500M - $1B index includes all NYSE and Nasdaq bank s in SNLs coverage universe with $500M to $1B in assets as of most recent financial data. Performance includes dividend reinvestment. Data Source: SNL Financial. Data as of May 10, Provided by Stephens. hubank.com 8

9 Rumors We are not selling our East branch We are not selling our West branch We are not selling to BB&T We are not selling to Wells Fargo Tim is not here to sell the bank We are not going to fail The bank does not take positions on public matters like Mary s Meadows Employees did not get let go for supporting Mary s Meadows In fact, none of these have ever been discussed by our board hubank.com 9

10 Tri-Cities News Highlands Stronger than Ever! Expanding to Johnson City and Kingsport hubank.com 10

11 Our responsibility and commitment Bryan Lawson and Sally Stringer-Scott hubank.com 11

12 $55 mil Shareholders Equity A majority in the Tri-Cities $495 mil Deposits A majority in the Tri-Cities hubank.com 12

13 82 Washington County Employee Families Half live in the Town of Abingdon 111 Tri-Cities Employee Families A majority of our employees hubank.com 13

14 Only Bank Headquartered in Washington County $165,000 Town of Abingdon Taxes One of, if not, the largest in the Town hubank.com 14

15 $90 mil Invested in Loans Across the Town of Abingdon $261 mil Invested in Loans Across the Tri-Cities hubank.com 15

16 Hundreds & Thousands Volunteer Hours and Sponsorships Across the Tri-Cities hubank.com 16

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18 Highlands yesterday Rita Abel and Rusty Little hubank.com 18

19 Taking Care of the Customer 19 hubank.com

20 Operational Weaknesses Lack of Business Development High Operating Expenses Poor Credit Culture Limited product set Revenue employees single product focused No sales expectations or training Grew by: Doing more business with the same people Obtaining business from brokers No staffing metrics or monitoring Contracts not competitively bid Paying for numerous services never used or no longer used Not paying for services used Approval criteria materially below industry norm Concentrations in materially higher risk categories Weak loan review process No formal collection and recovery process hubank.com 20

21 Gap to Peer Performance 120% Efficiency Ratio 8% Past Due Loans 100% 80% 7% 6% 5% 60% 4% 40% 20% 3% 2% 1% 0% % Assets per Employee 10% NPAs / Loans + OREO 4 8% 3 6% 2 4% 1 2% % hubank.com 21

22 Highlands today Tim Schools hubank.com 22

23 First Who Then What Tim Schools joined Highlands in November 2015 as Chief Executive Officer and a Director. He is leading the execution of the company's strategic plan and effort to improve financial performance. Previously, he served as President of $7 billion American Savings Bank where over a three year period he led its highly successful transformation from an 82 year old thrift to a full service bank. With the assistance of six former National Commerce teammates, ASB: remediated a preexisting Cease and Desist Order, improved pretax preprovision income $38 million or 45%, enhanced its return on assets from 0.65% to 1.30%, increased its leverage ratio from 7.7% to 9.3% while at the same time providing a special one-time dividend to shareholders of $55 million, and created a dynamic culture that earned ASB a reputation as one of the best companies to work for. Schools began his banking career at SouthTrust and National Commerce and subsequently served as Chief Financial Officer for The South Financial Group. Title Major Experience Years Banking Years HLND Ray Skinner Chief Banking Officer National Commerce 27 1 John Gray Chief Financial Officer First Citizens 29 1 Brian Lowery Chief Credit Officer National Commerce 28 1 Vicki Andrews EVP Bank Operations National Commerce 34 1 Bryan Booher EVP Operations & IT BB&T, Highlands Rusty Little Chief Risk Officer Highlands hubank.com 23

24 Confronting the Brutal Facts 1 Rationalize expenses so that pre-tax earnings can absorb credit related losses Review staffing based on industry metrics Identify and renegotiate major contracts Evaluate daily expenses and processes Establish a strong credit culture to limit losses on existing credits and generate stronger future credits Create a focused mission, welcoming brand, and add key personnel critical areas Develop an expanded and competitive product set and seek opportunistic organic growth Review and amend credit policies to industry norms Educate employees on sound credit principles Create formalized collections and recovery processes Work non-performing and weak pass credits Narrow target focus and instill discipline Bring branding more current Strengthen credit and revenue talent Board succession for vacancies Merchant Capture, Merchant Services, Mortgage, Positive Pay, Swaps, ZBA Digital banking Greensboro, Johnson City, Kingsport, Raleigh hubank.com 24

25 Gap to Peer Performance 120% Efficiency Ratio 8% Past Due Loans 100% 80% 7% 6% 5% 60% 4% 40% 20% 3% 2% 1% 0% Q17 Assets per Employee Q17 0% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Q17 NPAs / Loans + OREO Q17 hubank.com 25

