Dear Shareholders:
Two million dollars is not an overwhelming figure by today’s standards, but in 1985 it was enough to start a community bank on Main Street in Abingdon, Va.
Here we are – a quarter of a century later – celebrating the 25th anniversary of Highlands Union Bank and looking forward to another 25 years and beyond. As we look back at the journey that has brought us to this milestone, we thank you, our shareholders, our loyal customers and our board of directors for your continued support. We are grateful for the relationships that have evolved along the way and for upholding a legacy that’s built on service excellence. Those are the keys to our success, and they will always be the cornerstones of our foundation as HUB moves forward in an ever-changing financial environment.
As we celebrate our silver anniversary in 2010, we continue to operate in the most challenging financial-banking environment in decades. The economy is in a prolonged recession. At the end of 2009, there were a few hopeful signs of a recovery emerging. Although credit markets and the economy show signs of improvement, they are still tied to government involvement and support. As a result, it is the general consensus that any economic recovery will be slow and protracted.
In 2009, industry profits were approximately 10 percent of 2007 industry earnings. In the fourth quarter of 2009 alone, banks with assets less than $10 billion reported a loss of $2.2 billion. This leads to the highest proportion of non-profitable institutions in any one year since 1984. This strain on earnings is largely a result of the weak economy. High unemployment (approximately 10 percent) and the overall slowdown in business activity have led to a strain on the industry’s asset quality. Nonperforming loans have greatly increased nationally. At year-end, 5.37 percent of all loans and leases for the industry were 90 days or more past due or in non-accrual status. This increase in nonperforming loans has led to significant increases in contributions to loan loss reserve at almost all banks. Investment write-downs continue to be unusually high because of the weakened economy. Other issues in 2009 that greatly affected industry earnings included the extraordinarily high FDIC premium assessments imposed on banks in an effort to replenish the FDIC Fund, which was greatly reduced due to the large number of bank failures in 2008 and 2009.
In 2009, Highlands Bankshares, Inc. (HBI) experienced many of the same pressures on earnings that are described above for our industry. HBI recorded negative earnings of $6,379,000 in 2009. The negative earnings are largely due to a contribution to allowance for loan loss reserve of $9,614,000 as a result of the increase in past due and nonperforming loans, non-cash “other than temporary impairment” (OTTI) in the securities portfolio of $5,621,000 and FDIC premiums of $1,184,000. This large addition to allowance for loan loss reserve leaves the reserve fund to protect against future loan losses of $11,681,000 at year-end. This is a significant cushion for the future. To compare and indicate the increased expense, the 2008 FDIC premium for Highlands Union Bank was $332,000.
Within the industry, there continues to be pressure on banks to significantly increase their allowance for loan loss reserve to protect the banks against future losses due to the uncertain state of the economy and significant increases in nonperforming assets. The bank has not been immune to the deterioration in asset quality and will continue to monitor and adjust its allowance account accordingly. Based on generally accepted accounting principals, investment securities must be analyzed on an ongoing basis to determine if an OTTI condition has occurred. The bank has investments in Collateralized Debt Obligations (CDOs) and the market for these securities has virtually disappeared over the past 18 months. Market values of these securities are reflective of this condition. During the year, the bank took a non-cash OTTI charge of $5,621,000.
Although 2009 was a challenging year for our industry and your company, and earnings were certainly not up to our expectations, we remain hopeful that the economy is poised to recover. We continue to make decisions and adjustments that we believe to be prudent and beneficial to the long-term goal of enhanced shareholder value as we operate in a very strained financial environment. Moving forward, we continue to make decisions that will strengthen the company’s balance sheet and help prepare us to take advantage of opportunities that arise in the future.
As we close out 2009 and enter 2010, it is time to celebrate 25 years of serving you, our valued shareholders, and our many different communities and customers. It is also a time to be diligent and focused as we work our way through the economic recession. We pledge to you our continued diligence and commitment to providing the best in community banking services. Thank you for 25 years of confidence and support. We look forward to another 25 years and beyond of serving you and our communities, and we look forward to reporting to you on the future progress of your company.
Samuel L. Neese
Chief Executive Officer