26 2016 and First Quarter 2017 Financial Performance Net Income Shareholders Equity $6 $4 $2 $- $(2) $(4) $(6) $(8) Q17 Annualized $60 $50 $40 $30 $20 $10 $ Q17 Annualized Shares O/S including $10 $8 $6 $4 $2 $- Earnings per Share Book Value per Share Note: Net Income and Return on Assets exclude offsetting DTA adjustments during the period Q17 Annualized $(2) Q17 Annualized Note: 1Q17 results represent management's estimation for the period. hubank.com 26

27 Taking Even Better Care of the Customer 27 hubank.com

28 Mission Statement To be a knowledgeable, relationship based, and customer centric financial services provider to small and medium sized businesses, their owners, professionals, and individuals wherever our employees have or can develop deep, long lasting relationships hubank.com 28

29 Simple, Focused, and Disciplined Business Model Target Customer Small to mid-sized private businesses Business owners and management Professionals Other individuals Strategy Provide a differentiated, relationship-based, and highly personal banking experience Seek low cost deposits and ancillary deposit services Operate with industry leading efficiency Invest/lend prudently never sacrificing risk adjusted spreads for balance or earnings growth Delivery Focus is on people; not filling in a geographic map Attract and retain "best in breed" employees; hire better and manage less Limit bricks and mortar to strategically located, business-oriented offices Apply technology strategically to provide a wow employee and customer experience Goals Outstanding customer service Disciplined capital allocation High returns on capital Stable and growing earnings per share hubank.com 29

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33 High Country Market Executive - David Lecka Advisory Board Rob Angle attorney Barbara Armstrong President, Caldwell County Chamber Loretta Clawson former Mayor, Boone J.B. Lawrence Mayor, Blowing Rock Ralph Leonard CPA, Leonard, Kelly & Associates Jennifer & Samuel Parker owner, Our Daily Bread Lee Rankin owner, Apple Hill Farm Cale Smith owner, G&S Trees Frank Wimbush owner, Azalea Inn John Wright attorney hubank.com 33

34 Knoxville Market Executive Amy Pangelinan Advisory Board Dr. David Campbell DDS Amber Hansen owner, Hansen Steamway Bruce Hayes TN Small Business Development Center Wayne Helton Alderman, City of Sevierville Bill King owner, Accounting and Business Advisors Teresa Luttrell realtor, ReMax Mike May owner, Bearland General Store Jim McGill Sevierville Chamber of Commerce Dwight Ogle owner, multiple hotel and RV parks Gary Underwood agent, Farmer's Insurance hubank.com 34

35 Southwest Virginia Market Executive Mark Farris Advisory Board Andy Blevins President, Empire Vending Mike Ferracci President, Appalachian Cast Products Drew Hembree VP Marketing, Food City Greg Tucker CPA, Bostic & Tucker Debbie VanDyke owner, Lakeside Ready Mix hubank.com 35

36 Tri-Cities Market Executive Mike Hill Advisory Board Colette George owner, Blue Ridge Properties Jeff Green owner, Healthcare Choice Alan Hurley President, FlexTech Solutions Kim Keith realtor, ReMax Mike Longhouser COO, State of Franklin Health Care Tim Scott attorney, McKinnis & Scott hubank.com 36

37 Board of Directors Sutton Bacon Chairman, Nantahala Outdoor Center Chuck Meade President, Meade Tractor Rob Moser Chief Operating Officer, Immedion hubank.com 37

38 New Products and Services Merchant Capture Merchant Processing Mortgage hubank.com 38

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50 Valuation and Investment Thesis Tim Schools hubank.com 50

51 HLND Trading Comps Banks headquartered in NC, SC, TN, and VA between $400MM and $1B in assets, equity/assets between 8-12%, NPAs/loans + OREO < 2%, and return on assets > 0.50% Note: Market data as of March 8, Financial data as of most recent quarter available.. Note: HLND ROA, ROE, and Price to EPS calculated using annualized March 31, 2017 earnings. Data Source: SNL Financial. Provided by Stephens. hubank.com 51

52 HLND Investment Thesis Quality Management New management team with demonstrated shareholder value creation experience Adding three new board members with successful CEO/COO shareholder value creation experience Insiders own 16.3% of the company Shareholder-friendly culture committed to prudent capital allocation Industry Leading Operational Experience National Commerce and SouthTrust maintained top decile financial performance for over twenty years CEO and CBO led highly successful transformation of American Savings Highlands profitability approaching median to top quartile performance in only a 12 month period Repeatable Investment Opportunities Well networked management team providing numerous lift out opportunities for consolidated regional bank employees across the Southeast who value a higher touch and more entrepreneurial culture Extensive experience in creating significant shareholder value from underperforming banks providing acquisition opportunities others might not find appealing or might not be as successful with Attractive Valuation Market value to intrinsic value gap as operating metrics and growth prospects have materially improved and are approaching peer median to top quartile levels while Highlands' valuation lags these groups 30% 50% for an equivalent price of $8.13 $9.46 hubank.com 52

53 Questions and answers Management Team hubank.com 53

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